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A   TREATISE 

ON    THE 

LAW  OF   INTERCORPORATE   RELATIONS 


s 


T^M 


TREATISE  ON  THE  LAW 

OF 

INTERCORPORATE  RELATIONS 


BY 


WALTER   CHADWICK   NOYES 

UNITED    STATES    CIRCUIT   JUDGE    FOR    THE    SECOND    CIRCUIT 
AUTHOR    OF    "  AMERICAN    RAILROAD    RATES  " 


SECOND  EDITION 
REVISED  AND  ENLARGED 


BOSTON 

LITTLE,   BROWN,   AND   COMPANY 

1909 


?,f'^^'4 


Copyright,  1902,  1909, 
By  WALTER  CHADWICK  NOYES. 


T 


printers 
S.  J.  Parkhill  &  Co.,  Hoston,  XT.  S.  A. 


DEDICATED 

TO    THE    MKMORY    OF    THE 

HONORABLE  AUGUSTUS  BRANDEGEE 

AS    A    TRIBUTE    TO    A    LAWYER    WHO    BY 

HIS    LEARNING,    BRILLIANCY,    HIGH 

IDEALS     AND     ACHIEVEMENTS 

HONORED  HIS  PROFESSION 


686492 


PREFACE  TO   SECOND   EDITION 

The  development  during  the  past  six  years  of  the  law  upon 
the  subjects  examined  in  this  treatise  has  rendered  a  new 
edition  necessary.  This  development  has  been  most  marked 
in  the  law  relating  to  legislation  against  combinations,  and  the 
last  six  chapters  which  embrace  this  subject  have  been  almost 
wholly  rewritten.  Consequently,  while  the  section  arrange- 
ment of  the  first  edition  has  been  elsewhere  retained,  it  has 
been  found  necessary  to  abandon  it  in  those  chapters.  Refer- 
ences to  the  first  edition,  therefore,  apply  to  this  edition  in  all 
but  the  last  six  chapters. 

The  purpose  of  this  treatise  is  to  examine  exhaustively  a 
limited  number  of  important  subjects.  Only  in  so  far  as  it 
may  furnish  the  practitioner  adequate  information  concerning 
the  law  existing  upon  any  of  the  phases  of  those  subjects  does 
it  fulfil  its  purpose. 

W.  C.  N. 

New  York, 
October  28,  1908 


Vll 


PREFACE  TO   FIRST   EDITION 

The  modern  tendency  of  business  is  toward  concentration  and 
cooperation  instead  of  competition.  The  modern  instrument 
of  business  is  the  corporation.  The  development  of  the  tend- 
ency through  the  instrument  has  resulted  in  the  joining  together, 
in  varying  forms,  of  corporate  entities  and  properties.  Cor- 
porate conjunction  involves  intercorporate  relations,  and  the 
legal  questions  growing  out  of  these  relations  furnish  the  subject- 
matter  of  this  treatise. 

The  preparation  of  the  first  four  parts  of  this  work  has  been 
a  process  of  amplification;  of  the  last  part,  a  process  of  reduc- 
tion. The  conjunction  of  corporate  entities  through  consoli- 
dation, of  corporate  properties  through  sales  and  leases,  and 
the  concentration  of  corporate  control  through  holding  shares, 
are  outlined  in  general  treatises  upon  corporation  and  railroad 
law.  The  material  for  the  development  of  the  subjects,  in  a 
manner  commensurate  with  their  importance,  has,  however, 
only  been  found  through  a  systematic  examination  of  original 
sources. 

The  law  governing  combinations  of  corporations  is  more 
accessible,  but  less  adaptable.  The  value  of  a  mass  of  ap- 
parently conflicting  decisions  appears  only  when  it  is  reduced 
to  principles.  In  collecting  the  cases  much  assistance  has 
been  derived  from  the  general  treatises  upon  monopolies  and 
similar  subjects.  Especial  acknowledgment  is  due  to  Mr. 
Eddy's  valuable  work  upon  combinations  of  labor  and  capital 
("Combinations"),  although  its  underlying  theory  that  a  com- 
bination of  capital,  to  be  unlawful,  must  be  a  conspiracy,  is 
essentially  different  from  that  of  the  present  treatise.  The 
theory  of  this  treatise  is  that  the  validity  of  a  combination 
depends  upon  considerations  of  pulilic  policy.  Rules  of  public 
policy  are  formulated,  and  an  attempt  is  made  to  deduce  from 
the  cases  collected  principles  of  general  application.     No  con- 

ix 


PREFACE   TO    FIRST    EDITION 

sideration  is,  however,  given  to  labor  combinations  and  other 
subjects  examined  in  the  general  treatises. 

The  statutes  of  all  the  American  States  and  many  English 
statutes,  governing  the  various  relations  of  corporations,  are 
collected  in  footnotes;  and  the  cases,  where  numerous,  are 
arranged  under  the  names  of  the  respective  States.  By  this 
plan,  it  is  believed  that  the  statute  and  case  law  of  each  State 
may  be  readily  found. 

With  hardly  a  single  exception,  each  citation  has  been  care- 
fully verified  with  the  original  report,  the  date  of  the  opinion 
inserted,  and  parallel  references  added. 

A  treatise  of  this  nature,  prepared  amid  the  distractions 
incident  to  the  performance  of  other  duties,  cannot  be  free 
from  fault.  But  while  the  conclusions  may  not  always  follow 
from  the  premises,  and  the  theories  may  have  no  foundation 
at  all,  it  is  hoped  that  the  work  will  be  found  accurate  in 
stating  and  referring  to  the  decisions  of  the  courts.  And 
whatever  measure  of  accuracy  it  may  possess  is  due,  in  no 
inconsiderable  degree,  to  the  dihgence  of  Mr.  Frank  L.  McGuire, 
of  the  New  London  (Conn.)  bar,  who  has  verified  the  references 
and  prepared  the  Table  of  Cases. 

W.  C.  N. 
Lyme,  Connecticut, 
September  1,  1902. 


CONTENTS 


PAGE 

§§  1-6.    PRELIMINARY 3 

PART    I 
CONSOLIDATION  OF  CORPORATIONS 

CHAPTER  I 
NATURE  OF  CONSOLIDATION 

§   7.    Term  "Consolidation"  of  Uncertain  Meaning 11 

8.  Uses  of  the  Term  distinguished 13 

9.  Consolidation  as  a  Result  and  as  a  Process 15 

10.  An  Analogy  in  the  Civil  Law 16 

11.  Merger 16 

12.  Amalgamation 17 

13.  Distinction  between  Consolitlation  and  Sale 18 

14.  Distinction  between  Conssolidation  and  Lease 21 

15.  Distinction  between  Consolidation  and  Control 22 

16.  Distinction  between  Consolidation  and  Combination 23 

CHAPTER   II 
LEGISLATIVE  AUTHORITY  FOR  CONSOLIDATION 

I.    Necessity  for  Legislative  Authority 

§   17.    Consolidation  without  Legislative  Authority  ultra  vires     ....       24 

18.  Consolidation  of  Qwnsi'-public  Corporations  without  Legislative  Au- 

thority against  Public  Policy 26 

II.    Conferring  and  Withdrawal  of  Legislative  Avthority 

19.  Power  of  Legislature  to  authorize  Con-soUdation 27 

19a.  Authorization  of  Consolidation  of  Interstate  Railroads  not  Regula- 
tion of  Interstate  Commerce 29 

20.  Legislative  Sanction  —  How  expressed        31 

21.  Public  Policy  regarding  Consolidation  of  Non-competing  Railroads  32 

22.  What  Railroads  may  consolidate  —  Statutory  Provisions       ...  33 

23.  What  Business  Corporations  may  consolidate  —  Statutory  Provi- 

sions        41 

24.  Power  of  Legislature  to  withdraw  or  limit  Right  to  conisolidate  — 

(A)  In  Absence  of  Reserved  Power 44 

25.  Power  of  Legislature  to  withdraw  or  limit  Right  to  consolidate  — 

(B)  In  Exerci.se  of  Reserved  Power 46 

26.  Power  of  Legislature  to  withdraw  or  limit  Right  to  consolidate  — 

(C)  In  Exerci.se  of  Police  Power 46 

xi 


CONTENTS 

III.    Construction  of  Statutes  authorizing  Consolidation  page 

27.  General  Rules  of  Construction        47 

28.  Construction  of  Particular  Statutory  Provisions 50 

29.  Construction  of  Statutes  authorizing  Consolidation  of  Railroads  — 

Connecting  or  Continuous  Lines 52 

30.  Construction  of  Statues  authorizing  Consolidation  of  Corporations 

other  than  Railroads 56 


CHAPTER  III 

CONSTITUTIONAL    AND    STATUTORY    RESTRAINTS    UPON 
CONSOLIDATION 

31.  Public  Policy  regarding  Consolidation  of  Competing  Railroads       .       58 

32.  Constitutional   and  Statutory  Provisions  against  Consolidation  of 

Competing  Railroads 60 

33.  Construction  of  Prohibitions  —  (A)  Meaning  of  Term  "Consolida^ 

tion" 64 

34.  Construction  of  Prohibitions  —  (B)  Whether  a  Lease  amounts  to 

Consolidation 66 

35.  Construction  of  Prohibitions  —  (C)   Arrangements  amounting  to 

Consolidation 67 

36.  Construction  of  Prohibitions  —  (D)  Control  of  Competing  Railroads 

by  Holding  Corporation 69 

37.  Construction  of  Prohibitions  —  (E)  What  are  Competing  or  Parallel 

Railroads 72 

38.  Prohibition  of  Consolidation  of  Competing  Railroads  not  a  Regu- 

lation of  Interstate  Commerce 74 

39.  Constitutional    Prohibitions    against  Consolidation  of  Competing 

Carrier  Corporations  other  than  Railroads 76 

40.  Enforcement    of    Provisions  against  Consolidation  of  Competing 

Lines 77 


CHAPTER  IV 

ASSENT  OF  STOCKHOLDERS 

41.  Requisite  Number  of  Stockholders  —  (A)  Under  Laws  in  Force  at 

Organization  of  Consolidating  Corporations 78 

42.  Requisite  Number  of  Stockholders  —  (B)  When  Unanimous  Con- 

sent is  necessary 80 

43.  Requisite  Number  of  Stockholders  —  (C)   Under  Enactments  in 

Exercise  of  Reserved  Power 84 

44.  Power  of  Legislature  to  compel  Consolidation  under  its  Reserved 

Power 86 

45.  Assent       of       Stockholders  —  How       manifested.     Acquiescence. 

Estoppel 8S 

46.  Rights  and  Remedies  of  Dissenting  Stockholders 90 

47.  Rights  and  Remedies  of  Dissenting  Subscribers 92 

48.  Procedure  in  Stockholders'  Actions 9^ 

49.  Laches  of  Stockholders 9-5 

50.  Can  a  Majority  effect  Consolidation  upon  giving  Security  to  Dissent- 

ing Stockholders? -     .     •       96 

51.  The  Right  to  condemn  Stock 98 

xii 


CONTENTS 

CHAPTER  V 
METHOD  OF  CONSOLIDATION 

PAGE 

52.  Formal  Statutory  Requisites 100 

53.  When  Consolidation  is  effected 106 

54.  Construction  of  Statutes  prescribing  Mode  of  Consolidation  .     .     .  106 

55.  What  Statutory  Provisions  Conditions  Precedent 108 

56.  What  Statutory  Provisions  not  Conditions  Precedent 109 

57.  Statutory  Provisions  for  Appraisal  of  Stock Ill 


CHAPTER   VI 

EFFECT  OF  CONSOLIDATION  UPON    STATUS    OF   CONSOLIDATING 
CORPORATIONS  AND  THEIR  STOCKHOLDERS 

§  58.    Effect   of   Consolidation    may    be    Fusion,    Merger,    or   Continued 

Existence 113 

59.  Effect  of  Con.solidation  depends  upon  Terms  of  Con.solidation  Act  .     114 

60.  As  a  General  Rule,  Effect  of  Consolidation  is  Creation  of  New  Cor- 

poration and  Dissolution  of  Constituents 115 

61.  Exceptions  to  the  Rule  —  Merger  and  Continuance  of  Corporations     118 

62.  Construction    of    Particular    Consolidation    Acts.     Cases    showing 

Creation  of  Distinct  Corporation 120 

63.  Construction  of  Particular  Consolidation  Acts.     Cases  of  Absorption 

or  Merger 122 

64.  Effect  of  Valid  Consolidation  upon  Stockholders  of  Constituent  Cor- 

porations     123 

CHAPTER   VII 
RIGHTS  AND  POWERS  OF  CONSOLIDATED  CORPORATION 

I.    Statutory  Transmission  of  Property,  Franchises,  and  Privileges 

§  65.    General  Rule.      Legal  Presumption 126 

66.  Real  Estate  and  Rights  in  Streets 129 

67.  Cho.ses  in  Action 131 

68.  Subscriptions 132 

69.  Enforcement  of  Subscriber's  Obligations.     Conditional  Subscrip- 

tions        133 

70.  Municipal  Aid 135 

71.  Constitutional  liiuiitations  upon  Grants  of  Privileges  and  Imminii- 

ties 137 

72.  Exemptions  from  Taxation        138 

73.  Special  Privileges  and  Immunities  other  than  Tax  Exemptions       .     142 

II.    Po^vers 

74.  Powers  of  Consolidated  Corporation.     In  General 143 

75.  Power  to  issue  Mortgage  Bonds 144 

76.  Rigiit  of  Eminent  Domain 145 

77.  Miscellaneous  Powers 140 

xiii 


CONTENTS 

CHAPTER  VIII 
OBLIGATIONS  OF  CONSOLIDATED  CORPORATION 

I.    Direct  Obligations 

PAGE 

I  78.    Constitutional  Limitations 149 

78a.  Consolidated  Corporation  liable  upon  its  Own  Obligations     .      .      .  150 

79.  As  a  General  Rule  Consolidated  Corporation  directly  assumes  all 

Obligations  of  Constituents 150 

80.  Obligation  to  perform  Public  Duties  of  Constituents 154 

81.  Liability  of  Consolidated  Company  to  Bondholders  and  Preferred 

Stockholders  of  Constituents.      Other  Special  Contracts      .      .      .  156 

82.  Liability  for  Torts  of  Constituents 159 

83.  Rule  of  Liability  inapplicable  to  Consolidation  after  Foreclosure 

Sale • 161 

II.    Liens 

84.  Conventional  and  Statutory  Liens 162 

85.  Equitable  Liens 163 

III.    Remedies  of  Creditors  of  Constituent  Corporations 

86.  Remedy  of  Creditors  against  Consolidated  Corporation — ■  At  Law  .  165 

87.  Remedy  of  Creditors  —  In  Equity 167 

88.  Remedy  against  Constituent  Corporation  if  not  dissolved       .      .      .  168 

89.  Effect  of  Consolidation  upon  Pending  Suits 170 

90.  Procedure  regarding  Pending  Suits 171 

91.  Allegation  and  Proof  of  Consolidation 172 

CHAPTER  IX 
IRREGULAR  AND  INVALID  CONSOLIDATIONS 

^  92.    Attempted  Consolidation  —  (Staiws  of  Resulting  Organization    .     .  174 

93.  Effect  of  Unlawful  Consolidation 176 

94.  Effect  of  Irregular  Consolidation 177 

95.  Who  may  attack  Irregular  Consolidation 178 

96.  Estoppel  to  deny  Regularity  of  Consolidation 180 

97.  Accounting  after  Attempted  Consolidation 183 

98.  Fraud  in  Consolidation  Agreement 183 

CHAPTER  X 

INTERSTATE  CONSOLIDATIONS 

5  99.    Consolidation  of  Corporations  of  Different  States  —  How  authorized  186 

100.  Construction  of  Interstate  Consolidation  Statutes 186 

101.  Status  of  Interstate  Consolidated  Corporation 187 

102.  Effect  of  Intel  state  Consolidation  upon  Status  of  Constituent  Cor- 

porations       192 

103.  Management  of  Interstate  Consolidated  Corporation 193 

104.  Rights  and  Powers  of  Interstate  Consolidated  Corporation    .      .      .  194 

105.  Duties  of  Interstate  Consolidated  Corporation  —  Taxation    .      .      .  195 

106.  Citizenship  of  Interstate  Consolidated  Corporation 196 

107.  Foreclosure  of  Mortgages  after   Interstate  Consolidation.     Juris- 

diction     199 

xiv 


CONTENTS 

PART   II 
CORPORATE  SALES 

ARTICLE  I 
SALES  OF  CORPORATE  PROPERTY  AND  FRANCHISES 

CHAPTER  XI 
SALES  OF  CORPORATE  PROPERTY 

I.    Sales  of  Property  of  Private  Corporations 

PAQE 

108.  Power  to  purchase  and  sell  generally 202 

109.  Sale  of  Entire  Corporate  Property  by  Unanimous  Consent       .     .     203 

110.  Sale  of  Entire  Property  of  Prosperous  Corporation  by  Majority 

Vote 205 

111.  Sale  of  Entire  Property  of  Losing  Corporation  by  Majority  Vote   .  210 

112.  Sale  of  Entire  Corporate  Property  by  Directors 211 

113.  Ratification  by  Stockholders  of  Sale  by  Directors 213 

114.  Remedies  of  Dissenting  Stockholders  in  Case  of  Invalid  or  Unfair 

Sales 215 

115.  Procedure  in  Stockholders'  Actions 221 

116.  Defences  to  StockhoKlers'  Actions.     Estoppel 223 

117.  Effect  of  Sale  of  Entire  Corporate  Property 220 

II.    Exchange  of  Property  of  One  Corporation  for  Stock  of  Another 

118.  Transfer  of  Entire  Corporate  Property  without  Unanimous  Con- 

sent requires  Monetarj'  Consideration 227 

119.  Exchange  of  Property  for  Stock  ultra  vires 227 

120.  Exchange  of  Property  for  Stock  Infringement  of  Rights  of  Dis- 

senting Stockholders 229 

121.  Appraisal  of  Stock  of  Dissenting  Stockholders 232 

122.  Stock  received  upon  Exchange  belongs  primarily  to  Corporation   .  234 
122a.  Effect  of  Execution  of  Ultra  Vires  Contract  for  Exchange  of  Prop- 
erty for  Stock 236 

122b.  Remedies  of  Dissenting  Stockholders  in  Ca.se  of  Exchange  of  Prop- 
erty for  Stock 237 

III.    Rights  and  Remedies  of  Creditors 

123.  Liabilitvof  Purchasing  Corporation  for  Debts  of  Vendor  Companv  .      237 

124.  Fraudulent  Sales '    .     243 

12.5.     Remedies  of  Creditors 247 

126.  Priority  of  Purchaser's  Mortgage  over  Claims  of  Vendor's  Creditors     251 

IV.    Sales  of  Property  of  Qiiasi-piihlic  Corporations 

127.  Indispensable  Property  cannot  be  alienated  or  taken  on  Execution 

without  Statutory  Authority 252 

128.  Test  of  Indispensability 254 

129.  Sales  of  Surplus  Property 255 

129a.  Ultra  Vires  Sales  of  Property  of  Private  and  Qwasi-publie  Corpora- 
tions      250 

XV 


CONTENTS 

CHAPTER   XII 
SALES  OF  CORPORATE  FRANCHISES 

I.    Transferability  of  Franchises 

PAGE 

§   130.  Nature  of  a  Franchise 261 

131.  Franchi.se  of  Corporate  Exi.stence 262 

132.  Tran.sferability  of  Franchise  of  Corporate  Exi.stence 264 

133.  Franchises  of  Corporations 265 

134.  Transferability  of  Franchises  of  Corporations 270 

II.    Legixlative  Authority  for  Sale  of  Franchises 

135.  I;egislative  Authority  essential  to  Alienation  of  Franchises       .     .  271 

136.  Unauthorized  Sale  of  Franchises — Ultra  Vires 272 

137.  I'nauthorized  Sale  of  Franchises  —  Against  Public  Policy  .     .     .  273 

138.  Unauthorized  Sale  of  Franchises  —  Unlawful  Delegation  of  Powers  274 

139.  Legislative  Authority  essential  to  Purchase  of  Franchises    .     .     .  275 
139a.  Ultra  Vires  Sales  of  Franchises 277 

ARTICLE   II 

SALES    OF    RAILROADS 
CHAPTER  XIII 

CONTRACT  OF  SALE  AND  ITS  EXECUTION 

I.    Nature  of  Sale  of  Railroad 

§   140.    Conventional  and  Judicial  Sales  of  Railroads  distinguished       .     .     278 

141.  Distinction  between  Relation  of  Vendor  and  Vendee  and  other 

Intercorporate  Relations 278 

142.  Distinction  between  Sale  of  Railroad  and  Sale  of  Franchises    .     .     279 

II.    Grants  of  Power  to  sell  and  purchase  Railroads 

143.  Statutory  Authority  essential  to  Sale  of  Railroad 280 

144.  Seller  must  have  Authority  to  sell  and  Buyer  to  buy       .      .      .      .  281 

145.  What  Railroads  may  be  the  Subject  of  Sale.      Statutory  Provisions  282 

146.  Construction  of  Statutes 289 

147.  Constitutional  and  Statutory  Prohibitions  of  Purchase  of  Compet- 

ing or  Parallel  Lines 291 

III.    Authorization  and  Execution  of  Contract  of  Sale 

148.  Statutory  Requisites 292 

149.  Assent  of  Stockholders.      Whether  Approval  of  Majority  is  suffi- 

cient     293 

150.  Acquiescence  of  Stockholders 296 

151.  Rights  and  Remedies  of  Dissenting  Stockholders 296 

CHAPTER  XIV 

EFFECT   OF   EXECUTION    OF   CONTRACT   OF   S.ALE 

I.    Rights  and  Liabilities  of  Vendor  Corporation 

§   152.    Sale  of  Raihoad  and  Franchises  does  not  terminate  Corporate 

Existence 299 

xvi 


CONTENTS 

PAGE 

153.  Rights  of  Vendor  Corporation  after  Authorized  Sale 300 

154.  Liabilities  of  Vendor  Corporation  in  Case  of  Authorized  Sale   .     .  301 

155.  Liabilities  of  Vendor  Corporation  in  Case  of  Unauthorized  Sale    .  301 

156.  Quo  Warranto  and  other  Proceedings  against  Vendor  Corporation  .  302 

II.    Rights  and  Liabilities  of  Vendee  Corporation 

157.  Essential  Franchises  pass  upon  Sale  of  Railroad 302 

158.  Rights  and  Powers  of  Vendee  Corporation  —  In  General     .     .     .  303 

159.  Right  of  Eminent  Domain 304 

160.  Exemptions  from  Taxation 304 

161.  Right  to  fix  Rates  of  Fare.     Chartered  Rates 306 

162.  Obligations  of  Vendee  Corporation  in  respect  of  Public  Duties  of 

Vendor 307 

163.  Vendee  Corporation  not  liable  upon  Obligations  of  Vendor  unless 

assumed  or  imposed  by  Law 308 

164.  Status  of  Foreign  Purchasing  Corporation 311 


PART   III 

CORPORATE   LEASES 

ARTICLE  I 

CHAPTER  XV 
LEASES   OF  CORPORATE   PROPERTY   AND   FRANCHISES 

I.    Leases  of  Property  of  Private  Corporation 

§   165.  Power  to  lease  and  take  a  Lease  generally 312 

166.  Lease  of  Entire  Property  of  Prosperous  Corporation 314 

167.  Lease  of  Entire  Property  of  Losing  Corporation 316 

168.  Voidable  Leases 317 

169.  Remedies  of  Objecting  Stockholders 319 

II.    Leases  of  Property  and  Franchises  of  Quasi-public  Corporations 

170.  Distinction  between  Leases  of  Private  and  Quasi- public  Corpora- 

tions      320 

171.  Leases  of  Indispensable  Property  of  Qwasz-public  Corporation      .  320 

172.  Leases  of  Surplus  Property 320 

173.  Leases  of  Franchises 322 

174.  Railroad  Leases  typical  of  Leases  of  Qwosi-public  Corporations    .  322 

ARTICLE   II 
LEASES    OF    RAILROADS    (INCLUDING    TRACKAGE    CONTRACTS) 

CHAPTER  XVI 

NATURE  AND  AUTHORIZATION  OF  CONTRACT  OF  LEASE 

I.    Nature  of  Lease  of  Railroad 

§   175.    What  constitutes  a  Lease  of  a  Railroad 323 

176.     Distinction  between  Relation  of  Lessor  and  Lessee  and  other  Inter- 
corporate Relations 326 

xvii 


CONTENTS 

II.    Legislative  Authoriti/  for  Lease  of  Railroad  page 

177.    Lease  of  Railroad  invalid  without  Legislative  Authority      .     .     .  326 

1.78.    Necessity  for  Legislative  Authority  to  take  a  Lease .329 

179.  Legislative  Ratification  of  Unauthorized  Lease 329 

180.  Wliat  Railroads  may  be  leased.     Statutory  Provisions   ....  331 

181.  Rule  of  Construction  of  Statutes 334 

182.  Construction  of  Statutes  —  (A)  Provisions  authorizing  Leases      .  335 

183.  Construction  of  Statutes  —  (B)  Provisions  not  authorizing  Lea.ses  338 

184.  Construction  of  Statutes  —  (C)  Power  to  lease  Unfinished  Road   .  341 

185.  Construction  of  Statutes  —  (D)  Leases  of  Connecting  Lines    .     .  342 

186.  Constitutional  and  Statutory  Prohibitions  of  Leases  of  Competing 

or  Parallel  Lines 343 

187.  Long  Term  Leases  not  prohibited  by  Statutes  against  Perpetuities  343 

CHAPTER  XVII 
APPROVAL    AND   EXECUTION    OF   CONTRACT    OF   LEASE 

I.    Assent  of  Stockholders  to  Railroad  Lease 

188.  Necessity   for   Consent    of    Stockholders   to    Lease   of    Railroad. 

Power  of  Directors 344 

189.  Whether  Unanimous  Consent  is  necessary  unless  otherwise  pro- 

vided   346 

190.  Requisite  Majority  prescribe  Terms  of  Lease 348 

191.  Remedies  of  Dissenting  Stockholders 349 

192.  Acquiescence  and  Laches  of  Stockholders 350 

II.    Method  of  approving  and  executing  Railroad  Leases 

193.  Statutory  Requirements 353 

194.  Construction  of  Statutes  prescribing  Mode  of  approving  and  exe- 

cuting Leases 354 

195.  Formalities  attending  Execution  of  Lease  of  Railroad     ....  356 

196.  Corporation  may  be  estopped  from  alleging  Irregular  Execution  of 

Lease 359 

CHAPTER  XVIII 

THE   CONTRACT   OF   LEASE 

I.    Form  and  Construction  of  Railroad  Leases 

197.  Form  of  Lease 360 

198.  Consideration         361 

199.  Rules  of  Construction  of  Leases 361 

200.  Construction  of  Particular  Leases 362 

201.  Lease  for  Longer  Term  than  Existence  of  Corporations  may  be 

valid .  364 

202.  Partial  Invalidity  of  Leases.     Void  Restrictions 365 

203.  Dependent  and  Independent  Contracts 366 

203a.  Assigmnents  of  Leases 367 

II.    Covenants  in  Railroad  Leases 

204.  Covenant  to  pay  Rent.     Assumption  of  Interest  Payments      .     .  368 

205.  Covenant  to  pay  Taxes 370 

206.  Covenant  not  to  assign 372 

207.  Covenant  to  make  Repairs 374 

xviii 


CONTENTS 

PAGE 

208.  Covenant  to  pay  Damages  and  defend  Suits 375 

209.  Miscellaneous  Covenants 376 


CHAPTER  XIX 
RIGHTS   AND    LIABILITIES    OF   LESSOR   CORPORATION 

I.    Rights  and  Remedies  of  Lessor  Corporation 

210.  Lessor  Corporation  retains  Prerogative  Powers  —  Right  of  Emi- 

nent Domain 377 

211.  Rights  of  Lessor  when  entitled  to  Share  of  Earnings  —  Equitable 

Lien 379 

212.  Rights  of  Stockholders  when  Rent  is  payable  in  Form  of  Dividends  381 

213.  Mortgage  of  Rent  Charge 383 

214.  Remedies  of  Lessor  Corporation 383 

II.    Liabilities  of  Lessor  Corporation 

215.  Obligations  of  Lessor  Corporation  to  State 385 

216.  Lessor  Corporation   cannot   avoid   Statutory   Obligations   unless 

exempted 3S6 

217.  Lessor  cannot  avoid  Primary  Obligations  unless  exempted       .     .     389 

218.  Liability  of  Lessor  for  Negligent  Operation  of  Railroad  —  (A) 

Under  Unauthorized  Lease 392 

219.  liiability  of  Lessor  for  Negligent  Operation  of  Railroad  —  (B) 

Under  Authorized  Lease 393 

220.  Liability  of  Lessor  for  Negligent  Operation  of  Railroad  —  (C)  To 

Employees  of  Lessee        400 

221.  Liability  of  Leaser  for  Negligent  Operation  of  Railroad  —  (D) 

When  it  shares  in  Control 403 

222.  Liability  of  Lessor  upon  Contracts  of  Lessee 404 

223.  Liability  of  Lessor  for  Reconstruction  and  Repairs 405 

224.  Taxation  of  Leased  Railroads 406 


CHAPTER  XX 
RIGHTS   AND   LIABILITIES   OF   LESSEE   CORPORATION 

I.    Rights  and  Remedies  of  Lessee  Corporation 

225.  Rights  of  Lessee  in  General.      Incidental  Franchises 409 

226.  Rights  of  Lessee  in  Matter  of  Tolls ■ 410 

227.  Mortgages  of  Leases 411 

228.  Remedies  of  Lessee  Corporation 412 

II.    Liabilities  of  Lessee  Corporation 

229.  Obligation  of  Lessee  to  perform  Lessor's  Public  Duties  ....     412 

230.  Statutory  LiabiUty  of  Lessee 414 

231.  Liability  of  Lessee  for  Torts  in  Operation  of  Road  under  Author- 

ized or  Unauthorize<l  Lea.se 417 

232.  .Joint  I^iability  of  Lessor  and  Lessee 419 

233.  Liability  of  Lessee  for  Debts  of  Lessor 421 

xix 


CONTENTS 

CHAPTER   XXI 
RAILROAD   LEASES    UNDER   RECEIVERSHIP 


PAGE 


§  234.     Receiver  not  Assignee  of  the  Term.     May  not  abrogate  Leases  as 

between  Parties 422 

235.    Receiver  may  elect  within  Reasonable  Time  to  assume  or  renounce 

Lease        424 

23G.    Obligations  of  Receiver  pending  Election 426 

237.  Obligations  of  Receiver  after  Election 429 

238.  Lease  of  Railroad  by  Receiver .  431 


CHAPTER   XXII 

ULTRA   VIRES    AND   VOIDABLE   RAILROAD   LEASES 

239.  Distinction  between  Ultra  Vires  and  Irregular  Lea.ses     ....  432 

240.  Enforcement  of  Executory  Ultra  Vires  Leases 434 

241.  Delivery  of  Possession  under  Ultra  Vires  Lease 435 

242.  Right  and  Duty  of  Disaffirmance 437 

243.  Recovery  of  Property  after  Disaffirmance 438 

244.  Recovery  on  Quantum.  Meruit  for  Past  Use 440 

245.  Improvements  made  by  Lessee  under  Ultra  Vires  Lease      .     .     .  443 

246.  Effect  of  Ultra  Vires  Lease  upon  Stock  Subscriptions      ....  444 

247.  Guarantee  of  Ultra  Vires  Lease  void 444 

248.  Voidable  Railroad  Leases 445 

249.  Leases  of  Railroads  for  Purpose  of  suppressing  Competition     .     .  448 

250.  Remedy  of  State  —  Quo  Warranto 448 

251.  Remedy  of  State  —  Injunction 449 


CHAPTER  XXIII 

LEASES   TO    FOREIGN   CORPORATIONS 

252.  Authority  to  lease  must  be  derived  from  State  where  Railroad  is 

located 451 

253.  Authority  to  lease  to  Foreign  Corporation 453 

254.  Status  of  Foreign  Corporation  leasing  Railroad 454 

CHAPTER  XXIV 
TRACKAGE   CONTRACTS 

255.  Nature  of  a  Trackage  Contract 455 

256.  Express    Authority    not    necessary    for    Execution    of   Trackage 

Contract 457 

257.  Execution  of  Trackage  Contracts 459 

258.  Assignability  of  Trackage  Contracts 460 

259.  Construction  of  Trackage  Contracts 461 

260.  Specific  Performance  of  Trackage  Contracts 464 

261.  Liability  of  Proprietary  Company  to  Third  Persons 466 

262.  Liability  of  Licensee  Company  to  Third  Persons 468 

263.  Liability  to  Employees 470 

XX 


CONTENTS 


PART   IV 
CORPORATE  STOCKHOLDIXG  AND  CONTROL 

CHAPTER  XXV 

POWER  OF  CORPORATION  TO  HOLD  STOCK  IN  OTHER 
CORPORATIONS 

I.    Rule  that  Statutory  Authority  is  essential 

PAGE 

§  264.    Necessity  for  Statutory  Authority  to  purchase  Stock.      Rule  in 

United  States 473 

265.  Necessity  for  Statutory  Authority  to  purchase  Stock.      Rule  in 

England 475 

266.  Neces.sity  for  Statutory  Authority  to  subscribe  for  Stock     .     .     .  476 

267.  Subscriptions  or  Purchases  through  Trustees  or  Agents  ....  478 

268.  Similar  Nature  of  Corporations  does  not  affect  application  of  Rule  479 

269.  Expediency  of  Purchase  of  Stock  immaterial 481 

270.  Assumption  of  Power  to  hold  Stock  in  Articles  of  Association    .     .  482 

II.    Express  Power  to  acquire  Stock 

§  271.    Corporations   may    acquire    Stock    in    other   Corporations    when 

authorized.      Statutory  Provisions 483 

272.  Power  to  subscribe  for  Stock  in  Foreign  Corporations     ....  491 

273.  Construction  of  Statutes 492 

274.  Construction  of  Constitutional  Prohibitions 497 

III.    Incidental  Power  to  acquire  Stock 

275.  In  General 499 

276.  Incidental  Power  to  make  Investments  in  Stocks 500 

277.  Incidental  Power  to  take  Stock  in  Satisfaction  of  Debt  ....  501 

278.  Incidental  Power  to  take  Stock  as  Collateral 504 

279.  Incidental  Power  to  acquire  Stock  in  Connection  with  Consolida- 

tion or  Purchase 505 

280.  Incidental  Power  to  take  Stock  upon  a  Reorganization  ....  507 

281.  Incitiental  Power  to  take  Stock  in  Exchange  for  Corporate  Assets  507 

282.  Miscellaneous  Instances  of  Incidental  Power  to  acquire  Stock   .     .  508 

283.  Presumption  of  Power  to  hold  Stock 510 

283a.  An  Analogous  Power 510 

CHAPTER  XXVI 

RIGHTS    AND   OBLIG.\TIONS    OF   CORPORATION    AS    STOCK- 
HOLDER 

I.    Intra   Vires  Holdings 

§  284.    Status  of  Corporation  holding  Stock 516 

285.  Nature  of  "Holding  Corporations" 517 

286.  Rights  of  Foreign  Corporation  holding  Stock 519 

287.  Incidents  of  Ownership  attach  to  Intra  Vires  Holdings  ....  523 
287a.  Collateral  Trust  Bonds 525 

xxi 


CONTENTS 

II.    Ultra  Vires  Holdings  paqf 

§  288.    What  Incidents  of  Ownership  attach  to  Ultra  Vires  Holdings       .  520 

288a.  Status  of  Parties  to  Ultra  Vires  Purchases  of  Stock 530 

289.  Liability  for  Assessments  uyion  Ultra  Vires  Holdings       ....  532 

290.  Ultra  Vires  Contracts  for  Purchase  of  Stock,    Who  may  question 

Validity  of  Ultra  Vires  Purchases.     Dependent  Contracts    .     .  535 

291.  Independent  Contracts 536 

292.  Holding  Stock  to  prevent  Competition 538 

293.  Remedies  in  Case  of  Ultra  Vires  Stockholding 539 

CHAPTER  XXVII 
CONTROL   OF   ONE   CORPORATION   BY   ANOTHER 

§  294.    Meaning  of  Term  "Control" 542 

295.  Distinction  between  Control  of  Corporation  and  Control  of  its 

Property        543 

296.  Distinction  between  Control  and  Community  of  Interest      .      .     .  544 

297.  Distinction  between  Control  and  Consolidation 545 

298.  Power  to  purchase  Stock  to  obtain  Control 545 

299.  Status  of  Corporations  as  Controlling  Stockholders 547 

300.  Trust   Relation  of  Controlling   Corporation  to   Minority   Stock- 

holders       547 

301.  Remedies  of  Minority  Stockholders  of  Controlled  Corporation    .      .     550 

PART   V 
COMBINATIONS  OF  CORPORATIONS 

ARTICLE  I 

COMBINATIONS  AS  AFFECTED  BY  PRINCIPLES  OF  CORPORATION 

LAW 

CHAPTER  XXVIII 
NATURE   AND    FORMATION    OF   COMBINATIONS 

§  302.    Definition  of  Term  "Combination" 552 

303.  Definition  of  Term  "Association" 553 

304.  Definition  of  Term  "Trust" 554 

305.  Popular  Use  of  Word  "Trust" 554 

306.  Definition  of  Phrase  "Corporate  Combination" 555 

307.  Evolution  of  the  Combination 556 

308.  Formation  of  Associations 557 

309.  Formation  of  Trusts 559 

310.  Formation  of  Corporate  Combinations 560 

311.  Analysis  of  Principles  determining  Legality  of  Combinations   .      .  561 

CHAPTER  XXIX 

PRINCIPLES  OF   CORPORATION    LAW    AFFECTING    ASSOCIATIONS 

AND   TRUSTS 

§  312.    Legality  of  Associations  not  generally  a  Question  of  Corporation 

Law " 562 

xxii 


CONTENTS 

PAGE 

§  313.    In  Formation  of  Trust,  State  regards  Acts  of  Stockholders  as  Acts 

of  Corporation 562 

314.  Trust  invalid  as  involving  Partnership  of  Corporations  ....  564 

315.  Trust  invalid  as  involving  Delegation  of  Corporate  Powers       .      .  566 

316.  Trust  invalid  as  involving  Practical  Consolidation 567 

317.  Rights  and  Liabilities  growing  out  of  Trusts 569 

CHAPTER   XXX 

PRINCIPLES    OF    CORPORATION     LAW    AFFECTING    CORPORATE 
COMBINATIONS 

§  318.    Corporate  Combinations  by  means  of  Purchasing  Corporations  — 

In  General    . 570 

319.  Issue  of  Stock  for  Property  in  Formation  of  Corporate  Combina- 

tion       571 

320.  Issue  of  Stock  for  Good-will  in  Formation  of  Corporate  Combina- 

tion  573 

321.  Over-valuation  of  Property  acquired  by  Issue  of  Stock  ....     575 

322.  Power  of  Vendor  Corporations  to  sell  Properties  for  Stock  of  Pur- 

chasing Corporation 577 

323.  Corporate    Combinations    through    Formation    of    Holding    Cor- 

porations        577 

ARTICLE  II 

COMBINATIONS  AS  AFFECTED  BY  PRINCIPLES  OF  COMMON  LAW 
AND    PUBLIC    POLICY 

CHAPTER  XXXI 

APPLICATION  OF  LAW  OF  CONSPIRACIES 

§  324.    Definition  and  Classification  of  Conspiracies 578 

325.    Criminal  and  Civil  Conspiracies  distinguished 580 

'326.    Applicability  of  Law  of  Conspiracies  to  Corporations       ....  581 

327.  What  Combinations  are  Conspiracies 583 

327a.  Remedies  and  Procedure  in  Case  of  Conspiracies 587 

328.  Modern  Combinations  of  Capital  seldom  Conspiracies      ....  590 

CHAPTER  XXXII 
APPLICATION  OF  LAW  OF  MONOPOLIES 

§  329.    Primary  Meaning  of  Term  "Monopoly" 593 

330.  Growth  of  Monopolies  —  Their  Illegality 593 

331.  No  True  Monopolies  in  United  States.     Patents  and  other  Quasi- 

Monopolies 595 

332.  Modern  L^se  of  Term  "Monopoly" 597 

333.  Direct  Test  of  Validity  of  Combination  not  whether  it  is  a  Mo- 

nopoly       601 

CHAPTER  XXXIII 

APPLICATION   OF  LAW  OF  CONTRACTS  IN  RESTRAINT  OF  TRADE 

§  334.     Definition  and  Nature  of  "Contract  in  Restraint  of  Trade"      .     .     602 
335.    Connection  between  Contracts  in  Restraint  of  Trade  and  Corporate 

Combinations 603 

xxiii 


CONTENTS 

PAGE 

§  336.    Modern  Use  of  Phrase  "Contract  in  Restraint  of  Trade"     .     .     .  605 
337.     Direct   Test   of   Validity   of  Combination   not   whether   it   is   in 

Restraint  of  Trade 608 

CHAPTER  XXXIV 
FORMULATION   OP^  RULES   OF  PUBLIC  POLICY 

§  338.    Definition  and  Nature  of  Public  Policy 609 

339.  Necessity  for  Rules  of  Public  Policy 611 

340.  Difficulty  of  Formulating  Rules  of  Public  Policy  concerning  Com- 

binations         612 

341.  Formulation  of  Rules.      Basis  in  Judicial  Decisions 613 

342.  Basis  of  Rules  —  (A)  Case  of  the  Sugar  Trust 613 

343.  Basis  of  Rules  —  (B)  Case  of  the  Standard  Oil  Trust      ....  616 

344.  Basis  of  Rules  —  (C)  Whiskey  Trust  Cases 618 

345.  Basis  of  Rules  —  (D)  Case  of  the  Preservers  Trust 620 

346.  Basis  of  Rules  —  (E)  Case  of  the  Chicago  Gas  Trust        ....  621 

347.  Basis  of  Rules  —  (F)  Case  of  the  Diamond  Match  Company    .     .  623 

348.  Basis  of  Rules  —  (G)  Case  of  the  Glucose  Combination  ....  625 
348a.  Basis  of  Rules  —  (H)  Case  of  the  Pocahontas  Coke  Company       .  627 

349.  Basis  of  Rules  —  (I)  Miscellaneous  Cases 631 

CHAPTER  XXXV 
RULES  OF  PUBLIC   POLICY 

§  350.    In  General 633 

351.  Distinction  between  Rules  of  Public  Policy  applicable  to  Private 

and  Qwosi-public  Corporations 634 

352.  Rules 634 

353.  Rules  Conservative  Standards 634 

354.  Analysis  of  Rule  governing  Private  Corporations  —  (A)   Form  of 

Combination  immaterial 635 

355.  Analysis  of  Rule  —  (B)  Objects  and  Tendencies  of  Combinations  639 

356.  Analysis  of  Rule  —  (C)  Control  of  the  Market 642 

357.  Analysis  of  Rule  —  (D)  Extent  of  Territory 647 

358.  Analj'sis  of  Rule  —  (E)  Useful  Commodities 648 

359.  Analysis  of  Rule  of  Public  Policy    applicable    to    Qwasi-public 

Corporations 653 

CHAPTER  XXXVI 

APPLICATION   OF    RULES    OF    PUBLIC    POLICY  TO    PARTICULAR 
CLASSES  OF  COMBINATIONS 

§  360.    Associations  of  Manufacturers  and  Producers 654 

361.  Associations  of  Manufacturers  owning  Patents 658 

362.  Associations  of  Dealers 658 

363.  Associations  of  Railroad  Companies  —  (A)   Traffic  Contracts  of 

Connecting  Lines         659 

364.  Associations  of  Railroad  Companies — (B)   Traffic  Contracts  of 

Competing  Lines 661 

364a.  Associations  of  Railroad  Companies  —  (C)  Pools 662 

365.  Associations  of  Gas  Companies  and  other  Qiwisi-public  Corpora- 

tions      664 

xxiv 


CONTENTS 

CHAPTER  XXXVII 
RIGHTS  AND  REMEDIES 

PAGE 

366.  Rights  and  Remedies  of  Members  of  Illegal  Combinations.     In 

General 667 

367.  Rights  and  Remedies  between  Combination  and  its  Members       .  669 

368.  Rights  of  Receivers  and  Assignees 671 

369.  Collateral  Attack  upon  Combination.     Remedies  upon  Indepen- 

dent Contracts 672 

370.  Rights  of  Creditors 676 

371.  Rights  and  Remedies  of  Stockholders  of  Combining  Corporations  .  677 

372.  Remedies  of  State  —  (A)  Quo  Warrajito  against  Corporate  Com- 

bination    680 

373.  Remedies  of  State  —  (B)  Quo  Warranto  against   Combining  Cor- 

porations        682 

374.  Remedies  of  State  —  (C)  Injunction 684 

375     Evidence 686 

ARTICLE  III 

LEGISLATION    AFFECTING   COMBINATIONS 
I 
FEDERAL    ANTI-TRUST   STATUTE 

CHAPTER  XXXVIII 
THE  STATUTE  AND  ITS  CONSTITUTIONALITY 

376.  The  Statute 688 

377.  Analysis  of  Statute 689 

378.  Object  of  Statute 691 

379.  Constitutionality  of  Act  —  (A)   Power  of  Congress  under  Com- 

merce Clause  to  legislate  concerning  Private  Contracts  affecting 
Interstate  Commerce 692 

380.  Constitutionality  of  Act  —  (B)   Power  of  Congress  under  Com- 

merce Clause  to  legislate  concerning  Contracts  and  Combina- 
tions under  State  Laws 694 

381.  Constitutionality  of  Act  —  (C)   Power  of  Congress  under  Com- 

merce Clause  to  prohibit  Combinations  of  Competing  Railroads     696 

382.  Constitutionality  of  Act  —  (D)  Act  is  Constitutional       ....     697 

383.  Legislation  supploinonting  the  Statute  —  (1)  Anti-trust  provisions 

of  Wilson  Tariff  Act 698 

384.  Legislation  supi)lcmenting  the  Statute  —  (2)  The  Expedition  Act     698 

385.  Legislation    supplementing    the    Statute  —  (3)    The    Immunity 

Proviso 699 

CHAPTER  XXXIX 
CONSTRUCTION  AND  APPLICATION   OF   FEDERAL  STATUTE 

386.  Title  of  Statute 700 

387.  U.sc  of  Phrase  "Contract  in  Restraint  of  Trade."     Application  of 

Statute  of  Ancillary  Contracts 701 

XXV 


CONTENTS 

PAGE 

§  388.    Statute  not  limited  to  Unreasonable  Restraint  of  Trade       .     .     .     705 

389.  Use  of  Terms  "Monopolize"  and  "Monopolies" 709 

390.  Meaning    of    Phrase,    "Trade  or  Commerce  among  the   Several 

States" 714 

391.  Statute  applies  only  to  Restraints  upon  Interstate  or  International 

Commerce 716 

392.  Restraint  upon  Interstate  Commerce  must  be  Direct  —  (A)  In 

General 717 

393.  Restraint  upon  Interstate  Commerce  must  be  Direct  —  (B)  Com- 

'  binations  relating  to  Manufacture  and  of   Manufacturers    and 

Producers 719 

394.  Restraint  upon  Interstate  Conimerce  must  be  Direct  —  (C)  Re- 

straints upon  Facilities  for  Commerce 726 

395.  Restraint  upon  Interstate  Commerce  must  be  Direct  —  (D)  Ex- 

change and  Similar  Associations 728 

396.  Restraint   may   be   imposed   upon   those   engaged   in   Interstate 

Commerce  by  those  not  engaged  therein 729 

397.  Form  of  Combination  immaterial.      Illegality  of  Corporate  Device  730 
.     397a.  The  Northern  Securities  Case 731 

398.  Application  of  Statute  of  Combinations  of  Railroads  and  other 

carriers.     Combinations  of  Railroad  Employees 734 

399.  Application  of  Statute  of  Combinations  under  Patents    ....  739 

400.  Application  of  Statute  to  Combinations  under  Copyrights  .     .      .  742 

401.  Application  of  Statute  to  Combinations  under  Secret  Processes    .  743 

402.  Application  of  Statute  to  Contracts  concerning  Market  Quotations  745 

403.  Application  of  Statute  to  State's  Monopoly  and  State  Regulations  745 

404.  Statute  not  Retroactive  but  applies  to  Continuing  Combinations  .  746 

CHAPTER  XL 

EIGHTS,  REMEDIES  AND  PROCEDURE  UNDER  FEDERAL  STATUTE 

§   405.    Invalidity   under    Federal    Statute    as   a   Ground   of   Collateral 

Attack 746 

406.  Proceedings    in    Equity    by    Government.      Injunctive    Relief. 

Parties 749 

407.  Criminal  Proceedings.     Indictments.     Parties 751 

408.  Actions  by  Government  to  enforce  Forfeiture 753 

409.  Actions  for  Treble  Damages.     Pleadings 754 

410.  Limitations  of  Actions        758 

411.  Effect  of  Voluntary  Dissolution  of  Combination  pending  proceed- 

ing   758 

412.  Proof  of  Violation  of  Statute.     Evidence 759 

413.  Interpretation  of  Immunity  Proviso 761 

II 

STATE   ANTI-TRUST    STATUTES 

CHAPTER  XLI 
STATE  STATUTES  AND  THEIR  CONSTITUTIONALITY 

§  414.    The  Statutes.     Development  of  State  Legislation 762 

415.  Sphere  of  State  Legislation.     Operation  of  Commerce  Clause  of 

the  Constitution 783 

416.  Controlling  Propositions  in  determining  Constitutionality  of  State 

Statutes 784 

xxvi 


CONTENTS 

PAGE 

§  417.  Power  of  State  to  prohibit  Combinations  of  Quasi-public  Corpora- 
tions.    Power  over  Propertj'  devoted  to  Public  Uses   ....     785 

418.  Power  of  State  to  prohibit  Combinations  of  Corporations  in  Exer- 

cise of  Reserv-ed  Power 787 

419.  Validit}'   of   State   Statutes   tested   by   Fourteenth   Amendment 

—  (A)  Right  to  Contract 788 

420.  Validity  of  State  Statutes  tested  by  Fourteenth  Amendment  — 

(B)  Police  Power  of  the  State 791 

421.  \'alidity  of  State  Statutes  tested  by  Fourteenth  Amendment  — 

(C)  Class  Legislation 797 

422.  Validity  of  State  Statutes  under  State  Constitutional  Provisions  .     802 

423.  State  Courts'  Interpretation  of  State  Statute  followed  by  Federal 

Courts  in  determining  its  Constitutionality 805 

424.  Who  may  question  Constitutionality  of  Statutes 806 

CHAPTER  XLII 

CONSTRUCTION  AND  APPLICATION  OF  STATE  ANTI-TRUST 
STATUTES 

§   425.  Definitions 807 

42G.  Statutes  not  Regulations  of  Interstate  Commerce 809 

427.  Rule  of  Construction 810 

428.  Form  of  Combination  Immaterial.     Application  of  Statutes  to 

Holding  ai!d  Purchasing  Corporations 811 

429.  Objects  and  Tendencies  of  Combination  as  determining  Applica- 

tion of  Statutes 813 

430.  Extent  of  Combination  as  determining  Application  of  Statutes    .     815 

431.  Application  of  Statutes  to  Ancillarj-  Contracts  in  Restraint  of 

Trade 81G 

432.  Application   of    Statutes    to   Agency   and    other   Exclusive   and 

Restrictive  Contracts.     Sales  and  Leases 817 

433.  Application  of   Statutes  to  Particular  Associations  of  Manufac- 

turers and  Dealers 820' 

434.  Application    of    Statutes    to    Combinations    under    Patents    and 

Copyrights 823 

435.  Application  of  Statutes  to  Insurance  Combinations 823 

436.  Application   of   Statutes   to    Foreign   Corporations   doing    Local 

Business 825 

437.  Statutes  have  no  Extraterritorial  Force 827 

438.  Application  of  Statutes  to  Agreements  of  Qwasi-public  Corpora- 

tions     829 

439.  Effect    of    Statutes    upon    Exercise   of    Statutory    Authority    to 

consolidate  or  hold  Stock 830 

440.  Statutes  inapplicable  to  Contracts  with  State 832 

441.  Statutes  inapplicable  where  other  Statutes  eliminate  Comjiotition  832 

442.  Statutes  do  not  supersede  Common  Law        832 

443.  Statutes  not  Retroactive  but  apply  to  Continuing  Combinations  833 

444.  Construction  and  Application  of  Miscellaneous  Statutes  ....  834 

CHAPTER  XLIII 

RIGHTS,  REMEDIES  AND  PROCEDURE  UNDER  STATE  ANTI-TRUST 

STATUTES 

§  445.  Contracts  in  \'iolatic)n  of  Statutes  unenforceable.  Independent 
Contracts.  Invaliilitv  imder  Statutes  as  Ground  of  Collateral 
Attack      ....". 830 

xxvii 


CONTENTS 

PAGE 

§  446.    Criminal  Proceedings.      Indictments 840 

447.  Proceedings  to  enforce  Forfeitures 844 

448.  Proceedings  against  Corporations 846 

449.  Actions  for  Damages 847 

450.  Evidence.     Production  of  Books 850 

451.  Statutes  of  Limitation 851 

Index 853 


XXVIU 


TABLE    OF   CASES 


(References  are  to  pages.) 


Abbott  V.  American  Hard  Rub- 
ber Co.  212,  216 
V.  Johnstown,  etc.  Horse  R. 

Co.  25,  327,  392 

V.  New  York,  etc.  R.  Co.   128,  145, 

146,  265 

V.  Omaha  Smelting,  etc.  Co.     262 

Abby  V.  Billups  313,  376 

Abeles  v.  Cochrane  511 

Acker  v.  Alexandria,  etc.  R.  Co.       301 

Ackerman  v.  Cincinnati,  etc.  R. 

Co.  390,  397 

Adams  v.  Yazoo,  etc.  R.  Co.        27,  44 
Addj'ston  Pipe,  etc.  Co.  v.  United 

States    606,  642,  643,  693,  697,  702, 
715,  716,  717,  720,  722,  723 
Adelbert    University    v.    Toledo, 

etc.  R.  Co.  181,  187 

Adler  v.  Fenton  581 

Admiral,  The  162 

^^iltna  Ins.  Co.  v.  Albany,  etc.  R. 

Co.  370,  382 

V.  Commonwealth  824 

Africa  V.  Knoxville  129 

Albers,  C.  H.,  Commission  Co.  v. 

Spencer  822,  850 

Alderman  v.  People  579 

Aldnut  V.  Inglis  787 

Alexander  v.  Railway  Co.  80,  83 

V.  Relfe  '  249 

V.  Searcy  223,  225,  540, 

541,  551 

Alford  V.   Chicago,   etc.  R.   Co.        463 

Algor  V.  Thatcher  604 

Altonburgh  v.  Grant  570 

Altoona,    etc.    R.    Co.    v.    Beech 

Creek  R.  Co.  457 

American,  etc.  Co.  v.  Linn  550 

American    Biscuit,    etc.    Co.    v. 

Klotz  569,  607,  631,  650,  670, 

711 
American    Brake    Beam    Co.    v. 

Pungs  604 

American  Fire  Ins.  Co.  v.  State 

824,  852 


PAGE 

American  Handle  Co.  v.  Standard 

Handle  Co.  672,  839,  843,  849, 

850 
American  Loan,  etc.  Co.  v.  Min- 
nesota, etc.  R.  Co.        26,  27,  C3,  49, 
175,  176,  181,  187 
American    Preservers    Trust    v. 
Taylor  Mfg.  Co.    565,  566,  620,  651, 

670 
American  Railwav-Frog  Co.  v.  Haven 

514 
American  Soda  Fountain  Co.  v. 

Green  675 

American     Strawboard     Co.     v. 

Peoria  Strawboard  Co.  657,  667, 

838 
American    Tube,    etc.    Co.    v. 

Hayes  576 

American   Water   Works   Co.    v. 

Venner  537 

Ames  V.  Union  Pacific  R.  Co.   423,  425, 

428 
Ammant     v.     New     Alexandria 

Turnpike  Co.  254,  255 

Anchor,  etc.  Mfg.  Co.  v.  Hawkes      604 
Anderson  v.  Jett  644 

V.  Philadelphia  Warehouse 

Co.  525 

V.   Shawnee  Compress  Co. 

606,  656 
V.  United  States  718,  727,  728 

V.  Union  Terminal  R.  Co.        386 
Angier  v.  East  Tennessee,  etc.  R. 

Co.  197,  311 

Anglo-American    Land,   etc.    Co. 

V.    Lombard        205,   473,    494,    530. 

545 
Anglo- Italian  Bank,  In  re  112 

Anheuser  Busch  Brew.  Ass'n  v. 

Houck  641,  650,  652,  673 

Anthony  v.  American  Glucose  Co.  235 
V.  Campbell  251 

.\ppeal    Tax   Court    v.    Western 

Maryland  R.  Co.  40S 

Arbuckle  v.   Illinois  Midland  R. 

Co.  166,  168 

xxix 


TABLE    OF   CASES 


PAGE 

Archer  v.   Torre   Haute,   etc.    R. 

Co.  15,  22,  325 

Ardcsco  Oil  Co.  v.  North  Ameri- 
can Oil,  etc.  Co.  203,  213,  313 
Arkansas  MicUand  R.  Co.  v.  Berry  305 
Armstrong  v.  Karschner  300 
V.  Toler  674 
Arnot  V.  Pittston,  etc.  Coal  Co. 

650,  658,  673,  676 
Arrowsmith  v.  Nashville,  etc.  R. 

Co.  390,  391,  392,  397,  418 

Arthur  v.   Commercial   Railroad 

Bank  280 

Ashbury    Carriage,    etc.    Co.    v. 

Riche  257,  433,  434 

Ashhurst's  Appeal  226 

Ashley  v.  Ryan  75,  109,  190 

Aspinwall  v.  Ohio,  etc.  R.  Co.         193 

Assessors  v.  Morris,  etc.  R.  Co.         305 

Atchison,  etc.  R.  Co.  v.  Cochran      496 

V.  Davis  496 

V.  Denver,  etc.  R.  Co.         51,  659, 

660 

V.  Fletcher  496,  507 

V.  Phillips  County  80,  136 

Atkinson   v.    Marietta,    etc.    R. 

Co.  264 

Atlanta,  etc.  R.   Co.  v.  State  121, 

362 
Atlantic,  etc.  R.  Co.  v.  Allen    140,  306 
V.  St.  Louis  32 

Atlantic,  etc.  Tel.  Co.  v.  Union 

Pacific  R.  Co.  321,  323 

Atlantic  Ave.  R.  Co.  v.  Johnson       152 
Attorney  General  v.  A.  Booth  &  Co. 

684,  794,  812,  826,  846,  847 

V.  Chicago,  etc.  R.  Co.  450 

V.  Delaware,  etc.  R.  Co.  450 

V.  Great  Eastern  R.  Co.     450,  458 

V.  Great  Northern  R.  Co.  450, 

685 

V.  Jamaica  Pond  Aqueduct       450 

V.  Mid-Kent  R.  Co.  450 

V.  North-Eastern  Ry.  144 

V.  Reynolds  450 

V.  Tudor  Ice  Co.  449 

V.  Utica  Ins.  Co.  449 

Austin  V.  Seligman  382 

V.  Tecumseh  National  Bank      242 

Ayeock  v.   Raleigh,   etc.   R.   Co. 

388,  467 
Ayles  V.  South  Eastern  R.  Co.  467 
Axline  v.  Toledo,  etc.  R.  Co.  388 

B 

Babcock  v.  Schuykill,  etc.  R.  Co.     125 
Backus  V.  Detroit,  etc.  R.  Co.  390 

XXX 


PAGE 

Badische  Anilin  und  Soda  Fabrik 

V.  Schott  605 

Bagshaw  v.  Eastern  Union  R.  Co.     216 

Bailey  v.  Citizens  Gas  Light  Co.         183 

V.  Master  Plumbers'  Ass'n        791, 

795,  822 

V.  Philadelphia  597 

V.  Railroad  Co.  155 

Baker  v.  Harpter  242 

Baldwin  v.  Canfield  504 

Ball  Electric  Light  Co.  v.  Child        525 

Balliet  v.  Brown  212,  215 

Balsley  v.  St.  Louis,  etc.  R.  Co.      388, 

394 
Baltimore,  etc.  R.  Co.  v.  Mussel- 
man  12,  171 
V.  Paul  402 
V.  Pausch  408 
V.  Wabash  R.  Co.  418 
V.  Worker  417 
Baltimore,  etc.  Tel.  Co.  v.  West- 
ern LTnion  Tel.  Co.  666 
Baltimore  v.   Baltimore,   etc.   R. 

Co.  493 

Bancroft  &  Sons  Co.  i'.  Bloede  474 

Bank  of  Augusta  v.  Earle  261,  262 

Bank  of  Commerce  v.  Hart      480,  496 
V.  Tennessee  44 

Bank  of  Hindustan,  Higg's  Case, 

In  re  18,  19 

Bank  of  Long  Island  v.  Young       129 
Bank  of  Middlebury  v.  Edgerton     265 
Bank  of  San  Luis  Obispo  v.  Wick- 
er sham  511 
Bank  v.   Lanier                                     514 
V.  Smith                                380,  430 
Banks  v.  Georgia,  etc.  R.  Co.  402 
V.  Judah                                 225,  247 
Barataria  Canning  Co.  v.  Joulian     808, 

820 
Barber  v.  International,  etc.  Co.     243, 

248 
Barbier  v.  Connolly  790 

Barclay  v.  Quicksilver  Min.  Co.  249 
Barley  v.  Southern  R.  Co.  291 

Barnard  v.  Norwich,  etc.  R.  Co.  412 
Barnard's  Banking  Co.,  In  re  475 
Barnett   r.    Philadelphia  Market 

Co.  91,  97,  112 

Barr  v.  Bartram,  etc.  Mfg.  Co.  247 

V.  New  York,  etc.  R.  Co.  220. 

446,  547,  572 

Barrie  v.  United  Rvs.  Co.     238,  241. 

242,  246 

Barrows  v.   People's  Gas  Light, 

etc.  Co.  50 

Barry  v.  Merchants  Exch.  Co.  203 

Bartholomew  v.  Citj'  of  Austin        597 


TABLE    OF   CASES 


Bartholomew  v. 

Co. 
Bartlett  v.  Drew 

V.  Fourton 
Barto  V.  Nix 


Derby    Rubber 

316 

239 

511,  514 

512 


Barton  v.  Enterprise,  etc.  Ass'n     208 
V.  Mulvane  839 

V.  Port  Jackson  Road  Co.  512, 

514 
Bates  County  v.  Winters  136 

Bath  Gas  Light  Co.  v.  Claffy     323,  434, 
441,  442 
Batterson  v.  Grand  Trunk  R.  Co.    160 
Baxter  v.   Nashville,    etc.   Turn- 
pike Co.  254,  255 
V.  New  York,  etc.  Co.  402 
Beal  V.  Chase  604 
V.  Essex  Savings  Bank  525 
Bean  v.  Atlantic,  etc.  R.  Co.            388 
Bear  River  Orchard  Co.  v.  Hanley  535 
Beard  v.  Denis  604 
Bedford  R.  Co.  v.  Bowser                   345 
Beebe  v.  Hatfield  573 
V.  Richmond  Light,  etc.  Co.      355 
Beecher  v.  Marquette,  etc.  R.  Co.     351 
Beechley  v.  Mulville                    669,  824 
Beekman  v.  Hudson  River,  etc. 

R.  Co.  411 

Beggs  V.  Edison  El.  Light,  etc.  Co.      57 
Beling  i\  American  Tobacco  Co.     95, 

125 
Bell,  In  re  803 

Bell     V.     American     Protective 

League  423,  425,  428 

V.    Pennsylvania   R.    Co.      96,  182 

Bellerby  v.  Rowland  511 

Beman'v.  Rufford      216,  222,  274,  458 

Bement  v.  National  Harrow  Co.      704, 

740,  748,  750 

Benbow  r.  Cook  203 

Benedict  v.  Hoineberg  255 

V.  Western  Union  Tel.   Co.        660 

Benesh  v.  Mill  Owners  Mut.,  etc. 

Ins.  Co.  242 

Berger    v.    United    States    Steel 

Corp'n  513 

Berlin  Machine  Works  v.  Perry        60.5 

Berry  v.  Broach  211,  224 

V.  Kansas  City,  etc.  R.  Co.      152, 

160,  166 

I'.  Yates  477,  478,  480 

Beveridge  v.  New  York  Elevated 

R.  Co.  338,  344,  382 

Bickley  v.  Schlag  576 

Bienville    Water    Supply    Co.    v. 

City  of  Mobile  '  598 

Bigbee,  etc.  Packet  Co.  v.  Moore     530, 

537 


PAGE 

Bigelow  V.  Calumet,  etc.  Mining 

Co.  750,  755,  812 

Bingham  v.  Brands  794,  819 

Binney's  Case  203 

Birchfield  v.  Northern  Central  R. 

Co.  415 

Bird  V.   Bird's  Patent  Deodoriz- 
ing, etc.  Co.  216 
Birmingham,  etc.  Co.  v.  Freeman     213 
Birmingham  R.,  etc.  Co.  v.  Elsen     151, 

170 
Bish  V.  Johnson  79,  80,  133 

Bishop    V.    American    Preservers 

Co.    565,  566,  569,  620,  651,  670, 
755,  756,  826 
V.  Brainerd  32,  88,  100,  119, 

133,  188,  192 
Black    V.    Delaware,    etc.    Canal 
Co.     6,  25,  26,  27,  47,  48,  50,  53,  82, 
85,   97,   98,   99,    187,   208,   231,   253, 
289,    317,    327,    328,    335,    336,   454 
Blair  v.  City  of  Chicago  258 

V.  St.  Louis,  etc.  R.  Co.     244,  252 
Blake  v.  Domestic  Mfg.  Co.       243,  528 
V.  Winona,  etc.  R.  Co.  260 

Blalock  V.  Kerncrsville  Mfg.  Co.        513 
Blanc  V.  Paymaster  Min.  Co.  248 

Blanchard  Gun  Stock,  etc.  Fac- 
tory V.  Warner  202 
Blatchford  v.  Ross  25,  80,  90,  95, 
212,  221 
Blindell  v.  Hagan  750 
Block  V.  Standard  Distilling  Co.  750 
Blodgett  V.  Lanyon  Zinc  Co.  203 
Bloxham    v.    Metropolitan    R.    Co. 

223 
Blue  Rapids  Opera  House  Co.  v. 

Mercantile  Bldg.,  etc.  Ass'n  508 

Blundell's  Case  18 

Boardman  v.  Lake  Shore,  etc.  R. 

Co.  31,  125,  157 

Board  of  Trade  v.  Christie  Grain, 

etc.  Co.  745 

Bobbs-Merrill  Co.  v.  Straus  743 

Bohn  Mfg.  Co.  V.  HoUis  580 

Bonsack  Mach.  Co.  v.  Smith  675 

Booe  V.  Junction  R.  Co.  92 

Boon  V.  City  of  Utica  597 

Boor  ?'.  Tolman  175 

Booth  V.  Clark  422 

r.  Robinson  476 

Boston,  etc.  Min.  Co.  ^\  Montana 

Ore-Purchasing  Co.  210 

Boston,  etc.  R.  Co.  v.  Boston,  etc. 

R.  Co.       50,  187,  291,  366,  372, 

373,  383,  384,  461 

V.  Gilmore  255 

V.  Graham  352 

xxxi 


TABLE    OF   CASES 


Boston,  etc.  R.  Co.  v.  New  York, 
etc.  R.  Co.     49,    88,    208,  216,  225, 
226,  230,  296,  347,  352, 
434,  508 
Boston,  etc.  R.  Corp.  v.  Midland 

R.  Co.  128,  146 

Botts  V.  Simpsonville,  etc.  Turn- 
pike Road  Co.  81,  85,  90,  95 
Bouknight  v.  Charlotte,  etc.  R. 

Co.  392 

Bowden  v.  Johnson  525 

Bower  v.  Burlington,  etc.  R.  Co. 

392,  403,  415 
Bowman  v.  Foster,  etc.  Co.  508 

Boj'nton  v.  Roe  213 

Braeeville  Coal  Co.  v.  People  788 

Bradford  v.  Frankfort-,  etc.  R.  Co. 

89,  107,  110,  182 
Bramlet  v.  Commonwealth  Land, 

etc.  Co.  244 

Branch  v.  Atlantic,  etc.  R.  Co.  88, 

163,  291 

V.  Charleston  141 

V.  Jesup        51,  178,  256,  270,  280, 

303,  571 

Brant  v.  Ehlen  572,  576 

Braslin  v.   Somerville   Horse   R. 

Co.  327,  395 

Brenham  v.  Water  Co.  596,  597 

Brennan  v.  United  Hatters  673 

Brett  V.  Ebel  605,  704 

Brewster  v.  Hartley  514 

V.  Miller's  Sons  Co.  586,  848 

Brickerhoff  v.  Brown  226 

Bridgeport  v.  New  York,  etc.  R. 

Co.  262,  269,  280 

Briscoe  v.  Southern  Kansas  R. 

Co.  253,    337,   340,    392,    452, 

453 
British    Nation,    etc.    Ass'n,    Ex 

parte  532 

Brockway  Mfg.  Co.,  In  re  239 

Brooklyn,  etc.  R.  Co.,  In  re  365 

t).    Long  Island  R.  Co.  341 

Brooklyn  Distilling  Co.  v.  Stand- 
ard Distilling  Co.  820,  837 
Brooker  v.  Mavsville,  etc.  R.  Co.     336, 

392 

Brooks  V.  Cooper  610 

Brown  v.  Dibble  134,  173,  179 

V.  Duluth,  etc.  R.  Co.  225 

V.  Hannibal,  etc.  R.  Co.  389 

V.  Jacobs'  Pharmacy  Co.  578,  589, 

590,  642,  643,  652,  765,  798 

V.  Toledo,  etc.  R.  Co.         423.  428 

V.  Winnisimet  Co.  321 

Brufett  V.  Great  Western  R.  Co.     161, 

226,  238,  299 

xxxii 


Brum  V.  Merchants  Mut.  Ins.  Co.      152, 

248 
Bruner  v.  Brown  571,  576 

Brunswick     Gas     Light      Co.      v. 

United  Gas,  etc.   Co.       255,  271, 
323,  434,  437,  440,  441,  442, 
443 
Buck  V.  Ross  239 

Buck  Mountain  Coal  Co.   v.   Le- 
high Coal,  etc.  Co.  450 
Buckley  v.  Big  Muddy  Iron  Co.        217 
Buckner  v.   Richmond,   etc.    R. 

Co.  402 

Buckwalter  v.  Whipple  245,  250 

Budd  V.  New  York  786 

Buell  V.  Buckingham         203,  211,  213 
Buffalo,  etc.  R.  Co.,  In  re  494 

V.  Dudley  84 

Buffalo    Lubricating    Oil    Co.    v. 

Standard  Oil  Co.  582 

Buford   V.    Keokuk,   etc.    Packet 

Co.  231,  508 

Bull  V.  Baltimore,  etc.  R.  Co.  170 

Burden  v.  Burden  510 

Burge  V.  St.  Louis,  etc.  R.  Co.  308 

Burger  v.  Grand  Rapids,  etc.  R. 

Co.  189,  191,  193 

Burke  v.  Cleveland,  etc.  R.  Co.  53, 

107 
Burkinshaw  v.  Nichols  572 

Burnes  v.  Burnes  513 

Burr  V.  Pittsburg,  etc.  R.  Co.  224 

Burrows  v.   Interborough-Metro- 

politan  Co.  831 

Butler  V.  Rahen  365 

Button  V.  Hoffman  516 

Bvrne  v.  Schuvler  Electric  Mfg. 

'Co.  206,216,225,229,231,473, 

480,  507,  508 


Cain  V.  City  of  Wyoming  268 

V.  Syracuse,  etc.  R.  Co.  466 

Caledonian,  etc.  R.  Co.  v.  Magis- 
trates of  Helensburgh  434 

Caledonian  R.  Co.  v.  North  Brit- 
ish R.  Co.  457 

California   v.   Central   Pacific   R. 

Co.  262 

California  Bank  v.  Kennedy    473,  480, 
504,  505,  532,  533,  534 

California     Central     R.     Co.     v. 

Hooper  146,  170 

Callahan  v.  Donnolly  604 

Callaway  v.  Foster  136 

Calumet    Paper    Co.    v.    Haskell 

Show  Printing  Co.  213 


TABLE   OF   CASES 


PAGE 

Calumet  Paper  Co.  v.  Stotts  In- 
vest. Co.  504,  525 
Camden,    etc.    R.    Co.    v.    May's 

Landing  R.  Co.       275,  336,  435,  442 
Camden  v.  Stuart  573 

Camden  Interstate  R.  Co.  v.  Lee     249, 

310 
Camden  Safe  Deposit,  etc.  Co.  v. 

Burlington  Carpet  Co.  110,  145 

Cameron  v.  Havemeyer     569,  570,  614 

V.  New  York,  etc.  Water  Co.   46,  56 

Campbell  v.  Farmers,  etc.  Bank       238 

V.  Marietta,  etc.  R.  Co.     150,  290, 

307 

Canada   Life   Assur.    Co.   v.    Pell 

Mfg.  Co.  475 

Canal,  etc.  R.  Co.  v.  St.  Charles 

Street  R.  Co.  461 

Cannon  v.  Brush  Electric  Co.  548 

Cantlon  v.  Eastern  R.  Co.  416 

Canton  v.  Canton,  etc.  Co.  409 

Capital   City    Light,    etc.    Co.    v. 

City  of  Tallahassee  597 

Capital  Traction  Co.  v.  Offut       19,  238, 

309 
Carey  v.  Cincinnati,  etc.  R.  Co.        116, 

182 

Carr  v.  Le  Fevre  576 

V.  Rochester  Tumbler  Co.  224 

Carrol  v.  Greenwich  Ins.  Co.  797,  825, 

826 
Carson  v.  Iowa,  etc.  Co.  216 

Carston  v.  Hofins  242 

Carswell   v.    Farmers  Loan,    etc. 

Co.  423,  425,  426,  428 

Carter  v.  Producers,  etc.  Oil  Co.      212, 

496 

Carter-Crume  Co.  v.  Peurrung         637, 

657,  676 

Cartwright  v.  Dickinson  511 

Caruthers   v.    Kansas   City,    etc. 

R.  Co.  397 

Case  of  the  Monopolies  622 

Cashman  v.  Brownlee  129 

Cass  V.  Manchester,  etc.  R.  Co.  314, 

345 
Castle  Bread  Co.,  In  re  513,  514 

Catawissa  R.  Co.  v.  Philadelphia, 

etc.  R.  Co.  376 

Catskill  Bank  v.  Gray  676 

Ceballos    v.    Munson    Steamship 

Line  708 

Central,  etc.  Co.  v.  Farmers  Loan, 

etc.  Co.  381,  429,  431 

Centra!,  etc.  R.  Co.  v.  Morris     328,  341, 

405 

V.  Georgia         11,  14,  17,  114,  118, 

123,  128,  137,  138,  141 


PAGE 

Central,  etc.  R.  Co.  v.  Perry  466 

V.  Pettus  248 

V.  Phinazee  392,  394 

V.  Smith  566 

V.  State  110 

Central  Branch  Union  Pacific  R. 

Co.  V.  Western  Union  Tel.  Co.     324 
Central  Electrical  Co.  v.  Sprague 

Electrical  Co.  243 

Central  Ohio  Salt  Co.  v.  Guthrie     599, 

632,  641,  645,  651,  655 

Central  R.  Co.  v.  Brinson  394 

V.  Macon  53 

V.  Pennsylvania  R.  Co.     477,  478, 

479,  519,  520 

V.  Pettus  421 

Central  R.,etc.  Co.  v.  Collins     59,  94, 

216,  473,  479,  481,  538,  539,  677 

Central  Shade  Roller  Co.  v.  Cush- 

man  559,  651,  654,  686,  742 

Central    Transportation    Co.     v. 

Pullman  Car  Co.  24,  253,  255,  259, 
275,  327,  329,  334,  335,  340,  351,  432, 
434,  436,  437,  438,  439,  440,  441,  443, 

536 
Central  Trust  Co.  v.  Continental 

Trust  Co.  423,  425,  430 

V.  Colo.  Midland  R.  Co.     456,  468 

V.  Denver,  etc.  R.  Co.  466 

V.  Kneeland  528 

V.  Ohio  Cent.  R.  Co.  663 

V.  Rochester,  etc.  R.  Co.  197 

V.  Wabash,  etc.  R.  Co.      423,  430, 

431,  465 

V.  Washington  Co.  R.  Co.  290 

V.    Western   North   Carolina 

R.  Co.  263 

Central  University  v.  Walter  14,  52,  87 

Chamberlain  v.  Bromberg  213 

Chapin  v.  Brown  599,  648,  650,  658,  667 

Chapman  v.  Douglass  County  440,  441 

V.  Ironclad  Rheostat  513 

V.  Mad  River,  etc.  R.  Co.      82,  95 

ChappcU  V.  Brockway  602,  645 

Charitv  Hospital  v.  New  Orleans 

GasLight  Co.  116,  118,  155 

Charles  K.  Wiswall,  The  747 

Charles  River  Bridge  v.  Warren 

Bridge  269,  334 

Charleston  v.  Branch  141 

Charlotte,  etc.  R.  Co.  v.  Gibbes     116, 

143,  155 

Charlotte    First    Nat.     Bank    v. 

Charlotte  92 

V.  National  Exch.  Bank  502,  503, 

504 

Charlton  v.  Newcastle,  etc.  R.  Co.      27, 

459 

xxxiii 


TABLK    OF   CASES 


PACE 

Chase  v.  Michigan  Tel.  Co.  19,  22 

V.  Tuttle  213 

V.  Vanderbilt  148,  157 

Chatham   v.    Newcastle,    etc.    R. 

Co.  663 

Chattanooga,     etc.     R.     Co.     v. 

Evans  241,  244,  245,  250 

Chattanooga       Foundry,       etc. 

Works  V.  City  of  Atlanta     757,  758 
Chattanooga  Terminal  R.  Co.  v. 

Felton  379 

Chemical    Nat.    Bank    v.    Have- 

meyer  534 

Cheraw,  etc.  R.  Co.  v.  Anson  116 

Chesapeake,     etc.     Fuel    Co.     v. 

United  States  707,  724 

Chesapeake,  etc.  R.  Co.  v.  Griest     238, 

308,  309,  310 

V.  Miller  161,  305,  306 

V.  Osborne  392 

V.  Virginia  141 

Chester   Nat.    Bank   v.    Atlanta, 

etc.  R.  Co.  396,  405 

Chewaca    Lime    Works    v.    Dis- 

mukes  259 

Chicago,  etc.  Coal  Co.  v.  People     580, 

586,  587,  588,  643,  814,  815,  816,  826, 

832,  843,  845,  850,  851 

Chicago  V.  Cameron  223 

V.  Evans  409,  413 

Chicago,  etc.  R.  Co.  v.  Ashling    16,  20, 

52,  118,  123,  170,  180 


r.  Auditor  General 

189, 

198 

V.  Ayres 

659 

V.  Boyd 

324 

V.  Butts 

171 

V.  Chicago,  etc.  Coal  Co. 

309 

V.  City  of  Ottumwa 

372 

V.  Crane 

385 

413 

V.  Denver,  etc.  R.  Co. 

361, 

362, 
461 

V.  Doaul 

394 

V.  Dunbar 

261 

V.  Ferguson 

20 

160 

V.  Galey 

152 

V.  Groves 

468, 

469 

V.  Hart 

399, 

400 

V.  Illinois  Central  R.  Co. 

378 

V.  Lundstrom 

242 

311 

V.  Martin 

468, 

469 

V.  Mitchell 

468 

V.  Moffitt              128,  151 

152, 

160 

V.  Northern  Pacific  R.  Co. 

464 

V.  Posten 

468, 

469 

V.  Pullman  Southern  Car  Co. 

604 

V.  Schmitz 

394 

V.  Stafford  County 

136, 

179 

V.  State 

30 

Chicago,    etc.    R.    Co.    v.     Third 
National  Bank 
V.  Union  Pacific  R.  Co. 
V.  Wabash,  etc.  R.  Co.        26, 

V.  Weber  359 

Chicago  City  R.  Co.  v.  People     267 

Chicago   Gas   Light,    etc.    Co.    v. 
People's  Gas  Light,    etc.    Co. 
654, 

Chicago     Hansom     Cab     Co.     v. 
Yerkes  216,  217,  219^ 

Chicago    Mun.    Gas    Light    v. 
Lake 

Chicago  St.  R.  Co.  v.  Marseilles 

Chicago  Wall  Paper  Mills  v.  Gen- 
eral Paper  Co.  838, 

ChoUette  v.  Omaha,  etc.  R.  Co. 

301, 

Chouteau  v.  Dean 

Cilley  V.  United  Shoe  Mach.  Co. 

Cincinnati,  etc.  R.  Co.  v.  Bunnell 

V.  Indiana,  etc.  R.  Co. 
V.  McKeen 
V.  Paskins 
V.  Townsend 
Cincinnati  Packet  Co.  v.  Bay 

Citizens  State  Bank  v.  Hawkins 

502,  503,  504,  533, 
Citizens  St.  R.  Co.  v.  Memphis 

130, 
City  Bank  v.  Bruce 
City  Fire  Ins.  Co.  v.  Carrigi 
City  of  Belleville  v.  Indianapolis, 

etc.  R.  Co. 
City  of  Danville  v.  Noone 
City  of  Denver  v.  Hubbard 
City     of    Indianapolis    v.     Con- 
sumers' Gas  Trust  Co.  254, 
City  of  Kalamazoo  v.  Power  Co. 
City    of    Memphis    v.    Memphis 

Water  Co. 
City  of  New  York  v.  Sixth  Ave. 

R.  Co. 
City  of  Palestine  v.  Barnes 
City  of  Spokane  v.  Amsterdamsch 

Trustees  Kantoor  237, 

Clancy    v.    Onondaga    Fine    Salt 

Mfg.  Co.  667, 

Clapp  V.  Peterson  239,  513, 

Clark  V.  Central,  etc.  R.  Co.        77, 
V.  Chicago,  etc.  R.  Co. 
V.  Cyclone    Woven     Wire 
Fence  Co. 
Clarke  v.  Omaha,  etc.  R.  Co.     56, 
280,  290, 


421 
322 

653, 
663 
409 

,268 

323, 

,  665 

,  223 

266 
513 

839 
273, 
,  395 
572 
578 
387, 
415 
362 
536 
468 
468 
703, 
718 
473, 
547 
120, 
138 
513 
433 

178 
597 
598 

274 
270 

597 

169 
254 

258 

668 
515 
520 
470 

823 
272, 
341 


XXXIV 


TABLE   OF   CASES 


PAGE 

Clary  v.   Iowa  Midland   R.   Co.     387, 

415,  419 

Claw  V.  Van  Loan  281 

Clayton  v.  Ore  Knob  Co.  572,  576 

Clearwater  v.  Meredith     13,  27,  81,  82, 

90,  92,  115 

Cleland  v.  Anderson  796,  800,  815, 

821,  849 

Clement  v.  Canfield  415 

demons  v.  Meadows  657,  817 

Cleveland,  etc.  R.  Co.  v.  Berry         468 

V.  Bender  466,  468 

V.  Closser  653,  661 

V.  Erie  54 

V.  Prewitt  160 

Cleveland  v.  Spencer  372 

Cleveland   City    R.    Co.    v.    First 

National  Bank  79,  90,  108 

Clinch     V.     Financial     Corpora- 
tion 25,  221,  233 
Clokey  v.  International,  etc.  Co.       242 
Clyde    V.     Richmond,    etc.     R. 

Co.  429 

Coal  Creek,  etc.  Co.  v.  Tennessee 

Coal,  etc.  Co.  313,  321 

Coe  V.  Columbus,  etc.  R.  Co.  254, 

255,  267,  272,  280 
V.  East  &  West  R.  Co.  571 

Coffin  V.  Ransdell  571,  576 

Coggin  V.  Central  R.  Co.  159,  166 

Cohen   v.    Berlin   &   Jones   Env. 

Co.  559,  645,  655 

Coit  V.  Gold  Amalgamating  Co.       571, 

576,  577 

Cole  V.  Millerton  Iron  Co.         239,  247, 

251 
Coleman  v.  Eastern  Counties  R. 

Co.  444 

V.  Howe  239,  577 

Coler  V.  Tacoma  R.,  etc.  Co.     226,  228, 

492,  520 

Coleson  v.  Blunton  358 

Colgate  V.  Bacheler  603 

V.  New  York,  etc.  R.  Co.  130 

V.  U.S.  Leather  Co.      49,  83,  85,  90, 

92,  112,  125,  157,  184,  185,  548 

Collins  V.  Chicago,  etc.  R.  Co.  173 

Colt  V.  I^arnes  267 

Columbia,  etc.   Co.   v.   Kentucky 

Union  R.  Co.  '      411 

Columbia  Carriage  Co.  v.  Hatch       819 
Columbia  Wire  Cloth  Co.  v.  Free- 
man Wire  Cloth  Co.  675,  823 
Columbus,  etc.  R.  Co.   v.  Burke 

474,  480,  493 
V.  Pennsylvania  Co.  463,  4(>4 

V.  Powell  1.52 

V.  Skidmore         152,  156,  166,  174 


PAGE 

Columbus  R.  Co.  v.  Indianapolis 

R.  Co.  659 

Comer  v.  Burton,  etc.  Co.  817 

Commercial  Electric  Light,  etc.  Co. 

V.  City  of  Tacoma  266 

Commercial     Fire     Ins.     Co.     v. 

Montgomery  Co.  477,  480,  493 

Commercial  Nat.  Bank  v.  Burch     513, 

515 
Commercial    Union    Ins.    Co.    v. 

Shoemaker  581 

Commissioners  of  Tippecanoe  Co. 

V.   Lafayette,   etc.   R.   Co.     22,  327, 
339,  345,  346,  350,  448 
Commonwealth  v.  Alger  791 

V.  Atlantic,  etc.  R.  Co.      108,  173, 
179 
V.  Bavarian  Brewing  Co.   805,  823 
V.  Boston,  etc.  R.  Co.  514 

V.  Buffalo,  etc.  R.  Co.  194 

V.  Chesapeake,  etc.  R.  Co.  358 

V.  Grinstead  818,  843,  844 

V.  Hemingway  519 

V.  Hunt  579 

V.  Judd  580 

V.  Lowell  Gas  Light  Co.  266 

V.  Nashville,  etc.  R.  Co.     305,  408 
V.  New  York,  etc.  R.  Co.  520 

V.   Northern  El.    Light,   etc. 

Co.  57 

V.  Owensboro,  etc.  R.  Co.  306 

V.  Pennsylvania  R.  Co.       175,  414 
V.  Perry"  789 

V.  Smith  264 

V.  Standard  Oil  Co.  522 

V.  Straus.s  792 

V.  A\'aterman  579 

Compton  V.  Wabash,  etc.  R.  Co.        16, 

20,  165 
Conant    v.    Bellows    Falls   Canal 

Co.  356 

Concord  Nat.  Bank  v.  Hawkins       533 
Coney    Island,    etc.     R.    Co.    v. 

Brooklyn  Cable  Co.  456,  460 

Conn  V.  Chicago,  etc.  R.  Co.  197 

Connolly    v.    Union    Sewer    Pipe 

Co.  674,  747,  758,  798,  799 

Connor  v.  City  of  Marshfield  254 

Conro  V.  Port  Henry  Iron  Co.     314,  344 
Consolidated  Gas  Co.,  In  re      830,  832 
Consolidated    Gas   Co.    v.    Balti- 
more County  Commrs.  131 
Consolidated     Traction     Co.     v. 

Elizabeth  128 

Consolidated  Water  Power  Co.  r-. 

Nash  212 

Continental  Building,  etc.  Ass'n 
V.  Miller  91 

XXXV 


TABLE   OF   CASES 


Continental    Ins.     Co. 
York,  etc.  R.  Co. 


V.     New 
346,  356,  369, 
446,  448 
Continental  Trust  Co.  v.  Toledo, 

etc.  R.  Co.  49,  52,  55,  176,  178, 

181,  187 

Continental    Wall    Paper   Co.    v. 

Voight  708, 

Cook  V.  Detroit,  etc.  R.  Co. 
V.  Marshall  . 

V.  Milwaukee,  etc.  R.  Co. 
Cooper  V.  Day 

V.  Shropshire  Union  R.  Co 


724, 


158 

439 

133 

707,  752 

160 

171 


504 


749 
161 
522 
415 
358 
132, 
147 
Copeland   v.   Citizens  Gas  Light 

Co.  314,  319 

V.  Memphis,  etc.  R.  Co.  188 

V.  Minong  Min.  Co.  124 

Coppin  V.  Greenles,  etc.  Co.     257,  511, 

512 
Coquard  v.  National,  etc.  Co.  657,  678, 
681,  682 
Cordova  Coal  Co.  v.  Long 
Cork,  etc.  R.  Co.,  In  re 
Cork  V.  Patterson 
Corning,  In  re 
Cotzhausen  v.  H.  W.  Johns  Mfg. 

Co. 
Council    Grove,    etc.    R.    Co.    v. 

Lawrence 
County  Court  v.  Baltimore,  etc. 

R.  Co. 
County    of    Gloucester    Bank    v. 

Rudry  Merthyr,  etc.  Co. 
County  of  Mobile  v.  Kimball 
Couse  V.  Columbia  Powder  Mfg. 

Co.  244,  245,  249 

Covington,  etc.   Turnpike  Co.  v. 

Sanford  790 

Coyle  V.  Pittsburgh,  etc.  R.  Co.  419 
Coyne  v.  Warrior  Southern  R.  Co.  290 
Cox  V.  Terre  Haute,  etc.  R.  Co.     423, 

441 
Craft  V.  McConoughy     591,  599,  651, 
658,  667 
Crandall  v.  Lincoln    239,  511,  512,  515 
Crane  v.  Fry  543 

Crawford  v.  Longstreet  313 

Crawfordsville,  etc.  Turnpike  Co. 

V.  Fletcher  144 

V.  State  27 

Crump  V.  Ligon  816,  833 

Crystal  Ice  Co.  v.  Wylie  849 

CuUen  V.  Coal  Creek,  etc.  R.  Co.     541 

Cumberland  Coal  Co.  v.  Sherman     225 

Cumberland  Tel.,  etc.  Co.  v.  City 

of  Evansville  237,  253,  266,  268, 

272,  273 

xxxvi 


303 
715 


Cumberland  Valley  R.  Co.  v.  Get- 

ty.sburg,  etc.  R.  Co.  659 

Cummings  v.  Union  Blue  Stone 

A.ss'n  559,  650,  655 

Cunkle  v.  Interstate  R.  Co.  171 

Cupit  V.  Park  City  Bank  213 

Curran  v.  Arkansas  168 

V.  Galen  587 

Currier  v.  Concord  R.  Co.  69,  77 

V.  Lebanon  State  Co.  511 

Curries  Case  576 

Curtis  V.  Cleveland,  etc.  R.  Co.        397, 

399 


D 


Dady  v.  Georgia,  etc.  R.  Co. 


69, 
185, 


Dana  v.  American  Tobacco  Co. 

V.  Bank  of  United  States 
Daniels  v.  St.  Louis,  etc.  R.  Co. 

Darcy  v.  Allien 

Dartmouth     College     v.     Wood- 
ward 81, 
Davies,  Matter  of                833,  834, 
Davis  V.  A.  Booth  &  Co.           637, 
802,  813, 
V.  Cong.  Beth  Tephilas  Israel 
V.  Gemmell 
V.  Massachusetts 
V.  Memphis,  etc.  R.  Co. 
V.  New  York 

V.  Old  Colonv  R.  Co.         351, 
439, 
V.  Providence,  etc.  R.  Co. 

V.    United    States    Electric 
Power,  etc.  Co.      476,  524, 

Day  V.  New  Orleans,  etc.  R.  Co. 
V.  New  York,  etc.  R.  Co. 

V.  Ogdensburg,  etc.  R.  Co. 

270,  338,  341,  370, 

V.  Postal  Tel.  Co. 

V.  Spiral  Springs  Buggy  Co. 

V.  Worcester,  etc.  R.  Co.    153, 
Deaderick  v.  Wilson  89, 

Debs,  In  re  714,  739, 

De  Camp  v.  Aylward  213, 

De     La     Vergne     Refrigerating 
Mach.    Co.    V.      German    Sav- 
ings Inst.         473,  496,  535,  545, 
Delaware,  etc.  R.  Co.  v.  Rutter 

V.  Frank 
Delaware  R.  Co.  v.  Tharp 

V.  Salmon 


,  80, 

347 

95 

203 

142, 
307 
594 

473 
844 

704, 
816 
25 
223 
790 
299 
267 

433, 
440 

388, 
416 

547, 
551 
160 
146, 
170 
187, 
453 
424 
257 
156 
212 
750 
299 


546 
738 
748 
133 
466 


TABLE   OF   CASES 


PAGE 

Delaware  R.  R.  Tax   81,  141,  195,  196 
De  Neufville  v.  New  York,  etc.  R. 

Co.  549 

Denike  v.  New  York,  etc.  Cement 

Co.  313,  316,  319 

Dennehy  v.  McNulta  423,  673 

Denny  Hotel  Co.  v.  Schram      477,  482, 

519,  546 

Denver,    etc.    R.    Co.    v.    Denver 

City  R.  Co.  267,  268 

Depo-sit  Bank  v.  Barrett  507 

Descombes  v.  Woods  225 

Detroit  v.  Little  321 

Detroit  Salt  Co.  v.  National  Salt 

Co.  640,  656,  669,  686,  850,  851 

Devine   v.    Frankfort   Steel,    etc. 

Co.  219 

De  Witt  Wire  Cloth  Co.  v.  New 

Jersey  Wire  Cloth  Co.  559,  599,  632, 

643,  649,  651,  655,  668 

Dewey  v.  Toledo,  etc.  R.  Co.  259,  506 

Diamond  Match  Co.  v.  Roeber        605, 

623,  645 

Dickerman  v.  Northern  Trust  Co.  575, 

576 

Dickey  v.  Railway  Co.  310 

Dickinson  v.  Cunningham  832 

V.  Consolidated  Traction  Co.    337, 

347,  348,  350,  447 

Dick.son  v.  Chicago,  etc.  R.  Co.         419 

Dietrichs  v.  Lincoln,  etc.  R.  Co.       378 

Dillaway  v.  Boston  Gas  Light  Co.     529 

Dimpfel  v.  Ohio,  etc.  R.  Co.      33,  105, 

182,  296 

Distilling,  etc.  Co.  v.  People    607,  619, 

639,  642,  681,  682,  687 

Ditchett  V.  Spuyten  Duyvil,  etc. 

R.  Co.  387,  391,  398,  415 

Dittman   v.    Distilling   Co.     492,    495, 

490,  518,  529,  637,  679,  682 

Dix  V.  Shaver  135 

Dock  V.  Schlichter  Jute  Cordage 

Co.  513 

Dodge  V.  Wolsey  215 

Dolph   V.    Troy    Laundry   Mach. 

Co.  "  558,  651,  654 

Doremus  v.  Hennessey  581 

Dougan's  Case  17,  93 

Douglass  V.  Concord,  etc.  R.  Co.  92,  96 
Dow  V.  Biedleman  307 

V.  Northern  R.  Co.  327 

Downing  v.  Chicago,  etc.  R.  Co.     387, 

415 
257 
835 
211 


V.  Mt.  Washington  R.  Co. 

V.  Lewis 
Doyle  V.  Leitelt 
Drake  v.  New  York  Sub.  Water 
Co. 


89 


Drake  v.  Siebold 

DriscoU  V.  Norwich,  etc.  R.  Co. 

Dronfield  Silk.stone  Coal  Co.  R. 

Drj^den  v.  Grand  Trunk  R.  Co. 
Dubuque,  etc.  R.  Co.  v.  Litchfield 

V.  Sioux  City  Railroad  Co. 
Dudley  v.  Kentucky  High  School 

Dueber  Watch  Case  Mfg.  Co.  v. 
Howard  Watch,  etc.  Co.       705, 

Dunbar  v.   American   Telephone 
Co.  478,  523,  538,  539,  540, 

640,  643,  812, 

Dupee  V.   Boston   Water  Powei 
Co. 

Du  Pont  V.  Tilden 

Durfee  v.  Old  Colonv  R.  Co.    84,  86, 


PAGE 

650 
393, 
403 
511, 
514 
414 
334 
543 
86, 
216 

716, 
720 

546, 
,  814 

513 
576 
347 


E 

Earle  v.  Seattle,  etc.  R.  Co.       81,  327, 

458 
East  Alabama  R.  Co.  v.  Doe  253 

E^yast  Anglian  R.  Co.  v.  Eastern 

Counties  R.  Co.  32,  327,  435 

East  Boston,  etc.  R.  Co.  v.  East- 
ern R.  Co.  270,  303 
East  India  Co.  v.  Sandys  593 
East  Lincoln  v.  Davenport  136 
East  Line,  etc.  R.  Co.  v.  Culber- 
son                                     401,  402 
V.  Rushing       49,  73,  74,  273,  280, 
281,  290,  302 
V.  State          27,  49,  52,  53,  73,  77, 
272,  281,  290,  302,  335,  448,  449 
East  St.  Louis,  etc.  R.  Co.  v.  Ger- 

ber  387 

V.  Jarvis  22,  64,  65,  66,  73 

V.  Wabash,  etc.  R.  Co.  174 

East  Tennessee,   etc.    R.   Co.   v. 

Hamblin  Co.  305 

V.  Nashville,  etc.  R.  Co.  443 

Eastern   Building,   etc.   Ass'n.   v. 

Williamson  260 

Ea.storn     Counties     R.     Co.     v. 

Hawkcs  442 

Eastern  Plank  R.  Co.  v.  Vaughan     482 
Eastern  Townships  Bank  v.   St. 

Johnsbury,  etc.  R.  Co.  369 

Eastern  Union  R.  Co.  v.  Cochrane  131 
Easton  v.  Houston,  etc.  R.  Co.  430 
Easun  v.  Buckeye  Brewing  Co.  227, 
231,  473,  507,  508 
Eaton,  etc.  R.  Co.  v.  Hunt  116,  118, 
156,  162,  199 

xxxvii 


TABLE    OF   CASES 


Eclipse  Tow  Boat  Co.  v.  Ponchar- 

train  R.  Co.  558,  659 

Edison  Electric  Light  Co.  v.  New 

Haven  El.  Co.  119 

V.  Sawyer-Man  Electric  Co.      595, 

675 

V.  U.  S.  El.  Lighting  Co.  170 

V.  Westinghouse  170 

Edwards  v.  Bringier  Sugar  Ext. 

Co.  572 

V.  People  136 

Edwards  County  v.  Jennings  596 

Eel  River  Co.  v.  State  449 

Egerton  v.  Brownlow  610 

Eisel  V.  Hayes  604 

Elbogen  v.  Gerbereaux-Flynn  Co.  219 
Eldred  r.   American  Palace  Car 

Co.  216,  218 

Elkins  V.   Camden,   etc.    R.   Co.     216, 
459,  474,  506,  538,  539,  545 
Ellerman  v.  Chicago  Junction  R., 

etc.  Co.  538 

Ellis  V.  Inman  708,  724,  755,  757 

Elmira  Rolling  Mill  Co.   v.  Erie 

R.  Co.  462 

Elysville  Mfg.  Co.  v.  Oskisko  Co.  476 
Elyton  Land  Co.  v.  Dowdell  206,  227 
Emery  v.  Ohio  Candle  Co.        650,  655, 

668 
Empire   Assurance   Corporation, 

In  re  18 

Empire  Distilling  Co.  v.  McNulta     423, 
425,  426 
Empire  Mills  v.  Alston  Grocery 

Co.  523 

Empire  Township  v.   Darlington     136 
Enfield  Toll  Bridge  Co.  v.  Hart- 
ford, etc.  R.  Co.  270 
Era  Ins.  Soc,  Re  25 
Erie,  etc.  R.  Co.  v.  Pennsylvania 

R.  Co.  371 

Ertz  V.  Produce  Exch.  Co.         588,  822 

Ervin  v.  Oregon,  R.  etc.  Co.    180,  205, 

208,  217,  218,  222,  223,  548 

Espenson  v.  Kolpe  816 

Evans  v.  Bailey  510 

V.  Boston  Heating  Co.  266 

V.  Interstate   Rapid   Transit 

Co.  170 

V.  Sabine,  etc.  R.  Co.  403 

V.  Smallcomb  225 

V.  Union  Pacific  R.  Co.  222 

Evansville,  etc.   R.   Co.   v.  Com- 
monwealth 305,  306 
Ewing  V.  Composite  Brake  Shoe 

Co.  248 

Exchange  Bank  v.  Macon,  etc.  R. 

Co.  516 

xxxviii 


Export    Lumber    Co.    v.    South 
Brooklyn  Sawmill  Co.  820 


Factors,  etc.  Ins.  Co.  v.  New  Har- 
bor Protection  Co.  27,  476,  477, 

519 
Fairbanks  v.  Leary  591,  658 

Fame  Hose  Co.,  Appeal  of  20 

Fanning  v.  Osborne  281 

Farmers,  etc.  Bank  v.  Champlain 

Traction  Co.  513 

Farmers  Loan,  etc.  Co.  v.  Chicago, 

etc.  R.  Co.  430 

V.  New  York,  etc.  R.  Co.  547, 

548,  549 

V.  Northern  Pacific  R.  Co.        425, 

427,  429 

V.  St.  Joseph,  etc.  R.  Co.  345 

V.  Toledo,  etc.  R.  Co.         178,  180, 

181,  230,  297 

Farnum  v.  Blackstone  Canal  Co.       192 

Farnsworth    v.    Western    Union 

Tel.  Co.  325 

Farrar  v.  South  Western  R.  Co.     428 

Farwell  v.  Great  West.  Tel.  Co.        571 

V.  Houghton  Copper  Work         514 

Favette  Land  Co.   v.   Louisville, 

etc.  R.  Co.  258 

Featherstonhaugh    v.    Lee    Moor 

Porcelain  Clay  Co.  313,  317 

Fee  V.    New   Orleans  Gas  Light 

Co.  107,  116,  120,  124 

Feital  v.  Middlesex  R.  Co.  417 

Feld  V.  Roanoke  Investment  Co.  212, 
224,  229 
Felton,  Receiver  v.  City  of  Cin- 
cinnati 406 
Female  Orphan  Asylum,  Re  313 
Ferd     Heim     Brewing     Co.      v. 

Belinder  586,  605,  814,  819,  838 

Fernschild    v.  ■  Yuengling    Brew- 
ing Co.  242,  243 
Fidelity    Insurance,    etc.    Co.    v. 

Shenandoah  Valley  R.  Co.  358 

Fidelity  Insurance  Co.  v.  German 

Sav.  Bank  502,  534 

Field  V.  Barber  Asphalt  Co.     597,  716, 

719 
Fietsam  v.  Hay  261,  262,  263 

Financial  Corporation,  In  re  475 

Finch  V.  Schneider  Granite  Co.     656, 
803,  822,  834 
Finnegan  v.  Norrenberg  176 

First  National   Bank  v.   Chatta- 
nooga, etc.  Co.  248 


TABLE   OF  CASES 


First  National  Bank  v.  Dovetail 
Body,  etc.  R. 
v.  Hawkins 

V.  Louisville,  etc.  R.  Co. 
V.  Nat.  Exch.  Bank 
V.  North  Alabama,  etc.  Co. 
V.  Salem  Capital  Flour  Mills 
Co. 
Fischer  v.  West  Virginia  R.  Co. 


241 
533 
375 
473 
238 

513 
328, 
392 
597 
31, 


Fishburn  v.  City  of  Chicago 
Fisher  v.  Evansville,  etc.  R.  Co. 

80,  81,  89 
V.  Metropolitan  El.  R.  Co.  398 

V.  New  York  Central,  etc.  R. 

Co.  147,  338,  409,  411 

Fitzgerald  v.  Mis.souri  Pacific  R. 

Co.  189,  190,  191,  193,  197, 

543 
Fitzmaurice  v.  Bailey  366 

Flagg  V.  Manhattan  R.  Co.  382 

Flynn  v.  Brooklyn  City  R.  Co.        447, 

448 
Fogg  V.  Blair  238,  252 

Fontaine  v.  Southern  Pacific  R. 

Co.  387 

Foote  V.  Emerson  669 

Ford   V.    Chicago    Milk   Shippers 

As.s'n  588,  651,  811, 

834,  838 

Foreman  v.  Bigelow  571 

Forrest  v.  Manchester,  etc.  R.  Co.     322 

Forrester  v.  Boston,  etc.  Min  Co.     205, 

209,  210,  216,  223,  228,  229 

Fort    Payne    Bank    v.    Alabama 

Sanitarium  204,  244,  245, 

250 
Fort  Waj^ne,  etc.  R.  Co.  v.  Heine- 

baugh'  388 

Fort  Worth,  etc.  R.  Co.  v.  State     829, 

845 
Fort  Worth  Pub.  Co.  v.  Hitson  225 
Foss  V.  Cummings  667,  668 

Foster  v.  Fowler  -  253 

Fougeray  v.  Cord  217 

Fowle  V.  Parke  604,  744 

Fox,  etc.  Steel  Co.  v.  Schoen     602,  657 
Frank  v.  New  York,  etc.  R.  Co.       367, 
368,  423,  428 
Franklin    Bank    v.    Commercial 

Bank  474,  481,  504,  530 

Franklin  Co.  v.  Lewiston  Savings 

Inst.  473,  480,  499 

Franklin  Life  Ins.  Co.  v.  Adams       159 

V.  Hickson  157,  170 

Frazier  v.  Railway  Company    273,  280 

Freeman  v.  Minneapolis,  etc.  R. 

Co.  327,  392,  454 


PAGE 

Freeman  v.  Sea  View  Hotel  Co.  202 
Freemont   Carriage    Mfg.    Co.    v. 

Thomsen  513 
Frenkel  v.  Hudson  571 
Friedenwald  Co.  v.  Asheville  To- 
bacco Works  242 
Frisbie  v.  United  States  790 
Froelich  v.  Musicians'  Mut.  Ben. 

Ass'n  588 

Frothingham  v.  Barney  230 

Fry  V.  Lexington,  etc.  R.  Co.     83,  133 

Fuqua  v.  Pabst  Brewing  Co.  810 

G 

Gage  V.  State  804 

Gaither  v.  Stockbridge  422,  423 

Gale  V.  Troy,  etc.  R.  Co.  169 

Galpin  v.  Abbott  358 

Galveston,  etc.  R.  Co.  v.  Cowdrey     330 

V.  Daniels  400,  402 

V.  Gartesier  392 

V.  Texa.s  44 

Gamble  v.  Queens  County  Water 

Co.  548,  572 

Gamewell  Fire  Alarm  Tel.  Co.  v. 

Crane  604 

Gardner  v.   Hamilton  Mut.   Ins. 

Co.  124 

V.   London,  etc.  R.  Co.       458 

V.  Minneapolis,  etc.  R.  Co.         125 

Garst  V.  Harris  744 

Gasquet   v.    Fidelity   Trust,    etc. 

Co.  528 

Gates  V.  Hooper  806,  816 

V.  Tippecanoe  Stone  Co.  576 

Geer  v.  Amalgamated  Copper  Co.      539 
General  Electric  Co.  v.  Wise  747 

George  v.  Central  R.,  etc.  Co.  359,  547, 

550 
Georgia,    etc.     Banking    Co.    v. 

Smith  785 

Georgia,  etc.  R.  Co.  v.  Friddle         471 

V.  Wilks  147 

Georgia  Pacific  R.  Co.  v.  Gainet       74, 

147 
Georgia  R.  Co.  v.  Maddox  337,  343,  456 
Georgia  R.,  etc.  Co.   v.  Atlantic 

Postal  Tel.  Coal  Co.  666 

V.  Haas  273,  294,  396 

Gere  v.  New  York  Central  R.  Co.       22, 

67,  327,  338,  365 

German  American,  etc.  Ass'n  t;. 

Droge  509 

Germer  v.  Triple-State  Natural 

Gas,  etc.  Co.  230,  490 

Getz  Bros.  &  Co.  v.  Federal  Salt 

Co.  668,  708,  749,  819,  837 

xxxix 


TABLE   OF  CASES 


PAGE 

Gibbons  v.  Ogden  75,  76,  715 

Gibbs  V.  Consolidated  Gas  Co.     47,  88, 

653,  665 

V.  McNeeley       717,  720,  724,  729, 

755 

Gilbert  v.  Washington  City,  etc. 

R.  Co.  431 

Gilkie,   etc.   Co.   v.   Dawson,   etc. 

Co.  576 

Gilliland  v.  Chicago,  etc.  R.  Co.       313 

Giozza  V.  Tiernan  790 

Gladish  v.  Bridgeford  822 

V.   Kansas  City   Live   Stock 

Exch.  588,  658 

Glengarry    Consol.    Min.    Co.    v. 

Boehmer  219,  318,  448,  547 

Globe  Tobacco  Warehouse  Co.  v. 

Leach  676 

Gloninger  v.  Pittsburgh,  etc.  R. 

Co.  270,  303,  365 

Gloucester  Ferry  Co.  v.  Pennsyl- 
vania 715 
Gloucester  Isinglass,    etc.    Co.    v. 

Russia  Cement  Co.  651,  654 

Glymont  Imp.,  etc.  Co.  v.  Toller       88, 

224,  229 

Goetz  V.  Knie  213 

Goodin  v.  Cincinnati,  etc.  Canal 

Co.  547 

V.  Evans  572 

Goodwin  v.  Bodcaw  Lumber  Co.     217, 

237 
Goodvear    Shoe    Mach.     Co.     v. 

Daucel  242 

Gottschalk  v.  Lincoln,  etc.  R.  Co.     378 

Gould  V.  Head  566,  569 

V.  Langdon  155 

Graham  v.  Boston,  etc.  R.  Co.       193, 

330,  357 

V.  Chicago,  etc.  R.  Co.  308 

V.  Macon,  etc.  R.  Co.  203 

Grand  Trunk  R.   Co.   v.  Central 

Vermont  R.  Co.  370,  430 

Grand    Trunk    West.    R.    Co.    v. 

Chicago,  etc.  R.  Co.  364,  465 

Gray   v.    De   Castro,    etc.    Sugar 

Ref.  Co.  614 

V.  Massachusetts  Cent.  R. 

Co.  363 

V.  National  Steamship  Co.  238 

V.  Oxnard  Bros.  667,  668,  671 

Great  Eastern  R.  Co.  v.  Turner        476 

Great  Northern  R.  Co.  v.  Eastern 

Counties  R.  Co.       274,  328,  476 
V.  Manchester,  etc.  R.  Co.  459 

Great  Western  R.  Co.  v.  Bristol 

Port  R.  Co.  462 

V.  Metropolitan  R.  Co.  476 

xl 


PAGE 

Green  v.  Coast  Line  R.  Co.  394 

V.  StoUer  727 

Green  Bay,  etc.  R.  Co.  v.  Union 

Steamboat  Co.  459 

Green  County  v.  Conness  19,  122,  123, 

128 
Greene,  In  re     694,  705,  707,  711,  716, 
720,  740,  751,  752,  753 
Greenville  Compress,  etc.  Co.  v. 

Planters,  etc.  Compress  Co.   25,  183, 

257 
Greenwood  v.  Freight  Co.  522 

Greer  v.  Payne  667,  668,  669 

V.  Stoller  749 

Gregory  v.  Patchett  224,  548 

Grenell  v.  Detroit  Gas  Co.         245,  249 
Grice,  In  re  754,  789,  796,  827 

Griffin  v.  Piper  651,  658 

Gross  V.  U.  S.  Mortgage  Co.  330 

Guaranty  Trust  Co.   v.   Atlantic 

Coast  Electric  Co.  528 

Gubernator  v.  City  of  New  Or- 
leans 314 
Gue  V.  Tide  Water  Canal  Co.    253,  255 
Gulf,   etc.    R.   Co.   V.   Galveston, 

etc.  R.  Co.  463 

V.  Hewes  305 

V.  Miami  Steamship  Co.    660,  661, 

738,  750 

V.  Morris     253,  273,  275,  280,  328 

V.  Newell  19,  27,  82,  161,  300 

V.  State  64,  69,  74,  77 

Gunn  V.  Central  R.,  etc.  Co.  566 

Gyger  v.  Philadelphia,  etc.  R.  Co.       72 


H 


Hadley  Dean  Plate  Glass  Co.  v. 

Highland  Glass  Co.  747,  810 

Hafer  v.  Cincinnati,  etc.  R.  Co.  55,  77 
Haff  V.  Minneapolis,  etc.  R.  Co.  418 
Hagan  v.  Blindell  750 

Hagemann  v.  Southern  Electrical 

Co.  238,  249,  309 

Hale  V.  Cheshire  R.  Co.  84,  86 

V.  Henkel  761 

Hall  V.  Brown  418 

V.  Herter  243 

V.  Sullivan  R.  Co.       265,  270,  330 

V.  Tanner,  etc.  Engine  Co.         203 

V.  White  670 

Hamilton  v.  Clarion,  etc.  R.  Co.      133, 

180 
V.  Menominee   Falls   Quarry 

Co.  251 

V.  Mut.  Ins.  Co.  V.  Hobart  83 

V.  Savannah,  etc.  R.  Co.       69,  77, 

327,  473 


TABLE   OF    CASES 


Hamlin  v.  Jerrard  162 

Hammond  Packing  Co.  v.  State 

845, 
Hammond  v.  Port  Royal,  etc.  R. 

Co. 
Hamor  v.  Taylor  Rice  Engineer- 
ing Co. 
Hampe  v.  Mt.  Oliver  I.  R.  Co. 

V.  Traction  Co. 
Hamsher  v.  Hamsher 
Hancock  v.  Holbrook         211,  214, 
V.  Louisville,  etc.  R.  Co.      53, 
Hand  v.  Savannah,  etc.  R.  Co. 
Hanna  v.  Cincinnati,  etc.  R.  Co. 

94,  135, 
V.  Railway  Co.  396, 

Hannibal,  etc.   R.  Co.  v.  Marion 

County 
Hanson  v.  Power 
Harbison  v.  Knoxville  Iron  Co. 
Harden  v.  North  Carolina  R.  Co. 

Harding  v.  American  Glucose  Co. 
608,  611,  625,  635,  641,  644,  651, 
678,  679,  680,  686, 
Hare  v.  London,  etc.  R.  Co.      59, 
558,  661, 
Harkness  v.  Manhattan  El.  R.  Co. 
Harmon  v.  Columbia,  etc.  R.  Co. 

393,  395, 
Harper  v.  Newport  News,  etc.  R. 

Co. 
Harriman  v.  Northern  Securities 

Co.  518, 

Harrison  v.  Arkansas  Valley  R. 
Co.  152, 

V.  Glucose  Sugar  Refin.  Co. 

673,  747, 
V.  Union  Pac.  R.  Co. 
Harshman  v.  Bates  County 
Hart  V.  Railroad  Co. 
Harter  v.  Keruochan 
Hartford,    etc.    R.    Co.    v.    New 

York,  etc.  R.  Co. 
Hartford  Fire  Ins.  Co.  v.  Chicago, 
etc.  R.  Co.  321, 

V.  Raymond  825, 

Hartman  v.  John  D.  Park  &  Sons 

Co. 
Hartwell  v.  Buffalo,  etc.  R.  Co. 
Hartz  V.  Eddy  686, 

Hastings  Industrial  Co.  v.  Baxter 
Hastings    Malting    Co.    v.     Iron 

Range  Brewing  Co.        572,  576, 
Hatch  V.    American   Union   Tel. 

Co. 
Hatcher  v.  Toledo,  etc.  R.  Co.     32, 


PAGE 
,    163 

805, 
851 

309 

511 
53 
342 
258 
225 
524 
305 
80, 
170 
402 

136 
669 
792 

395, 
401 

229, 

677, 
826 

450, 
663 
383 

328, 
404 

395 

732 

168 
604, 
838 
152 
1.37 
390 
130 

059 

375 

846 

744 
498 
851 
836 

577 

236 
161, 
330 


Havemeyer  v.  Superior  Court 
Hawarden  v.  Youghiogheny,  etc 

Coal  Co.  583 

Hawes  v.  Oakland 
Hawkins  v.  Central  of  Georgia  R. 
Co.  152, 

V.  Small 
Hawley  v.  Gray  Bros.,  etc.  Co. 
Hayden  v.  Atlanta  Cotton  Fac- 
tory 
V.  Official  Red  Book  and  Di- 
rectory Co.      206,  208,  211, 
Haves  v.  Northern  Pacific  R.  Co. 

390,  392,  396, 
V.  Ottawa,  etc.  R.  Co.        301, 
Hays  r.  Illinois,  etc.  Co. 
Hazard  v.  Vermont,  etc.  R.  Co. 

341, 
Hazlehurst  v.  Savannah,  etc.  R. 

Co.  473,  479, 

Hearst  v.  Putnam  Min.  Co.       203, 
Heath  v.  Missouri,  etc.  R.  Co. 
Ileck  V.  McEven 
Heims  Brewing  Co.  v.  Flannery 
Heimsbucher  v.  GofT  656,  708, 

Hendee  v.  Pinkerton  256, 

Hendrie  v.  Grand  Trunk  R.  Co. 
Henry  v.  Pittsburgh,  etc.  R.  Co. 
Henry  County  i'.  Nicolay 
Heron  v.  St.  Paul,  etc.  R.  Co 

Herriman  v.  Menzies         559,  598, 
650, 
Herring  v.  Ruskin 
Hervey  v.  Illinois  Midland  R.  Co. 

Hess  Mfg.  Co.,  In  re 

Hibernia   Ins.   Co.    v.   St.    Louis, 

etc.  Transportation  Co.  244, 

Higgins  V.  Downward 
Hiles  V.  Hiles  Co. 
Hill  V.  Atlantic,  etc.  R.  Co.     337, 
352,  356,  364, 

V.  Beach 

V.  Fogg 

V.  Gould  219, 

V.  Gruell 

V.  Nisbet  90,  221,  499, 

V.  Rich  Hill  Coal  Min.  Co. 
Hinds  County  v.  Natchez,  etc.  R. 

Co. 
Hitchcock  V.  Barrett 

V.  Galveston 
Hoag  V.  Hannibal,  etc.  R.  Co. 
Hoard  v.  Chesapeake,  etc.  R.  Co. 
Hodder  v.  Kentucky,  etc.  R.  Co. 
Hodges  V.    New   England   Screw 
Co.  216,  231,  500,  501,  502, 

xli 


PAGE 

683 

,  586 
216 

309 
143 
359 

571 

217 
387, 
402 
444 
273 
324, 
383 

538 
222 
300 
482 
437 
818 
365 
355 
346 
136 

397, 
466 

643, 
686 
511 
54, 
296 
576 

248 
299 
19 
351, 
383 
522 
226 
220 
249 
505 
535 

294 
446 
441 
257 
161 
357 

508 


TABLE    OF   CASES 


PAGE 

Hoene  v.  Pollak  224 

Hoffman  v.  Brooks  646,  648,  651 

Hollifield  v.  Wrightsville,  etc.  R. 

Co.  540 

Hollins  V.  Brierfield  Coal,  etc.  Co.     241 

V.  St.  Paul,  etc.  R.  Co.  223 

Holman  v.  Johnson  435 

Holmes,  etc.  Mfg.  Co.  v.  Holmes, 

etc.  Metal  Co.  204,  258,  502,  508,  537 
Hoist  V.  Sidney,  etc.  Coal.,  etc. 

Co.  235 

Home  Friendly  Soc.  v.  Tyler  25 

Hood  V.  New  York,  etc.  R.  Co.  499 

Hoole  V.  Great  Western  R.  Co.  222 

Hooper  v.  California  715,  790 

Hope  V.   International  Financial 

Soc.  511 

Hopkins  v.  St.  Paul,  etc.  R.  Co.        161 

V.  United  States         715,  716,  717, 

718,  727,  728 

Home  V.  Boston,  etc.  R.  Co.     190,  191, 

193,  198 

V.  Railroad  Co.  193 

Horner  v.  Graves  605 

Hospe  V.  Northwestern  Mfg.,  etc. 

Co.  241 

Houck  V.  Anheuser  Busch  Brew- 
ing Ass'n  796 
V.  Wright                                        818 
Hough  V.  Cook  County  Land  Co.     258 
Houston,  etc.  R.  Co.  v.  Shirley     19,  21, 
161,  166,  167 
V.  McFadden                         325,  398 
Howard  v.  Chesapeake,  etc.  Co.       392, 

452 
Howe  V.  Boston  Carpet  Co.     502,  503, 

508 
Howe  Grain,  etc.  Co.  v.  Jones  513 

Howell  V.  Lansing,  etc.  Traction 

Co.  20,  181 

Hubbard  v.  Chappell  173 

V.  Miller  604 

Huck  V.  Chicago,  etc.  R.  Co.  408 

Huggins   V.    Milwaukee    Brewing 

Co.  238 

Hukill  V.  Maysville,  etc.  R.  Co.     392, 

393,  402 

Hukle  V.  Atchison,  etc.  R.  Co.         309 

Humphreys  v.  Mooney  520 

V.  McKissock  354,  543 

V.  Pegues  306 

V.  St.  Louis,  etc.  R.  Co.     355,  359, 

434 

Hunt  V.  American  Grocery  Co.  211,  214 

V.  Hauser  Malting  Co.     473,  480, 

501,  534 

V.      Riverside      Cooperative 

Club  815,  821 

xlii 


PAGE 

Hunter  v.  Columbia,  etc.  R.  Co.       388 
Huntting  v.  Hartford  St.  R.  Co.     335, 

342 
Hurd  V.  New  York,  etc.  Laundry 

Co.  239,  248 

Hurd  County  v.  Natchez,  etc.  R. 

Co.  517 

Hutchins  v.  Hutchins  581 

V.  Weldon  670 


Illinois  Cent.  R.  Co.  v.  Kanouse      415 
V.  Lucas  395 

Illinois,  etc.  R.  Co.  v.  Cook  81 

Illinois    State    Trust    Co.    v.    St. 

Loui.s,  etc.  R.  Co.  291 

Imperial  Mercantile  Credit  Ass'n, 

In  re  233 

Independent  Refiners'  Ass'n  v. 
Western  New  York,  etc.  R. 
Co.  664 

India  Bagging  Ass'n  v.  Koch         607, 
650,  658,  667 
India  Mut.  Ins.  Co.  v.  Worcester, 

etc.  R.  Co.  156 

Indiana  Mfg.    Co.    v.   J.    I.    Case 

Threshing  Co.  740,  741,  742 

Indianapolis,  etc.  R.  Co.  v.  Jones     152, 
153,  160,  166,  173 
V.  Solomon  466 

V.  State  253 

Indianapolis  Mfg.  Union  v.  Cleve- 
land, etc.  R.  Co.  367,  374 
Indianola  R.  Co.  v.  Fryer         116,  166, 

171 
IngersoU  v.  Stockbridge,  etc.  R. 

Co.  388 

Ingraham  v.  Nat.  Salt  Co.  551 

Inhabitants  of  Waldoborough  v. 

Knox,  etc.  R.  Co.  348 

Interborough-Metropolitan     Co., 

In  re  832 

International,     etc.     R.     Co.     v. 

Bremond  89,  91,  95 

V.  Eckford  392 

V.  Moody  328 

V.  Thornton  404 

International    Harvester    Co.    v. 

Commonwealth  818,  828 

V.  Kentuckj^  844 

Interstate    Commerce    Com.     v. 

Texas,  etc.  R.  Co.  188 

Iowa  Lumber  Co.  v.  Foster      513,  514 
Irrigation  Co.,  In  re  233 

Irvin  V.  New  Orleans,  etc.  R.  Co.     407, 

408 


TABLE   OF   CASES 


PAGE 

Island    City    Savings    Bank  v. 

Sachtleben  226 

V.  Schattchen  238 

Isom  V.  Rex  Crude  Oil  Co.  119,  122 

Ives  V.  Smith  664 


Jack  V.  Kansas  793,  805 

Jackson  v.  Brick  Ass'n  650,  655 

V.  Ludeling  180,  548 

Jacksonville,     etc.     R.     Co.     v. 

Hooper  313,  357,  358,  376 


Louisville,  etc.  R.  Co. 
Jayne  v.  Loder 

Jefferson  v.  Chicago,  etc.  R.  Co. 
Jeffersonville,  etc.  R.  Co.  v.  Hen- 
dricks 
Jemison  v.  Citizens  Savings  Bank 


364 
744 
467 

160 

434 
266 


Jersey  City  Gas  Co.  v.  Dwight 
Jersey    City    Gas    Light    Co.    v. 

United  Gas  Imp.  Co.      322,  323,  371 
Jessup  V.  Illinois  Cent.  R.  Co.     22,  225, 
446,  542,  547 
John    D.    Park    &    Sons    Co.    v. 
Nat.       Wholesale       Druggists 
Ass'n  607,  704 

John   Hancock,   etc.    Ins.   Co.    v. 

Worceister,  etc.  R.  Co.  127,  156 

Johnson  v.  Shrewsbury,  etc.  R.  Co.   458 
V.  State  143,  269 

Johnson  Co.  v.  Miller  256 

Johnson  Countv  v.  Thaver  513 

Johnson  Pub.  Co.  v.  Mills  832 

Johnston  v.  Markle  Paper  Co.  572 

Joint     Stock     Discount     Co.     v. 

Brown  480 

Jones    V.    Arkansas    Mechanical 

and  Agricultural  Co.  245 

V.  Brim  790 

V.  Carter,  600,  806,  811,  814 

V.  Concord  R.  Co.  341,  342,  346 
V.  Georgia  Southern  R.  Co.  403 
V.  Guaranty,  etc.  Co.  203 

V.  Lees  605 

V.    Missouri-Edison    Electric 

Co.  25,  57,  90,  179,  184 

V.  Seaboard  Air  Line  R.  Co.       160 

V.  Southern  R.  Co.  169 

V.  Whitworth  576 

Jones'  Case  578 

Jordan  v.  Collins  204 

Joseph  V.  Raff  513 

V.  Southern  R.  Co.  161 

Joy  V.  City  of  St.  Louis  405 

V.  Jackson,  etc.  Plank  Road 

Co.  203 


PAGE 

Judd  V.  Harrington  041,  645,  651,  658, 

667 
Justices,  In  re  Opinion  of  793 

K 

Kadish  v.  Garden  City,  etc.  Ass'n  508 
Kann  v.  Illinois  Southern  R.  Co.  309 
Kansas  City  Hotel  Co.  v.  Sauer  226 
Kansas,  etc.  R.  Co.  v.  Smith  171 

Kassler  v.  Kyle  514 

Kaufman  v.  Pittsburgh,  etc.  R. 

Co.  335,  336.  342 

Kavanaugh  v.  Omaha  Life  Ass'n      25, 

50,  176 
Kean  v.  Johnson  82,  208 

Kearney  v.   New  Jersey  Central 

R.  Co.  419 

V.  Central  R.  Co.  390 

Keeley  Brewing  Co.  v.  Mason  313 

Keller  v.  Kansas  City,  etc.  R.  Co.  388 
Kellogg  V.  Larkin  611,  646,  658 

V.  Lehigh  Valley  R.  Co.  587 

Kelly  V.  Fletcher  576 

Kennebec,  etc.  R.  Co.  v.  Portland, 

etc.  R.  Co.  330 

Kennedy    v.    California    Savings 

Bank  504,  533 

Kenosha,  etc.  R.  Co.  v.  Marsh  85,  133 
Kent  V.  City  of  Binghamton  130,  308 
V.  Quicksilver  Mining  Co.  214,  223 
Kent  Coast,  etc.  R.  Co.  v.  Lon- 
don, etc.  R.  Co.  356 
Kentucky,    etc.     Bridge    Co.    v. 

Louisville,  etc.  R.  Co.  660 

Keokuk,  etc.   R.  Co.  v.   Missouri     12, 

114,  116,  121,  128,  139,306 

V.  Scotland  County  138,  139 

Kern  v.  Day  535 

Kersey  Oil  Co.  v.  Oil  Creek,  etc. 

R.  Co.  346,  352 

Ketcham  v.  Madison,  etc.  R.  Co.  177 
Kevil  1'.  Standard  Oil  Co.  816 

Key  City,  The  162 

Kifld  i\  Pearson  719 

Killian  v.  Augusta,  etc.  R.  Co.  470 
Kimball  v.  Atchison,  etc.  R.  Co.       72, 

77,  496 
V.  Harman  581 

Kinion  v.   Kansas  Citv,  etc.   R. 

Co.  116,  170,  171,  172 

Kinner  v.  Lake  Shore,  etc.  R.  Co.  073 
Kinnej'  v.  North  Carolina  R.  Co.  395 
Kip  V.  New  York,  etc.  R.  Co.  378 

Klingel's  Pharmacy  v.   Sharp         578, 
586,  588,  607,  643 
Klosterman  v.  Mason  County,  etc. 

R.  Co.  270 

xliii 


TABLE   OF    CASES 


Knickerbocker  v.  Conger 
Knoup  V.  Piqua  Branch  of  State 

Bank 
Knowles  v.  Sandercock     473,  477 
Knoxville  v.   Knoxville,   etc.    R. 

Co.  48,  81,  86,  251 

Knoxville  Iron  Co.  v.  Harbison 


Koehler  v.  Feurbach 
Kohl  V.  Lilienthal  204, 

Koons  V.  Chicago,  etc.  R.  Co. 
Kosciusko    Oil   Mill,    etc.    Co.    v. 

Wilson  Cotton  Oil  Co. 
Kroenert  v.  Johnson  572, 

Kyle  V.  Wagner 


PAGE 

235 

263 
,  498 

,  294 
790, 
792 
610 
,  234 
173 

817 
576 
213 


107, 

69,  77, 


Lafayette  Bridge  Co.  v.  City  of 

Streator  673, 

Lafayette  Co.  v.  Neeley 
Lagrone  v.  Zimmerman 
Lake  Shore,  etc.  R.  Co.  v.  Ohio 

V.  People 
Lakin  v.  Railroad  Co. 
Lancashire,   etc.   R.   Co.   v.   East 

Lancashire,  etc.  R.  Co. 
Lancaster    v.    Amsterdam    Impt. 

Co. 
Langan  v.  Franklyn 
Langdon  v.  Branch 

V.  Vermont,  etc.  R.  Co. 
Lange  v.  Werk 
Langhorne  v.  Richmond,  etc.  R. 

Co.  151,  160,  166, 

Langley  v.  Boston,  etc.  R.  Co. 
Lanier  Lumber  Co.  v.  Rees      477, 

Lanyon  v.  Garden  City  Sand  Co. 

Laredo    v.    International  Bridge, 

etc.  Co. 
Larocque  v.  Beauchemin 
Lasher  v.  People 
Latham  v.  Boston,  etc.  R.  Co. 
Lathrop  v.   Commercial   Bank 

V.  Middleton 
Latimer  v.  Citizens  State  Bank 

V.  Richmond,  etc.   R.  Co. 

Lauman   v.    I^ebanon    Vallev   R. 
Co.         27,  82,  97,  116,  208,  216, 

Lawrence  v.  Kidder 

V.  Morgan's  Steamship  Co.  266, 
V.  Saratoga  Lake  R.  Co. 

Lawry  v.  Williams 

Lawson  v.  Illinois  Southern  R.  Co. 

Layng  v.  French  Spring  Co. 

xliv 


839 
222 
477 
791 
196 
393 

464 

258 
112 
498 
383 
605 

173 
405 

478, 
532 

70S, 
819 

600 
572 
268 
177 
202 
255 
496, 
505 
352 

233 
605 
,304 
465 
358 
309 
496 


PAGE 

Leather  Cloth  Co.  v.  Lor.sont  605 

Leathers  v.  Janney  204,  220 

Leavenworth  v.  Chicago,  etc.  R. 

Co.  178 

Leavenworth   County   v.    Barnes     182 
V.  Chicago,  etc.  R.  Co.  110 

Lebeck  v.  Fort  Payne  Bank  252 

Lee  V.  Atlantic  Coast  Line  R.  Co.     14, 
123,  198 
V.  Southern  Pacific  R.  Co.         389, 
390,  402 
Leedam  v.  Plymouth  R.  Co.     254,  255 
Leep  V.   St.    Louis,   etc.    R.   Co.     788, 
789,  790 
Leeper  v.  State  593,  832 

Lehigh,  etc.  Mining  Co.  v.  Kelly     238 
Leonard  v.  Abner-Drurv  Brew- 
ing Co.  589,  590,  681,  754 
V.  New  York  Central, 

etc.  R.  Co.  468,  469 

V.  Poole  667,  668 

Leslie  v.  Lorillard  605,  677,  686 

Lester  v.  Bemis  Lumber  Co.     473,  531 

Levering  v.  Bimel  241 

Levin  v.  Chicago  Gas  Light  Co.     677 

Levins  v.  People's  Grocery  Co.  247 

Lewis  V.  Clarendon  128,  136,  182 

V.  Weatherford,  etc.  R.  Co.       818 

Lewiston,   etc.   R.    Co.   v.   Grand 

Trunk  R.  Co.  364 

Lewright  v.  Bell 

Liddle  v.  Keokuk,  etc.  R.  Co. 

Liebke  v.  Knapp 

Lightner  v.  Boston,  etc.  R.  Co. 


371 
851 
416 
573 
120, 
131 


Lincoln    St.    R.    Co.    v.    City    of 

Lincoln  162,  267,  268 

Linfield  v.  Old  Colony  R.  Corp.  417 
Lipfield  V.  Charlotte,  etc.  R.  Co.  338 
Little  Rock,  etc.  R.  Co.  v.  Daniels  389, 

397 

V.  McGehee  304 

V.  St.  Louis,  etc.  R.  Co.  659,  660,  661 

Liverpool,  etc.  Ins.  Co.  v.  Clunie      673 

Live  Stock  Ass'n  v.  Levy 

Livingston  County  v.  Portsmouth 

First  Nat.  Bank  56 

Llanelly,  etc.  R.  Co.  v.  London, 

etc.  R.  Co. 
Lloyd  V.  Preston 
Locker  v.  American  Tobacco  Co. 

656,  819 
Lockhart  v.  Little  Rock,  etc.  R. 

Co.  470 

Loewe  v.  Lawlor         725,  726,  729,  755 

Logan  V.  Courtown  479 

V   North  Carolina  R.  Co.  395,  400, 

419 


559 


136 


461 
577 


TABLE   OF   CASES 


Logan  County  Bank  v.  Townsend 
London,  etc.  Bank,  Re  511. 

London,  etc.  Bread  Co.,  In  re 
London,    etc.    R.    Co.    v.    Good- 
win 

V.  London,  etc.  R.  Co. 

V.  Southeastern  R.  Co. 
Long  Acre  Electric  Light,  etc.  Co. 

In  Matter  of,  270,  274, 

Long  V.  Georgia  Pacific  R.  Co. 

Lord  V.  Copper  Mines  Co. 
Loud  V.  Pomona,  etc.  Co. 
Lough  V.  Outenbridge 
Loughlin  v.  United  States  School 

Furniture  Co. 
Louisiana  v.  Wood  440, 

Louisville,  etc.  R.  Co.  v.  Biddell 


V.  Blythe 
V.  Boney 


128,  152,  166, 


V.  Breeden's  Admx.    392,  466, 

V.  Carson 

V.  Chesapeake,  etc.  R.  Co. 

V.  Commonwealth 

V.  Cumberland,  etc.  R.  Co. 

V.  Gaines 

V.  Howard 

V.  Illinois,  etc.  R.  Co. 

V.  Jarvis 

V.  Kentucky        30,  48,  50,  75, 
275,  329,  451,  473, 

V.  Kentucky,  etc.  R.  Co.       45, 

47,  60,  65,  69 

460, 

V.  Literarj'    Society    of    St. 
Rose 

V.  Louisville  S.  R.  Co. 

V.  Louisville  Trust  Co. 

V.  Mississippi,  etc.  R.  Co. 

V.  Palmes 

V.  Schmidt 

V.  Summers  160, 

V.  Utz 
Louis\ille  Gas  Co.  v.  Kaufman 
Louisville  Trust  Co.  v.  Louisville, 

etc.  R.  Co.  32,  181,  182, 

Louisville  Water  Co.  v.  Hamilton 

Lowe  V.  Pioneer  Threshing  Co. 
Lowenstein  v.  Evans 
Lowry  v.  Tile,  etc.  Ass'n  729, 

756, 
Lufkin  Rule  Co.  i\  Fringeli 
Lyons-Thomas  Hardware  Co.  v. 

Perry  Stove  Mfg.  Co.  239, 

Lytle  V.  Galveston 


PAGE 

504 

,  514 

233 

131 
459 
410 

,  276 
257, 
258 
125 
571 
599 

187 
441 

310, 
311 
128 

253, 
255 
469 
318 
464 
451 
363 
306 
81 
325 
294 
77, 
538 
46, 

,  72, 
545 

499 
463 
331 
464 
305 
374 
172 
172 
543 

.505 
253, 
255 
513 
745 
755, 
758 
653 

240 
830 


M 

PAGE 

MacGinnis  v.  Bo.ston,  etc.  Mining 

Co.  474,  47.5,  476,  524,  5.50,  641, 

679,  680,  682,  808,  812,  813 
Mack  V.  De  Bardeleben,  etc.  Co.        550 
Mackintosh  v.  Flint,  etc.  R.  Co.         19, 
215,  280,  291,  473,  508 
Macon,  etc.  R.  Co.  v.  Mayes     400,  402 
Madi.son,  etc.  Plank  Road  Co.  v. 
Watertown,    etc.    Plank   Road 
Co.  444 

Maha.ska   County  R.   Co.    v.   Des 

Moines  Valley  R.  Co.  212,  290 

Mahoney  v.  Atlantic,  etc.  R.  Co.     389, 
397,  418 
V.  Spring  Valley  Water  Co.       304 
Mallett  V.  Simpson  202,  258 

Mallorj'  V.  Hanaur  Oil  Works  437, 

565,  566,  671 
Manchester,  etc.  R.  Co.  v.  Con- 
cord R.  Co.    64,  69,  437,  441,  644,  661 
Manchester  St.  R.  Co.  v.  Williams    535 
Manny  v.  National  Suretj'  Co.  152, 

158 

Mansfield,  etc.  R.  Co.  v.  Brown       79, 

82,  106,  108,  133,  134,  179 

V.  Drinker  108,  109,  134,  179 

V.  Pettis  134 

V.  Stout  134,  135,  179 

Manufacturers  Sav.  Bank  v.  Big 

Muddy  Iron  Co.  212,  220 

Marble  Co.  v.  Harvey       474,  478,  480, 
523,  536,  538 
Marbury     v.     Kentucky     Union 

Land  Co.  22,  499,  505 

March  v.  Eastern  R.  Co.  221,  341 

Marine  Bank  v.  Ogden  566 

Market  St.  R.  Co.  v.  Hellman     28,  84, 
86,  105,  106,  111,  118,  121,  123,  482, 
495,  524,  547 
Markej'  v.  Louisiana,  etc.  R.  Co.      388 
Marquette,  etc.  R.  Co.  v.  Langton     173 
Marshall  v.  Western  North  Caro- 
lina R.  Co.  248 
Marshall  Foundrj'  Co.  v.  Killain       239 
Martin  i\  Continental  Passenger 

R.  Co.  295,  296,  346 

V.  Ohio  Stove  Co.      473,  477,  478, 

492,  545 

V.  Wilson  535 

V.  Zellerbach  234 

Marvin  v.  Anderson  513,  515 

Maryland  Trust  Co.  v.   National 

Mechanics  Bank  511,  512 

Mason  v.  Adoue  849 

V.  Finch  87 

V.  Pewabic  Mining  Co.       215,  227, 

232,  233 

xlv 


TABLE    OF   CASES 


PAGE 

Matthews  v.  Miirchison  524,  547 

Maunsell  v.  Midland  Great  West- 
ern R.  Co.  476 

Mayfield  v.  Alton  Ry.  Gas  &  Elec. 
Co.  79,  91 

Mayor,  etc.  of  Colchester  v.  Law- 
ton  203 

Mayor,     etc.     of    New    York    v. 

Miln  792 

Mayor,  etc.  of  Worcester  v.  Nor- 
wich, etc.  R.  Co.  304,  378,  386 

Mayor,  etc.  v.  Twenty-Third  St. 

R.  Co.  413,  414 

McAlister  v.  Florence,  etc.  R.  Co.     477, 

478,  493 

V.  Henkel  763 

Mc Alpine  v.  Union  Pac.  R.  Co.  128 

McBlair  v.  Gibbes  674 

McCabe  Admx.  v.  Maysville,  etc. 

R.  Co.  327,  337,  394 

McCall  V.  Chamberlain  415 

McCampbell  v.  Fountain  Head  R. 

Co.  477,  478,  541 

McCandless  v.  Richmond,  etc.  R. 

Co.  411,  455 

McCauley   v.   Columbus,    etc.    R. 

Co.  32 

McCluer  v.    Manchester,    etc.    R. 

Co.  418 

McClure  v.   People's  Freight  R. 
Co.  106 

McConnell  v.  Camors-McConnell 

Co.  705,  748 

McCoy  V.  Kansas  City,  etc.  R.  Co.     388 
V.  World  Columbian  Expos.       535 

McCray  v.  Junction  R.  Co.  81,  92 

McCurdy  v.  Meyers  208 

McCutcheon  v.  Merz  Capsule  Co.     229, 
473,  480,  491,  501,  508,  538 

McDonald  v.  Williams  241 

McGeorge     v.     Big     Stone     Gap 

Imp't  Co.  224 

McGrath  v.   New  York  Central, 

etc.  R.  Co.  468,  469 

McGregor  v.  Dover,  etc.  R.  Co.       435 
V.  Erie  R.  Co.  411 

Mcintosh  V.  Flint,  etc.  R.  Co.  272 

McKee  v.  Chautauqua  Assembly       87 

McKusick  V.  Seymour,  Saben  & 

Co.  249 

McLeary  v.  Erie  Tel.,  etc.  Co.       319, 
382,  448 
13,  115,  116, 
168 

McMillan   v.    Carson   Hill   Union 

Min.  Co.  477,  480 

V.  Michigan,  etc.  R.  Co.    410,  414, 

418 

xlvi 


McMahon  v.  Morrison 


PAGE 

McMirmville,  etc.  R.  Co.  v.  Hug- 
gins  431 
McVicker  v.  American  Opera  Co.      2.50 
V.  Ross                                    97,  233 
McWilliams    v.     City     of     New 

York  248 

Mead  v.  New  York,  etc.  R.  Co.         32, 
143,  195,  199 
Mechanics  Sav.  Bank  v.  Meriden 

Agency  Co.  477,  509 

Medical  College  Case  482 

Meeker  v.  Winthrop  Iron  Co.    180,  318, 
319,  446,  448,  548 
Mellen  v.  Moline  Iron  Works  421 

Memphis,    etc.    R.    Co.    v.    Com- 
missioners 264,  265,  305 
V.  Grayson  327,  351 
V.  Wood  539,  550 
Memphis     Barrel,     etc.     Co.     v. 

Ward  239 

Menasha  v.  Hazard  136 

V.  Milwaukee,  etc.  R.  Co.  161 

Menier    v.     Hooper's    Telegraph 

Works  217,  548 

Mercantile,  etc.  Co.   v.   Southern, 

etc.  R.  Co.  428,  430 

Mercantile  Trust  Co.  v.  Atlantic 

etc.  R.  Co.  -  430 

V.  Baltimore,  etc.  R.  Co.  430 

V.  Farmers  Loan,  etc.  Co.  425, 

426,  427 
V.  Missouri,  etc.  R.  Co.  431 

Merchants,  etc.  Line  v.  Wagancr      208 
Meredith  v.   Zinc  and  Iron  Co.     644, 
6Sl,  655 
Merrill  v.  Railroad  Co.  470 

Merz  Capsule  Co.  v.  U.  S.  Cap- 
sule Co.  491,  519,  671,  798 
Metcalf      V.      American      School 

Furniture  Co.         209,  214,  221,  230, 
237,  497,  637,  675,  750 
Methodist,  etc.  Church  v.  Pickett     176 
Metropolitan     Citv     R.     Co.     v. 

Chicago  West  Div.  R.  Co.     267,  268 
Metropolitan  Concert  Co.  v.  Ab- 
bey 312 
Metropolitan  El.  R.  Co.  v.  Man- 
hattan R.  Co.          212,  338,  346,  356 
Metropolitan  Trust  Co.  v.  Colum- 
bus, etc.  R.  Co.                        365,  377 
Mever  v.  Johnston   11,  14,  16,  18,  118, 
123,  264,  303 
V.  Staten  Island  R.  Co.  548 
Meyers  v.  Merillion  668 
Michigan  Central  R.  Co.  v.  Bul- 

lard  321 

V.  Pere  Marquette  R.  Co.  325, 

363 


TABLE    OF    CASES 


PAGE 

Michigan  Telephone  Co.  v.  City  of 

St.  Joseph  274 

Middlesex  R.  Co.  v.  Boston,  etc. 

R.  Co.  327,  443 

Midland  R.  Co.  v.  Great  Western 

R.  Co.  459 

V.  Manchester,  etc.  R.  Co.  457 

V.  Neath,  etc.  R.  Co.  457 

Midland   Great   Western   R.    Co. 

V.  Leech  15,  133 

Milbank  v.  New  York,  etc.  R.  Co.     474, 
479,  504,  530,  551 
Miles,  Dr.,  Medical  Co.   v.  Gold- 

thwaite  744 

V.  Jaynes  Drug  Co.  743,  744 

V.  Piatt  744 

Miles    V.    New    South    Building 

Ass'n  529 

Milhau  V.  Sharp  267 

Military  Interstate  Ass'n  v.   Sa- 
vannah, etc.  R.  Co.  477,  509 
Miller  v.  Consolidated  Lake  Su- 
perior Co.  220 
V.  Green  Bay,  etc.  R.  Co.  468 
V.  Lancaster                  116,  128,  131 
V.  New  York,  etc.  R.  Co.    391,  398 
V.  Rutland,  etc.  R.  Co.  265 
V.  Wheeler,  etc.  Co.  188 
Mills  V.  Central  R.  Co.      21,  27,  82,  96, 
97,  99,  327,  328,  336,  347,  350,  352 
Miltenberger    v.    Logansport    R. 

Co.  430 

Milwaukee,  etc.  R.  Co.  v.  Brooks, 

etc.  Works  428 

Miner  v.  Belle  Isle  Ice  Co.  448 

Miners  Ditch  Co.   v.  Zellerbach     203, 
236,  269,  433,  508 
Mines  v.  Scribner  743 

Minneapoli-s,  etc.  R.  Co.  v.  Gard- 
ner 116,  125,  138 
Minnesota  v.  Northern  Securities 

Co.  834,  846 

Mississippi,  etc.  R.  Co.  v.  South- 
ern R.  Ass'n  422 
Mississippi  Valley  R.  Co.  v.  Chi- 
cago, etc.  R.  Co.  163 
Missouri,  etc.  R.  Co.  v.  Carter  159 
V.  Warner                                       310 
V.  Sisson                                          833 
Missouri   Pac.    R.   Co.   v.    Meeh      188, 

189 
V.  Morrow  416 

V.  Owens  27,  66,  166,  2.53,  303 

V.  Texas,  etc.   R.  Co.  663 

V.  Watts  398,  402 

Mitchell  V.  Deeds  32,  178,  330 

V.  Reynolds  605 

Mobile,  etc.  R.  Co.  v.  Gilmer  158 


PAGE 

Mobile,  etc.  v.  State  154 

Mogul  Steamship  Co.  v.  McGregor    559, 
583,  591,  646 
Monongahela    River    Con.    Coal 

Co.  V.  Jutte  704 

Monroe  County  111.  v.  Village  of 

Mt.  Gilead  597 

Monroe   v.    Fort   Wayne,    etc.    R. 

Co.  ■  110 

Monsseaux  v.  Urquhart  514 

Montague  v.  Lowrv  707,  716,  718, 

724,  726,  729,  754,  755,  756 
Montgomery,  etc.  R.  Co.  v.  Bor- 
ing 128,  152 
V.  Branch             167,  168,  248,  311 
Montgomery  Web  Co.  v.  Dienelt     245, 

250 

Monument  Bank  v.  Globe  Works     433 

Moore  v.  Mining  Co.  223 

Moorsheads  v.  United  Rys.  Co.     324, 

338,  363,  397 

Mo  ran  v.  Pittsburg,  etc.  R.  Co.         412 

Morgan  v.  King  220,  503,  507 

V.  Louisiana  266,  305,  306 

Morisette  v.  Howard  204,  215 

Morrell  v.  Smith  County      49,  51,  136, 

147,  183 

Morrill  v.  Railroad  Co.  64,  69 

Morris  v.  Elyton  Land  Co.     215,  222, 

224,  228,  229,  233 

Morris  Run  Coal  Co.  v.  Barclay 

Coal  Co.  559,  590,  633,  645,  650, 

655,  668,  669 

MorrLson  v.  American  Snuff  Co.         152 

V.  St.  Paul,  etc.  R.  Co.  324 

Morville  v.  American  Tract  Soc.     439 

Moss  V.  Averell  202 

Motter  V.  Kennett  Tp.  Electric 

Co.  56 

Mowrey  v.  Indianapolis,  etc.  R. 

Co.  81,  85,  88,  89,  90,  97 

Moxie  Nerve  Food  Co.  v.  Baum- 

bach  519 

Mozloy  V.  Alston  94,  222 

Mugier  V.  Kansas  790 

Mullen  V.   Philadelphia  Traction 

Co.  413 

Muller  V.  Dows  188,  197,  199 

Mumford  v.  Ecuador  Devel.  Co.       217 
Munn  ?'.  Illinois  786 

Munson  v.  Syracuse,  etc.  R.  Co.  90 

Muntz  V.  Algiers,  etc.  R.  Co.  393 

Murch  V.  Concord  R.  Co.  398,  402, 

418 
V.  Eastern  R.  Co.  411 

Muscatine  Western  R.  Co.  v.  Hor- 

ton  299 

Mj^ers  V.  Murray,  etc.  Co.  188 

xlvii 


TABLE    OF   CASES 


N 

PAGE 

Naglee  v.  Alexandria,  etc.  R.  Co.     273, 

301 
Nantasket  Beach  S.  S.  Co.v.  Shea    258, 

313 

Nashua,  etc.  R.  Corp.  v.  Boston, 

etc.  R.  Corp.    188,  189,  197,  198,  459, 

545,  603 

Nashville,  etc.  R.  Co.  v.  Carroll         420 

Nashville,    etc.    Turnpike   Co.    v. 

Davison  County  598 

Nassau  Bank  v.  Jones      257,  434,  474, 
479,  480 
Natchez,  etc.  R.  Co.  v.  Lambert       141 
Nathan  v.  Tompkins  94,  95,  223 

National  Bank  v.  Case       504,  505,  525 
National     Bank     of     Xenia     v. 

Stewart  514 

National  Cotton  Oil  Co.  v.  Texas     710, 
793,  799,  800,  805,  826 
National  Distilling  Co.  v.  Cream 

City  Importing  Co.         673,  675,  616 
National  Enameling,  etc.  Co.  v.  Ha- 

berman  604 

National  Fire  Proofing  Co.  v.  Mas- 
ter Builders'  Ass'n  587 
National  Folding  Box,  etc.  Co.  v. 

Robertson  675 

National  Foundry,  etc.  Works  v. 

Oconto  Water  Co.  525 

National  Harrow  Co.  v.  Bement     651, 

656,  834 

V.  Hench  667,  740,  741,  742 

V.  Quick  675,  740,  742 

National  Lead  Co.  v.  Grote  Paint 

Store  Co.        582,  631,  637,  826,  838, 

840 
National  Salt  Co.  v.  Ingraham  838 

National  Tube  Works  v.   Ballou  _  248 
Natusch,  V.  Irving  98 

Naugatuck  R.  Co.  v.  Waterbury 

Button  Co.  459 

Navigation  Co.  v.  Winsor  604 

Nebraska  Shirt  Co.  v.  Horton         477 
Neeley  v.  State  269 

Nelson,  In  re  705 

Nelson  v.  Vermont,  etc.  R.  Co.     328, 

404 

V.  Railroad  Co.  393 

Nester    v.    Continental    Brewing 

Co.  559,  599,  606,  641,  650,  6-52, 

655,  668,  672 

New    Bedford    R.     Co.     •;;.     Old 

Colony  R.  Co.  167 

New  Buffalo  v.  Iron  Co.  136 

Newcastle    Northern    R.    Co.    v. 

Simpson  440 

New  England  Trust  Co.  v.  Abbott     513 

xlviii 


PAGE 

New    Hampshire    Sav.    Bank    v. 

Richey  203,  240,  241 

New  Haven,  etc.   Co.   v.  Linden 

Spring  Co.  572 

New   Jersey   Midland   R.    Co.    v. 

Strait  131,  132 

New  Jersey  Southern  R.   Co.   v. 

Long  Branch  Commrs.  269 

Newland     Hotel     Co.     v.     Lowe 

Furniture  Co.  477,  480 

Newman  ■;;.  Mercantile  Trust  Co.     537 
New  Orleans,  etc.  R.  Co.  v.  Dela- 

more  264,  303,  304 

V.  Harris  82,  92 

New  Orleans,  etc.  Steamship  Co. 
V.  Ocean  Dry  Dock  Co.         477,  478, 

480 
New   Orleans   Gas   Light   Co.    v. 

Hart  791 

V.   Louisiana  Light,   etc.   Co.     56, 
57,  118,  120,  142,  266,  268 
New  York,  etc.  Canal  Co.  v.  Ful- 
ton Bank  25,  566 
New  York,  etc.  R.  Co.  v.  New 

York,  etc.  R.  Co.     48,  275,  282,  290, 

379,  423,  424,  425,  427,  428,  431, 

660 

V.  Offield  598 

V.    Saratoga,    etc.    R.    Co.  118 

New  York,  etc.  R.  Co.,  In  Matter  of,  410 

New  York  Central,  etc.  R.  Co.  v. 

City  of  Yonkers         28,  53,  105, 

118,  130 

Niagara  Fire  Ins.  Co.  v.  Cornell     796, 

801,  826 

Niantic  Savings  Bank  v.  Douglass     136 

Nibbs  V.  Chicago,  etc.  R.  Co.  409 

Nichols  V.  Boston,  etc.  R.  Co.  417 

V.  New  Haven,  etc.  R.  Co.       306 

Nicoll  V.  New  York,  etc.  R.  Co.        202 

Niles  V.  New  York,  etc.  R.  Co.  549 

Nordenfelt  v.  Maxim-Nordenfelt 

Co.  603,  605 

Norfolk,   etc.   R.   Co.   v.   Pendle- 
ton 138,  140,  307 
North   Carolina,    etc.    R.    Co.    v. 

Carolina  Central  R.  Co.  304 

North  Carolina  R.  Co.  v.  Drew  163 

Northern  Securities  Co.  v.  United 

States       75,  693,  695,  701,  702,  703, 
706,  709,  713,  723,  732 
Northern  Transportation  Co.   v. 

Chicago  314 

Northwestern   Mutual    Life    Ins. 
Co.  V.  Exchange  Real  Est.  Co.     571, 

576 
Northwestern  Nat.  Life  Ins.  Co. 
V.  Hare  158 


TABLE   OF   CASES 


Northwestern  Union  Packet  Co. 

V.  Shaw  257 

Northwestern  Warehouse  Co.  v. 

Oregon  R.,  etc.  Co. 
Norton  v.  Thomas  818, 

Norwalk    Savings    Bank    Co.    v. 

Norwalk  Metal  Spinning  Co. 
Nugent  V.  Boston,  etc.  R.  Co. 

V.  Railroad  Co.  390 

V.  Supervisors  79,  92,  93, 


Nye  V.  Storer 


PAGE 

,  259 

597 
,  819 

508 
402 
,  397 
132, 
136 
313 


O 


Oakdale  Mfg.  Co.  v.  Garst         645,  655 
O'Bear  Jewelry  Co.  v.  Volfer  241 

O'Brien  v.  Mu.sical,  etc.  Union         588 
Occum  Co.  V.  A.  &  W.  Sprague 

Mfg.  Co.  313 

O'Connor    Mining,     etc.     Co.     v. 

Coo.sa  Furnace  Co.  219,  246 

Oelbcrmann  v.  New  York,  etc.  R. 

Co.  494,  524,  541,  551 

Officld  V.  New  York,  etc.  R.  Co.       99 
Ogdensburg,  etc.  R.  Co.  v.  Ver- 
mont, etc.  R.  Co.  433 
Ohio,  etc.  R.  Co.  v.  Indianapolis, 

etc.  R.  Co.  458,  459 

V.  People  116,  189,  192,  195 

V.  Weber  195,  196 

V.  Wheeler  188,  193 

Olcott  V.   International,   etc.   R. 

Co.  438,  440,  441 

V.  Tioga  R.  Co.  457 

Old  Colony  R.  Co   v.  Evans  202 

Oliver  v.  Rahway  Ice  Co.  513 

Olmstead  v.  Distilling,  etc.  Co.         619, 

673 
V.  Vance,  etc.  Co.  515 

Olsen  V.  Smith  746 

Oman  v.  Bedford  Bowling  Green 

Stone  Co.  256 

Ontario    Salt    Co.    v.    Merchants 

Salt  Co.  646,  655 

Ophir     Consol.      Mines     Co.     v. 

Bryntesen  514 

Oregon,  etc.  R.  Co.  v.  Oregonian 

R.  Co.     51,  275,  327,  329,  331,  334, 
335,  340,  341,  434,  430,  441,  4.53,  482 
Oregon    Short    Line    R.    Co.    v. 

Northern  Pacific  R.  Co.  661 

Orient  Ins.  Co.  v.  Daggs  790 

Ottawa,   etc.    R.   Co.   v.    Black         444 
Over  V.  Byram  Foundry  Co.    056,  818, 

835 
Overstreet  v.  Citizens  Bank         19,  25 


PAGE 

Pacific  Factor  Co.  v.  Adler     559,  651, 
658,  669 
Pacific  R.  Co.  V.  Atlantic,  etc.  R. 

Co.  381 

V.  Renshaw  133 

Pacific  R.  R.  Cases  131,  178 

Page  V.  Heineberg  202 

Paine  v.  Lake  Erie,  etc.  R.  Co.         128, 

147 
Palmer  v.  Utah,  etc.  R.  Co.  392 

Panhandle  Nat.  Bank  v.  Emery       249 
Park,  John  D.,  Sons  Co.  v.  Nat. 

Wholesale  Ass'n  607,  744 

Park  V.  New  York,  etc.  R.  Co.  423, 

424,  425,  426,  428,  526 

Parkersburg  v.  Brown       438,  440,  441 

Parkinson  v.  West  End  St.  R. 

Co.  157 

Parr  v.   Spartansburgh,   etc.   R. 

Co.  395,  396 

Parsons  v.  Tacoma  Smelting,  etc. 

Co.  315,  318,  319,  320,  474,  477, 

482,  510,  521,  524,  530 

Pastuer  Vaccine  Co.  v.  Burkey         810 

Patch  V.  Wabash  R.  Co.  197 

Patterson   v.    Portland   Smelting 

Works  220 

V.  Wabash,  etc.  R.  Co.  469 

Paul  V.  Baltimore,  etc.  R.  Co.  192, 

197,  198 

V.  Virginia  262 

Pauly  V.  Coronado  Beach  Co.         477, 

481,  532 

V.  State  Loan,  etc.  Co.  525 

Peabody  v.  Flint  221,  225 

V.  Westerly  Water  Works  207 

Pearce  v.  Madison,  etc.  R.  Co.     25,  81, 

177,  444 

Pearsall    v.    Great    Northern    R. 

Co.    44,  45,  46,  47,  58,  67,  71,  77,  81 
Pearson  v.  Concord  R.  Corp.  220,  470, 
479,  500,  501,  538,  545,  547 
Peik  V.  Chicago,  etc.  R.  Co.       189,  196 
Pell's  Case  573 

Pender  v.  Lushington  216 

Pendery  v.  Carleton  235 

Peninsular  R.  Co.  v.  Tharp      108,  133, 

134 
Pcnley  v.  Railroad  Co.  KiO 

Pennison  v.  Chicago,  etc.  R.  Co.     238, 

301 
Pennsylvania,  etc.  R.  Co.  v.  Har- 

kins  131 

Pennsylvania  v.  Bay  748 

Pennsylvania  Co.  v.  Ellett     394,  419, 

466,  467,  468 

V.  Erie,  etc.  R.  Co.  410,  422 

xlix 


TABLE   OF   CASES 


PAGE 

Pennsylvania  Co.  v.  St.  Louis,  etc. 
R.  Co.  275,  329,  335,  339,  340, 

436,  437.  441,  445 
Pennsylvania  College  Cases  29,  81,  87, 

135 
Pennsylvania  R.  Co.  v.  Common- 
wealth       22,  68,  69,  71,  73,  77, 
538,  539,  541,  544 
V.  Greso  466,  468,  469 

V.  Pennsylvania,  etc.  R.  Co.      527 
V.  St.  Louis,  etc.  R.  Co.     51,  188, 
197,  198,  327,  328,  434,  440,  444 
V.  Sly  411 

Pennsj'lvania         Transportation 

Co.'s  Appeal  161 

People  V.  Aachen  Fire  Ins.  Co.  588, 
685,  833,  846 
V.  Albanj^  etc.  R.  Co.  338,  412 
V.  American  Sugar  Ref.  Co.  683 
V.  Ballard  206,  211,  212,  230,  449 
V.  Boston,  etc.  R.  Co.  77 

V.  Butler  St.   Foundrv,   etc. 

Co.  798,  799,  801,  802,  810 

V.  California  College  203 

V.  Chicago  Gas  Trvist  Co.  47.3, 

479,  482,  494,  499,  500,  501,  502, 

538,  541,  577,  599,  601,  610,  621, 

653,  665,  684,  687 

V.  Chicago  Live  Stock  Exch.     681 

V.  Colorado,  etc.  R.  Co.  413 

V.  Erie  R.  Co.  426 

V.  Feitner  408 

V.  Kerr  267 

V.  Louisville,  etc.  R.  Co.  161 

V.  Met.  El.  R.  Co.  356 

V.  Milk  Exchange       651,  658,  681 

V.  New  York,  etc.  R.  Co.      114,  117 

121,  189,  196 

V.   North   River   Sugar  Ref. 

Co.    70,  560,  563,  565,  566,  567, 

568,  569,  599,  614,  640,  643,  651, 

666,  681,  683,  687 

V.  O'Brien  69 

V.  People's  Gas  Light  Co.     28,  665 

V.  Pullman  Car  Co.     473,  480,  509 

V.  Rice  50,  57 

V.  St.  Louis,  etc.  R.  Co.  413 

V.  Sheldon  581,  591,  640,  650,  658 

V.  Stanford  291 

V.  Wemple  57 

People's  Pass.  R.  Co.  v.  Memphis 

R.  Co.  267,  268 

Peoria,    etc.    R.    Co.   v.    Chicago, 

etc.  R.  Co.  430 

V.  Coal  Valley  Mining  Co.  26,  155, 

273 

V.  Lane  394,  466,  468 

Peoria  Gas,  etc.  Co.  v.  Peoria  839 

1 


PAGE 

P^re  Marquette  R.  Co.  v.  Wabash 

R.  Co.  362,  364 

Perin  v.  Megibben  298 

Perry  v.  Western  North  Carolina 

R.  Co.  395 

Pe-shtigo   Co.    v.    Great    Western 

Tel.  Co.  477,  478,  480,  532 

Peters  i'.  Boston,  etc.  R.  Co.    325,  336 

V.  Lincoln,  etc.  R.  Co.  354 

V.  Railroad  Co.  307 

Petersburg!!  v.  Petersburgh,  etc. 

R.  Co.  140 

Petition   of   New   York,    etc.    R. 

Co.,  In  Matter  of  378 

Pettibone  v.  United  States  578 

Phelan  v.  Hazard  576 

Phoenix    Fire,    etc.    Ins.    Co.    v. 

Tennessee  305,  306 

V.  Western  Union  Tel.  Co.  323 

Philadelphia,  etc.  R.  Co.  v.  Ander- 
son 418 
V.  Appeal  Tax  Court  408 
V.  Catawissa  R.  Co.  91,  124,  410 
V.  Howard  118,  167 
V.  Maryland  141,  195 
Philadelphia    v.    Thirteenth    St., 

etc.  Co.  50 

Phillips  v.  Aurora  Lodge  313 

V.    Covington,    etc.    Bridge 

Co.  572 

V.  Northern  R.  Co.  398 

V.  Providence  Steam 

Engine  Co.  211,  221 

Phinizy  v.  Augusta,  etc.  R.  Co.        12, 

89,  110,  117,  551 

Piatt  V.  Oliver  670 

Picard  v.  East  Termessee,  etc.  R. 

Co.  305,  306 

Pick  V.  Northwestern  R.  Co.  150 

Pickens  v.  Georgia  R.,  etc.  Co.  385 

Pidcock  V.  Harrington  750 

Pierce  v.  Commonwealth  26 

V.  Concord  R.  Corp.  416,  417 

V.  Emery  203,  263,  273 

V.  Fuller  604 

V.  Milwaukee,  etc.  R.  Co.  303 

V.  North  Carolina  R.  Co.  395 

V.  Old  Dominion  Copper  Min., 

etc.  Co.  548 

Pierson  v.  McCurdy  480 

Pinchback    v.    Bessemer    Mining 

Co.  204,  226 

Pingree  v.   Michigan  Central   R. 

Co.  15 

Pinkerton  v.   Philadelphia  Trac- 
tion Co.  398 
Pinkney,  Iti  re                                         824 
Pinkus  V.  Minneapolis  Linen  Mills     225 


TABLE   OF  CASES 


PAGK 

Pinto  Silver  Min.  Co.,  Re  226 

Pitcher  v.  Lone  Pine,  etc.  Min. 

Co.  209,  214,  220 

Pittsburg,  etc.  R.  Co.  v.  Bedford 

R.  Co.  272,  273,  280,  290 

V.  Bolner  387,  415 

V.  Campbell  4GG 

V.  Columbus,  etc.  R.  Co.    327,  357 

V.  Garrett  112 

V.  Hannon  387,  405 

V.  Harbaugh  404 

V.  Kain  418 

V.  Keokuk,  etc.  Bridge  Co.       .50, 

187,  275,  327,  329,  359,  441,  530 

V.  Reich  129, 

194 

V.  Rothschild  199 

V.  Thompson  468,  469 

Pittsburg  Carbon  Co.  v.  McMillan    667, 

672,  676 

Plainview   v.    Winona,    etc.    R. 

Co.  242 

Plant  V.  Macon  Oil,  etc.  Co.  316 

Planters  Ins.  Co.  v.  Wickes  242 

Piatt  V.  New  York,  etc.  R.  Co.  169 

V.  Union  Pacific  R.  Co.  256 

Plj^mouth,  etc.  R.  Co.  v.  Colwell     254 
V.  Groat  Western  R.  Co.  457 

Pocohontas    Coke    Co.    v.    Pow- 
hatan Coal   Co.     554,  559,  600,  608, 
627,  639,  640,  641,  643,  650,  655,  (586 

157, 
706 


Polhemus  v.  Fitchburg  R.  Co. 
Pond  V.  Vermont  Valley  R.  Co. 
Pondir  v.  New  York,  etc.  R.  Co. 


3.50, 
3.58 
448, 
548 
Port  Clinton  R.  Co.  v.  Cleveland, 

etc.  R.  Co.  125 

Port  Jorvis,  etc.   R.  Co.  v.  New 

York,  etc.  R.  Co.  456,  457,  400 

Port  of  Mobile  v.  Mobile  R.  Co.        2()8 

Porter  v.  Illinois  Southern  R.  Co.     309 

V.  Mack  579 

V.  PljTnouth  Min.  Co.  512 

Post  V.  Beacon  Vacuum  Pump, 

etc.  Co.  224,  229,  232 

V.  Southern  R.  Co.  750 

Powell  V.  North  Missouri  R.  Co.       18, 

238 
570 
670 


Powers  V.  Knapp 
Pratt  V.  Adams 
Prentice    v.    United 

Steamship  Co. 
Prescott,  etc.  R.  Co. 

etc.  R.  Co. 
Price  V.  Ilolcomb 


States,    etc. 


2.50 
,  V.  Atchison, 

660,  705,  738 
205,  208,  209,  211, 

226 


PAGE 

Pringle  v.  Eltringham  Construc- 
tion Co.  206,  207,  208 
Prospect  Park,  etc.  R.  Co.,  Matter 

of  48,  49 

V.  Coney  Island,  etc.  R.  Co.     464, 
465 
Providence    Coal    Co.    v.    Provi- 
dence, etc.  R.  Co.  191,  193 
Prouty  V.  Lake  Shore,  etc.  R.  Co.      125, 
157,  170,  172 
Pullan  V.  Cincinnati,  etc.  R.  Co.       303 
Pullman  i».  Upton  525 
Pullman     Car     Co.     v.     Central 

Transp.  Co.    434,  437,  438,  439, 

440,  441 

V.  Missouri  Pac.  R.  Co.        22,  116, 

121,  152,  158,  497,  542,  543, 

544,  547 

Purington  v.  Hinchliff  587,  588 

Purnell  v.  McLane  266,  268 


Q 


Queen  Ins.  Co.  v.  State     554,  649,  669, 
685,  714,  824 

Quested  v.  Newburyport,  etc. 

Co.  388,  395 

Quincy,    etc.    R.    Co.    v.    Hum- 
phreys 422,  423,  424,  425,  427 

Quincy    Railroad    Bridge   Co.    v. 
Adams  County  189,  195 


R 

Rabe  v.  Dunlap 
Racine,   etc.   R.  Co.   v. 
Loan,  etc.  Co.  32, 

188,    189,   192,    193, 
Rafferty  v.  Buffalo  City 
538,  645 
Ragan  v.  Aiken 
Railroad  Co.  v.  Ailing 

V.  Brown 

V.  County  of  Otoe 

V.  Culber.son 

V.  Evans 

V.  Gaines 

V.  Gebhard 

V.  Georgia      13,  15, 

V.  Hambleton 

V.  Harris 

V.  Hinsdale 

V.  Maine    115,  116, 


96 

Farmers 

177,  180,  187, 

195,    197,    330 

Gas  Co.        19, 

,  654,  665,  832 

264 

465 

392,  404,  420 

136 

393 

170 

305,  306 

4.52 

114,  116,  121, 

130,  138,  140 

391,  420 

188,  197 

273,  280,  300 

120.  129,  138, 

140,  142 


li 


TABLE    OF   CASES 


PAGE 

Railroad  Co.  v.  Mathers  366 

V.  Palmer  305 

V.  Whitton  189,  197 

V.  Wood  387,  390 

Railway  Co.  v.  Allerton  345,  522 

V.  Campbell  388 

V.  Dunbar  392 

V.  Keokuk  Bridge  Co.        367,  440 
V.  Neel  462 

Raleigh    v.    North    Carolina    R. 

Co.  395 

Ramsey  v.  Gould  216 

Rand,  McNallv  &  Co.  v.  Hartranft 

832 
Randall  v.  Detroit,  etc.  R.  Co.        250, 

310 
Ray  V.  Pecos,  etc.  R.  Co.  467 

Read  v.  Citizens  St.  R.  Co.  229 

Reed  v.  Southern  R.  Co.  389,  401 

Rebberg  v.  Tontine  Surety  Co.         242 
Reichwald  v.  Commercial  Hotel 

Co.  213,  226,  299,  571 

Reid  V.  Trowbridge  598 

Reifif  V.  Western  Union  Tel.  Co.        324 

Reynolds  v.  Cridge  300 

V.  Stark  County  Comm'rs  203 

Rice  V.  Norfolk  309 

V.  Rockefeller  569,  617 

V.  Standard  Oil  Co.  755 

Richards  v.   Merrimack,    etc.    R. 

Co.  253,  330 

Richardson  v.  Buhl  599,  623,  642,  651, 

669 
V.  Mellish  610 

V.  Sibley  273,  280,  299,  300 

Richelieu    Hotel    Co.     v.     Inter- 
national, etc.  Co. 
Richmond,  etc.  R.  Co.  v.  Durham 

etc.  R.  Co. 
Ricketts  v.  Chesapeake,   etc.  R. 

Co.  328,  392 

Ridgway  Township  v.  Griswold        94, 

116,  124,  128,  132 

Riggs  V.  Pursell 

Rio  Grande  R.   Co 

Power,  etc.  Co. 
Ritchie  v.  People 
Robertson  v.  Parks 

V.  Rockford 
Robinson  v.  Beel 
V.  Holbrook 
V.  Southern  Nat.  Bank 
V.  Suburban  Brick  Co. 
Robotham  v.  Prudential  Ins.  Co.     474, 
492,  494,  546,  547,  550 
Rochester,  etc.  R.  Co.,  Matter  of     510 
Rochester    R.     Co.     v.     City    of 

Rochester  ~    227,  306 

lii 


509 


456 


373 

Telluride 

106,  116,  118 

789,  792 

581 

128,  136 

514 

493,  560 

505,  533 

720 


PAGE 

Rodgers  v.  Wells  133,  134 

Rogers  v.  Nashville,  etc.  R.  Co.     258, 
275,  329,  345,  519,  520,  524,  548 
Rogersville,  etc.  R.  Co.  v.  Kyle         300 
Rollins  V.  Shaver  Co.  513 

Roman  v.  Dimmick  576 

Rome,  etc.  R.  Co.  v.  Chasteen         392 
Roper  V.  McWhorter  328 

Ro.senkrans  v.  Lafayette,  etc.  R. 

Co.  156 

Rothschild    v.    Memphis,    etc.   R. 

Co.  218 

Rothwell  V.  Robinson  211 

Rourke  v.  Elk  Drug  Co.  580,  848 

Rouse  V.   Merchants'  Nat.  Bank     239 
Rousillon  V.  Rousillon  605 

Royal  Bank  of  India's  Case  504,  505, 
524,  525 
Roj'al  British  Bank  v.  Turquand  433 
Rubber  Tire  Wheel  Co.  v.  Mil- 
waukee Rubber  Works  Co.  740,  741 
Rubins  v.  Pressed  Steel  Car  Co.  496 
Runvan  v.  Coster's  Lessee  4.51 

Russell  V.  Fuel  Gas  Co.  219 

Rutland  R.  Co.  v.  Central  Ver- 
mont R.  Co.  407 
Rutter  V.  Union  Pacific  R.  Co.  162 
Ryan  v.  Leavenworth,  etc.  R.  Co.    505, 

510 
Rverson    v.     Morris   Canal,    etc. 
Co.  385 


S 


Safety  Insulated  Wire,  etc.  Co.  v. 

Baltimore 
Sage  V.  Culver  446, 

V.  Lake  Shore,  etc.  R.  Co. 

St.    Joseph    Plank   Road   Co.    v. 

Klein 
St.  Joseph,  etc.  R.  Co.  v.  Hiun- 
phreys  425,  426, 

V.  St.  Louis,  etc.  R.  Co. 
St.  Louis,    etc.    Drayage    Co.    v. 

Louisville,  etc.  R.  Co. 
St.  Louis,  etc.  R.  Co.  v.  Balslev 
V.  Berry         44,  121,  138,  139, 
V.  Cleveland,  etc.  R.  Co. 
V.  Curi        387,  390,   391,  397, 
V.  Evans 
V.  Gill 
V.  Indianapolis,  etc.  R.  Co. 


V.  James 
V.  Marker 
V.  Miller 


156, 


434 

548 
189, 
195 

598 

428 
367 

659 
261 
143 
430 
418 
389 
307 
197, 
198 
188 
160 
166 


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sasvo  ao  aqavx 


TABLE    OF   CASES 


PAGE 

Tod    V.    Kentucky    Union    Land 

Co,  11,  499,  505,  545 

Tode  V.  Gross  605 

Todhunter   v.    Des    Moines,    etc. 

R.  Co.  343 

Toledo,  etc.  R.  Co.  v.  Dunlap  146, 

194 
V.  Rumbold        387,  415,  418,  466, 
408,  469 
Toler  V.  East  Tennessee,  etc.  R. 

Co.  527,  529 

Tomlinson  v.  Branch  17,  128,  139, 

141,  154 
Tompkins   v.    Augusta   Southern 

R.  Co.  152,  158,  160 

Topeka  Paper  Co.   v.   Oklahoma 

Pub.  Co.  177 

Tourteiot  v.  Whithed  502 

Town  of  Lakeview  v.   Rose  Hill 

Cemetery  Co.  791 

Town  of  Middletown  v.   Boston, 

etc.  R.  Co.  349 

Town  of  Pana  v.  Lippincott  136 

Town     of     Westbrook's    Appeal 

from  Commissioners  410 

Townscnd  v.  St.  Louis,  etc.  Min- 
ing Co.  250 
Tracy  v.  Talmadge  434 
V.  Troy,  etc.  R.  Co.  415 
Traer  v.  Prospecting  Co.  206 
V.  Lucas  Prospecting  Co.            209 
Trask  v.  Maguire                                   305 
V.  Pcekskill  Plow  Works  112 
Treadgill  v.  Pumphrev               273,  303 
V.  Salisbury  Mfg."  Co.                 207, 
208,  211,  216,  231,  5.38 
Trenton  Pass.  R.  Co.  v.  Wilson         185 
Trenton  Potteries  Co.  v.  Olyphant  605, 
'  636,  638,  645,  655,  657 
Trenton  St.  Ry.  Co.,  In  re  146 
Trester  v.  Missouri,  etc.  R.  Co.        146, 
189,  194 
Trevor  v.  Whitworth 
Trimm  v.  Marsh 

North    Western 


511,  512 
373 
Nat. 

213 
208 

572,  576 


Tripp    1 

liank 
Trisconi  v.  Winship 
Troup  V.  Horbach 
Troy,  etc.  R.  Co.  v.  Boston,  etc. 

R.  Co.  272,  280,  338 

V.  Kerr  300,  327,  444 

Troy  Buggv  Works  v.  Fife  819 

Troy  V.  Rutland  R.  Co.  274 

Trust  Co.  V.  State  498 

Trust  Co.    of   North   America  v. 

Manhattan  Trust  Co.  384 

Tuckahoe  Canal  Co.  v.  Tuckahoe, 

etc.  R  Co.  269,  279 


Tulare  Irr.   Dist.  v.  Kaweah  Ca- 
nal, etc.  R.  Co. 
Turner  v.  Stip 
Turnpike  Co.  v.  Illinois 
Turnpike  Road  Co.  v.  Campbell 

Tuscaloosa  Ice  Mfg.  Co.  v.  Will- 
iams 
Tuttle  V.  Michigan  Air  Line  Co. 

Tysen  v.  Wabash,  etc.  R.  Co. 


301 
358 
334 
266, 
268 

655 
82, 
179 
164 


U 

Underwood  v.  Barker  605 

Union,  etc.  Ass'n  v.  Masonic  Hall 

Ass'n  508 

Union  Bank  of  Chicago  v.  Kansas 

City  Bank  423 

Union  Bridge  Co.  v.  Troy,  etc.  R. 

Co.  357,  441 

Union  Pacific  R.  Co.  v.  Chicago, 

etc.   R.  Co.    321,  322,  357,  359, 
361,  365,  433,  456,  458,  459,  461, 
465 
V.  Gouchenour  131 

V.  Mc Alpine  164,  238 

Union  Pressed  Brick  Co.  v. 
Chicago  Hydraulic  Pressed 
Brick  Co.  589,  850 

Union   Sewer   Pipe   Co.    v.   Con- 
nolly 718 
Union  Trust  Co.  •;;.  Atchison,  etc. 

R.  Co.  666 

V.  Illinois  Mid.  R.  Co.  309 

United  Lines  Tel.  Co.  v.  Bo.ston 

Safe  Deposit  Co.  520 

United  New  Jersey  R.,  etc.  Co.  v. 

Happock  168 

LTnited  States  v.  Addyston  Pipe, 

etc.  Co.  602,  604,  728,  753,  7.59, 

760 

V.  Cassidy  578,  579 

V.  Chesapeake,  etc.  Fuel  Co.     712, 

718,  728 

V.   Coal   Dealers   Ass'n      691,  701, 

708,  718,  728,  751 

V.  Debs  714,  730 

V.  E.  C.  Knight  Co.   614,  643,  649, 

712,  71.5,  716,  717,  718,  719,  720, 

724,  725,  784 

V.  Elliott  739,  750 

V.  Greenhut  707,  752 

V.  Hopkins  691,  760 

V.  Jellico  Mountain  Coal,  etc. 

Co.  678,  718,  728 

V.  Joint  Traffic  Ass'n         693,  696, 

697,  703,  708,  716,  718,  735,  788 

Ivii 


TABLE   OF   CASES 


PAGE 

United   States   v.    Little  Miami, 

etc.  R.  Co.  299 

V.  McAndrew,  etc.  Co.     752,  753, 
7G0,  701 
V.  Nelson  752 

V.  Patterson  712,  739,  752 

V.  Southern  Pac.  Co.  32,  120 

V.  Standard  Oil  Co.  751 

V.  Swift  708 

V.  Trans-Missouri  Freight 

Ass'n     26,   611,   642,   653,   662, 
691,  696,  697,  698,  701,  702,  703, 
705,  712,  716,  718,  730,  735,  736, 
738,  746,  750,  753,  759,  811 
V.  Union  Pacific  R.  Co.  666 

V.  Western  Union  Tel.  Co.  450 

V.  Workinginen's       Amalga- 
mated Council        729,  739,  759, 
760 
United  States  Bank  v.  Dandridge     358 
United    States    Capsules    Co.    v. 

Isaacs  152 

United     States     Chem.     Co.     v. 

Provident  Chem.  Co.  604,  657 

United        States       Consolidated 
Seeded  Raisins  Co.  v.  Griffin       740, 

742 
United    States   Mortgage   Co.    v. 

Gross  330 

United  States  Trust  Co.  v.  Mer- 
cantile Co.  325,  372 
V.  Wabash  Western  R.  Co.       423, 
425,  427 
University  of  Vermont  v.  Baxter     131 
Utica  National  Brewing  Co.,  Mat- 
ter of  154,  169 


Vail  V.  Hamilton  514 

Valencia  County  v.  Atchison,  etc. 

R.  Co.  408 

Valley  R.  Co.  v.  Lake  Erie  Iron 

Co.  477,  478,  480,  481,  503 

Vance  v.  McNabb  Coal,  etc.  Co.       245, 

247 
Van  Cleve  V.  Berkey  576 

Van  Cott  V.  Van  Brunt  572 

Vanderpoel  v.  Gorman  213 

Vanderweghe  v.  American  Brew- 
ing Co.  818 
Van  Dresser  v.   Oregon  R.,   etc. 

Co.  392,  393,  409 

Van  Horn  v.  Van  Horn  580,  581 

Van  Steuben  v.  Central  R.  Co.  328 

Vaughn  v.  Comet,  etc.  Co.  250 

Venner  v.  Atchison,  etc.  R.  Co.       56, 
291,  540 


PAGE 

Vermont,  etc.  R.  Co.  v.  Vermont 

Central  R.  Co.  270,  324,  383 

Verplank  v.  Mercantile  Ins.  Co.       493 
Vicksburgh,  etc.  Telephone  Co.  v. 
Citizens  Telephone  Co.     13,  14,  123, 

248 
Victor   Talking    Machine    Co.    v. 

The  Fair  740 

Vilas  V.  Page  164 

Vincennes  v.  Gas  Light  Co.  598 

Vinegar  Co.   v.    Foehrenbach  645 

Virginia,  etc.  R.  Co.  v.  Washing- 
ton 398,  402 
Visalia  Gas,  etc.  Co.  v.  Sims  323 
Vought  V.  Eastern  Building,  etc. 

Ass'n  260 

Vulcan  Powder  Co.   v.   Hercules 
Powder  Co,  655,  667,  742 


W 


Wabash,  etc.  R.  Co.  v.  Ham     152,  164, 
165,  241 
V.  Keeler  470 

V.  Pavson  327 

V.  Pe^-ton  418,  468,  469 

V.  Williams  468 

Waco  Water,  etc.  Co.  v.  City  of 

Waco  597 

Wagner  v.  Marple  508 

V.  Meety  137 

Walburn  v.  Chevault  572 

Waldoborough  v.  Knox,  etc.  R. 

Co.  206,  207,  347 

Wall  V.  Chattanooga  Co.  242 

V.      London     Assets     Corp. 

(No.  1)  18,  505 

Wallace  v.  Long  Island  R.  Co.       53, 

67,  448 
v.  Loomis  182 

Walsh  V.  Ass'n  of  Master  Plumb- 
ers 589,  821,  850 
V.  Barton  258 
V.  Dwight                                        818 
Ward  V.  Bj^rne                                       605 
Warden  v.  Railroad  Co.                       445 
Ware  v.  Grand  Junction  Water 

Co.  216 

V.  Regent's  Canal  Co.  450 

Warfield  v.  Marshall  County  Can- 
ning Co.  238,  247 
Warren  v.  Mobile,  etc.  R.  Co.  152, 
160,  166 
Warrener  v.  Kankakee  County         49 
Washburn  v.  Cass  County          56,  136, 
178,  183 
V.  Donnes  343 


Iviii 


TABLE    OF    CASES 


PAGE 

Washburn  v.  National  Wall  Paper 

Co.  571,  573,  574 

Washington  v.  Northern  Securi- 
ties Co.  70 
Washington  St.,  etc.  R.  Co.,  Mat- 
ter of  50 
Wasmer    v.    Delaware,    etc.     R. 

Co.  419 

Waters-Pierce   Oil  Co.    v.    State     795, 

796,  799,  810,  820,  828,  84.5, 

847,  850,  852 

V.  Texas  826,  827 

Watson    V.    Harlem,    etc.    Nav. 

Co.  553 

V.  Richmond,  etc.  R.  Co.     418,  419 
Watt's  Appeal  509 

Weatherby  v.  Baker  239,  572,  576 

Webb  V.  Portland,  etc.  R.  Co.  468 

Wehrhane  v.   Nashville,   etc.    R. 

Co.  506 

Weiboldt    v.    Standard    Fashion 

Co.  817 

Welch  V.   Phelps,   etc.   Windmill 

Co.  817 

Welden  Nat.  Bank  v.  Smith     370,  3S2, 

392 
Wells    V.     Mi.ssouri    Edison    El. 

Co.  151 

V.  Rodgens  110,  111,  132 

Wells  Richardson  v.  Abraham  744 

Welsh  V.  Old  Dominion  Min.   & 

R.  Co.  264 

Wentworth  v.  Braun  237 

Werle  v.  Northwestern  Flint,  etc. 

Co.  209,  211 

West  End,  etc.  R.  Co.  v.  Dam- 

eron  301 

West  River  Bridge  v.  Dix  209 

West  Virginia  Transportation 
Co.  V.  Ohio  River  Pipe 
Line  Co.  654,  666 

V.    Standard   Oil   Co.  579,  582 

Western,  etc.  R.  Co.  v.  Cox  419 

V.  Johnstown  255 

V.  Smith  152 

Western  Pennsylvania  R.  Co.  v. 

.Johnston  2.54 

Western  Union  R.  Co.  v.  Smith        150 
Western  Union  Tel.  Co.  v.  Ameri- 
can Union  Tel.  Co.  666 
V.  Burlington,  etc.  R.  Co.  66(5 
V.  Chicago,  etc.  R.  Co.                 666 
V.  Pennsylvania  R.  Co.  666 
V.  Union  Pacific  R.  Co.  323 
Western    Woodenware    Ass'n    v. 

Starkie  655 

Whaley  v.  Bankers  Union  of  the 
World  175,  189 


P.\.GE 

Whceler-Stenzel  Co.  v.  Nat.  Glass 

Jobbers  Ass'n  708,  724,  754,  757 

Whipple  V.  Union  Pacific  R.  Co.     166, 

169 
White,   S.    S.,    Dental  Mfg.  Co.    v. 

Hertzberger  810 

White  V.  Albany  R.  Co.  375 

V.  Buss  434 

V.  Franklin  Bank  439 

V.  Marquardt  503 

V.   Syracuse,   etc.   R.  Co.  547 

White  Mountains  R.  Co.  v.  White 

Mountains  R.  Co.  300 

White  Star  Line  v.  Star  Line         737 
White  Water,  etc.  Co.  v.  Valette     203, 

330 
Whitman  v.  Watkin  493 

Whitney  Arms  Co.  v.  Barlow  259 

Whitney  v.  Atlantic,  etc.  R.  Co.     387 
V.  Mayo  221 

V.  Slayton  604 

Whittaker  v.  Howe  605 

Whittendon  Mills  v.  Upton  566 

Whitwell  V.  Continental  Tobacco 

Co.  713,  756 

Wiggins  Ferry  Co.  v.  Ohio,  etc. 

R.  Co.  325 

Wilbur  ?).  Trenton  Pass.  R.  Co.        128 
Wiley  V.  Nat.  Wall  Paper  Co.  675 

Wilkinson  v.  Banerle  213 

Williamson  v.  New  Jersev  South- 
ern R.  Co.  105,  163,  181, 

528 

Williard  v.  Spartansberg  402 

Wills  V.  Central  Ice,  etc.  Co.  586, 

589,  820 

Wilmington,   etc.   R.  Co.  v.  Als- 

brook  305,  306 

Wilmington  R.  Co.  v.  Reid  81 

Wilmington  Water  Power  Co.  v. 

Evans  262 

Wilson  V.  ^olian  Co.     231,  236,  250, 

251 
V.  Central  Bridge  Co.  208,  220 

V.  Gaines  305 

V.  Morse  640,  851 

V.  Salamanca  79,  137 

Wilson's  Case  508 

Winch    V.    Birkenhead,    etc.    R. 

Co.  49,  222,  274,  329,  350 

Winchester,  etc.  R.  Co.  v.  Com- 
monwealth 413 
WindmuUer  v.  Standard  Distil- 
ling, etc.  Co.  524 
Winnebago,  the  806 
Winsor  i'.  Bailey  223 
Wisconsin  Central  R.  Co.  v.  Ross  471 
Wittenberg  v.  Mollyneaux  657 

lix 


TABLE    OF   CASES 


Wolf    V.    Arminus   Copper    Mine 

Co.  212 

V.  Pennsylvania  R.  Co.     376,  448 
Wolverhampton,    etc.    R.    Co.   v. 

London,  etc.  R.  Co.  465 

Wood  V.  Bedford,  etc.  R.  Co.  289, 

290,  341 

V.  Dummer  239 

V.  Macon,  etc.  R.  Co.  280 

V.  Whitehead  605 

Woodberry  v.  McClurg  497 

Woodcock  V.  First  >rational  Bank     537 

Woodruff  V.  Erie  R.  Co.       33,  59,  338, 

426,  428,  435,  442 

Wood,    Walter   A.,    Mowing,    etc. 

Co.    V.    Greenwood    Hardware 

Co.  642,  814,  818 

Woods  V.  Lawrence  County  262 

Woolfolk  V.  January  572 

Wormser  v.   Metropolitan  St.    R. 

Co.  337,  338,  447 

Worth  Mfg.  Co.  V.  Bingham     220,  223 

Worthen  v.  Griffith  241 

Wragg,  Re  572,  576 

Wright  V.  Bundy  213 

V.  Kentucky,  etc.  R.  Co.  357 

V.  Lee  173,  537 

V.  Milwaukee,  etc.  R.  Co.  264, 

267,  268 

V.  Orville  Mining  Co.  548 

V.  Pipe  Line  Co.  259,  537 

V.  Rider  603,  604 


PAGE 

Wvlie   V.    National    Wall    Paper 

Co.  839 

Wyman  v.  American  Powder  Co.      572 


Yates  V.  Van  De  Bogert 
Yazoo,  etc.  R.  Co.  v.  Adams     17, 
113,  114,  115, 
121,  138,  140, 
V.  Searles  542,  636,  809, 

V.  Southern  R.  Co. 
Yeates  v.    Illinois  Cent.   R.   Co. 

York,  etc.  R.  Co.  r.  Winans     253, 

Young  V.  Erie  Iron  Co.  572, 

V.  Railroad  Co. 

V.  Rondout,  etc.  Gas  Light 
Co. 

V.  Toledo,  etc.  R.  Co. 

V.  Webster  City,  etc.  R.  Co. 
Youngman  v.  Elmira,  etc.  R.  Co 


256 
44, 

116, 
305 

813, 
830 
292 

397, 
399 

273, 
274 
576 
298 

90 
297 
263 
254, 
255 


Zabriskie    v.    Cleveland,    etc.    R. 

Co.  221,  351,  433 

V.  Hackensack  R.  Co.     85,  90,  208, 

347 

Ziuiiner  v.  State  44,  143 


Ix 


INTERCORPORATE   RELATIONS 


INTERCORPORATE    RELATIONS 


PRELIMINARY 


§  1.  A  corporation  is  an  artificial  person  created  by  law 
having,  within  the  limits  of  its  chartered  powers,  the  rights  of 
a  natural  person  in  the  transaction  of  business.  It  is  governed 
by  the  general  rules  of  law  relating  to  rights  of  property,  con- 
tracts and  torts  which  apply  to  individuals.  Its  relations 
with  other  corporations,  as  persons,  are  essentially  the  same  as 
the  relations  of  natural  persons. 

A  corporation  is  something  other  than  a  person.  It  pos- 
sesses the  property  of  immortality  — the  capacity  of  perpetual 
succession  —  and  may  act  with  certainty  in  reference  to  the 
future.  Its  possibilities  of  material  development,  through  the 
increase  and  disposition  of  shares,  may  be  as  unlimited  as  its 
duration.  Its  methods  of  control  and  management  are  regu- 
lated by  rules  applicable  to  it  alone.  While  the  relations  of 
corporations  with  each  other  as  persons  are  like  those  of  indi- 
viduals, the  relations  of  corporations  as  corporations  are  essen- 
tially different.  The  welding  of  several  corporations  into  one, 
the  selling  and  leasing  of  corporate  franchises,  the  acquiring 
of  controUing  stock  interests,  the  combining  of  corporate 
properties  —  all  are  governed  by  principles  .  of  law  either 
inapplicable  or  applying  in  different  degree  to  the  relations  of 
individuals. 

Intercorporate  relations  of  this  character  grow  out  of  a 
variety  of  processes  which  may  be  classified  as  follows : 

I.  The  union  of  stockholders,  properties  and  franchises  of 
several  corporations  in  a  single  corporation  — consolidation. 

II.  The  p.bsolute  transfer  of  the  franchises  and  property  of 
one  corporation  to  another  —  sale. 

3 


§  2  INTERCORPORATE    RELATIONS 

III.  The  transfer  for  stated  payments  of  the  franchises  and 
property  of  one  corporation  to  another  in  perpetuity  or  for  a 
term  of  years  —  lease. 

IV.  The  acquisition  by  one  corporation  of  shares  of  the  capi- 
tal stock  of  another  —  corporate  stockholding,  which  becomes 
control  when  a  majority  of  the  shares  is  acquired. 

V.  The  cooperation  of  several  corporations  to  accomplish  a 
given  purpose  —  combination. 

§  2.  The  consolidation  of  corporations  is  chiefly  exempli- 
fied by  railroad  companies  and,  to  a  far  less  degree,  by  other 
quasi-^\ih\\Q.  corporations,  where  the  transmission  of  the  fran- 
chise is  of  essential  importance,  and  where  the  statutory  method 
of  effecting  such  transfer  must  be  strictly  followed. 

The  consolidation  of  railroad  companies,  occasioned  by  their 
peculiar  nature  and  use,  has  been  taking  place  for  a  long  time. 
In  their  early  days,  the  extraordinary  powers  granted  to  them 
—  the  right  to  condemn  lands,  take  tolls  and  exclude  all  other 
cars  from  their  tracks  '  —  and  their  constantly  developing 
necessity  to  the  life  of  the  people,  led  the  legislatures  to  jealously 
guard  the  granting  of  authority  to  transfer  the  powers  so  in- 
trusted. But  it  soon  became  apparent  that  the  uniting  of 
short  connecting  roads  into  through  lines  brought  about  in- 
creased facilities  for  travel  and  lower  rates,  and  authority  to 
consolidate  came  to  be  granted  by  special  laws  in  particular 

'  But  in  the  very  earliest  days  of  Economic  principles,  however,  soon 
railroad  companies,  they  were  regarded  changed  these  early  \'iews.  While  in- 
both  in  England  and  this  country  as  dependent  carriers  might  possibly 
merely  owners  of  roads  upon  which  have  been  able  to  furnish  cars  for  the 
rails  were  placed,  and  upon  which  all  transportation  of  goods  upon  the  rail- 
persons  had  a  right  to  operate  their  roads,  it  was  quite  a  different  matter 
vehicles  upon  payment  of  tolls.  The  to  obtain  the  motive  power.  Few 
railroad  was  considered  a  public  high-  carriers  or  shippers  required  or  could 
waj'  for  independent  carriers.  Thus  afford  a  locomotive.  Trains  run  by 
the  charter  of  the  Ithaca  and  Oswego  different  managements  upon  the  same 
railroad,  granted  in  1828,  pro\dded  road  would  be  dangerous.  Inde- 
that  "all  persons  pajdng  the  toll  pendent  carriers  could  not  serve  the 
aforesaid  may,  with  suitable  and  public  with  facihty  nor  without  dupli- 
proper  carriages,  use  and  travel  upon  cation  of  expense.  Safety,  conven- 
said  railroad."  Still  it  was  usual  ience  and  economy  compelled  the 
to  authorize  the  railroad  company  to  railroad  company  to  exclusively 
act,  with  others,  as  a  carrier  upon  its  operate  its  own  road, 
own  road.  But  it  had  no  such  right 
without  special  authorization. 

4 


PRELIMINARY  §  3 

cases.  Special  acts  were  followed  by  general  laws  until,  at  the 
present  time,  the  public  policy  of  nearly  all  the  States,  as  indi- 
cated by  their  statutory  provisions,  is  in  favor  of  the  con- 
solidation of  connecting  railroads  which  are  neither  competing 
nor  parallel.  Under  this  policy  railroad  consolidations  have 
taken  place  in  constantly  increasing  numbers.  The  greater 
companies  have  absorbed  the  smaller  roads;  the  local  roads 
have  been  united  into  the  through  line;  the  through  line  has 
become  a  part  of  the  railway  system. 

§  3.  The  relation  of  vendor  and  vendee  between  corpora- 
tions as  constantly  arising  in  the  ordinary  transaction  of 
business,  is  manifestly  governed  b}'-  general  legal  principles 
applicable  both  to  individuals  and  corporations.  But  while  an 
individual  without  restraint  may  sell  and  dispose  of  all  his  prop- 
erty, the  right  to  sell  all  its  assets  and  render  itself  incapable  of 
performing  the  functions  for  which  it  was  created  exists  in  a 
q'Mo.si-public  corporation  only  when  expressly  conferred  by 
legislative  authority,  and  may  be  exercised  by  a  strictly  private 
corporation  only  by  the  unanimous  consent  of  its  stockholders 
or  as  a  means  of  liquidation. 

The  sale  of  corporate  property  for  stock  in  the  purchasing 
corporation — a  familiar  process  in  modern  industrial  enter- 
prises —  involves  not  only  the  power  of  the  vendor  corporation 
to  take  the  stock,  but  the  right  of  its  minority  stockholders 
to  object  to  the  embarkation  of  corporate  assets  in  new  adven- 
tures. 

The  sale  of  corporate  franchises,  especially  those  of  railroad 
companies,  has  been  illustrated  most  frequently  by  judicial 
sales  under  mortgage  foreclosures,  but  as  such  sales  involve 
the  relations  between  a  corporation  and  its  creditors  rather 
than  intercorporate  relations,  they  fall  outside  the  scope  of  this 
treatise. 

Private  sales  of  railroads  have,  however,  not  been  uncommon, 
and  general  statutes  exist  in  many  States  authorizing  the  pur- 
chase by  one  railroad  company  of  the  road  and  franchises  of 
another  forming  a  connecting  or  continuous  line  with  its  own. 
The  result  to  the  public  from  such  a  sale  and  purchase  in  the 
increase  of  facilities  for  travel  is  the  same  as  that  following  a 
consolidation. 

5 


§  4  INTERCORPORATE  RELATIONS 

§  4.  A  lease  executed  by  one  corporation  to  another  of  a 
portion  of  its  property,  incidental  to  the  transaction  of  the 
business  for  which  it  was  organized,  creates  the  relation  of 
landlord  and  tenant  between  them  and  is  governed  by  the 
general  principles  of  law  applicable  to  that  relation.  A  lease 
by  a  prosperous  corporation,  however,  of  its  entire  property 
constitutes  such  a  departure  from  the  purposes  for  which 
it  was  incorporated  that  it  requires  the  unanimous  consent 
of  its  stockholders;  and  such  a  lease  by  a  failing  corporation 
can  only  be  justified  when  it  appears  to  be  the  best  method  of 
realizing  upon  the  corporate  assets.  Principles  of  corporation 
law  relating  to  the  powers  of  corporations  and  the  rights  of 
minority  stockholders  may  determine  the  validity  of  such  leases. 

The  practical  results  of  a  consolidation  of  railroads,  the 
increase  in  facilities  for  travel,  the  lowering  of  rates,  the 
establishment  of  the  through  line  or  transcontinental  system 
—  all  the  results  apparent  from  a  point  of  view  outside  the  cor- 
poration —  may  be  as  well  obtained  by  a  lease  of  corporate 
franchises  and  property  for  an  extended  period,  whereby  the 
affairs  of  the  lessor  and  lessee  corporations  are  placed  under 
one  management,  as  by  a  strict  consolidation  according  to  the 
provisions  of  a  consolidation  statute.  The  result  from  a  point 
of  view  inside  the  corporation,  and  the  relations  of  the  cor- 
porations, are,  however,  essentially  different.  In  the  case  of 
a  consolidation  the  two  companies  become,  as  it  were,  part- 
ners in  a  new  enterprise.  In  the  case  of  a  lease  their 
relations  are  contractual  and  their  interests  as  lessor  and 
lessee  are,  to  an  extent,  antagonistic. 

In  determining  the  rights  of  lessor  and  lessee  under  a  lease 
of  railroad  propert}'  and  franchises,  in  the  usual  form,  the 
general  principles  of  law  governing  the  relations  of  landlord 
and  tenant  have  little  applicability.  Such  leases  can  only  be 
executed  by  the  sanction  of  the  legislature.  In  them  pro- 
\'isions  thought  essential  in  ordinary  leases  are  often  omitted. 
A  lease  for  the  usual  term  —  nine  hundred  and  ninety-nine 
years  —  is  equivalent  to  a  grant  of  the  fee.  "  It  would  carry 
us  to  a  time  as  remote  in  the  future  as  the  time  of  Alfred  the 
Great  is  distant  in  the  past."  ^ 

'  Van  Syckel,  J.,  in  Black  v.  Delaware,  etc.  Canal  Co.,  24  N.  J.  Eq.  465  (1873). 

6 


PRELIMINARY  §   G 

§  5.  Upon  the  principle  that  a  corporation  may  not  apply 
its  funds  to  objects  other  than  those  defined  by  its  charter,  it 
is  a  general  rule  of  law  that  one  corporation,  in  the  absence 
of  express  statutory  authority,  cannot  hold  stock  in  another 
corporation.  Such  authority,  however,  may  often  be  found  in 
special  charters,  and  appears  in  the  general  laws  of  the  States 
where  most  of  the  great  corporations  are  organized,  and,  under 
such  laws,  corporations  have  been  organized  for  the  special  pur- 
pose of  holding  stock  in  other  corporations. 

Corporations  of  this  nature  are  denominated  "holding 
corporations,"  and  present  a  late  phase  of  corporate  develop- 
ment. During  the  past  ten  years  a  large  part  of  the  practical  — 
as  distinguished  from  the  technical  ---  consolidations  which 
have  taken  place  have  been  effected  by  means  of  these  cor- 
porations. 

Where  several  corporations  hold  stock  in  another  corporation, 
or  where  they  are  mutually  interested  in  each  other's  shares, 
a  "community  of  interest"  may  be  said  to  exist.  Where 
one  corporation  purchases  a  majority  of  the  stock  of  another 
company,  it  acquires  control.  The  control  so  acquired  is 
not  consolidation.  Theoretically,  each  corporation  continues 
a  separate  and  distinct  existence.  Practically,  they  act  to- 
gether for  a  common  purpose,  and  the  minority  stockholders 
in  the  controlled  corporation  too  often  have  occasion  to  de- 
mand that  its  affairs  be  managed  in  the  interests  of  its  stock- 
holders and  not  in  the  interest  of  another  company. 

The  peculiar  value  of  the  holding  corporation  to  the  finan- 
cier is  that  by  means  thereof  he  obtains  the  maximum  of 
control  at  the  minimum  of  expense.  By  controlling  one 
corporation  which  holds  control  of  another  he  may  obtain 
practical  control  of  the  latter  at  but  little  more  than  half  the  cost 
of  direct  control. 

§  6.  The  union  of  corporate  properties,  as  distinguished 
from  the  union  of  shareholders  and  franchises,  is  chiefly 
exemplified  in  the  case  of  industrial  corporations.  In  ex- 
ceptional instances  consolidation,  according  to  statutory  pro- 
\ision.s,  has  been  effected  by  such  corporations.  Generally, 
as  there  are  no  franchises  to  be  preserved,  only  the  uniting  of 
corporate  properties,  either  by  direct  ownership  or  indirectly 

7 


§   6  INTERCORPORATJE   RELATIONS 

through  controlling  stock  interests,  has  been  attempted.  The 
present  method  of  accomplishing  such  result  has  come  about 
through  a  process  of  evolution.  At  first,  a  simple  association, 
without  community  of  financial  interest,  was  formed  by  corpora- 
tions in  the  same  line  of  business  for  the  purpose  of  maintaining 
prices  or  limiting  production.  These  associations  were,  as  a 
rule,  held  by  the  courts  to  be  unlawful  combinations  tending 
to  create  monopolies.  To  meet  these  objections  "trusts" 
were  created,  whereby  a  union  of  interests  was  effected  by  the 
depositing  of  stock  of  several  corporations  in  the  hands  of 
a  trustee  for  a  common  purpose.  "Trusts"  in  their  turn 
were  held  to  be  unlawful  combinations,  as  well  as  repugnant 
to  elementary  principles  of  corporation  law,  and  finally  the 
present  method  was  evolved  of  forming  a  purchasing  or  hold- 
ing corporation  to  acquire  the  property  or  stock  of  the  several 
corporations. 

The  association  of  industrial  corporations,  by  whatever 
means  accomplished,  has  been  induced  by  the  constantly  in- 
creasing tendency  in  modern  business  life  toward  a  unification 
of  interests  and  concentration  of  control.  This  tendency,  while 
of  somewhat  recent  inception,  has  developed  with  phenomenal 
and  startling  activity  in  America  during  the  last  decade. 
Manufacturing  and  mercantile  corporations  of  great  magnitude 
throughout  the  United  States  have  been  united  into  greater 
companies  covering  wider  fields,  and  these,  in  turn,  have  been 
combined  into  vast  aggregations  of  capital  controlling  whole 
branches  of  industry. 

The  principles  of  law  governing  combinations  of  corpora- 
tions are  similar  to  those  controlling  combinations  of  individ- 
uals. In  the  test  of  threatened  injury  to  the  public,  however, 
the  danger  of  a  combination  may  lie  in  its  corporate  charac- 
ter. The  real  menace  of  the  huge  corporate  combination  lies 
in  its  enormous  collateral  and  inherent  power  —  for  evil  or 
good — which  no  individual  or  combination  of  individuals, 
as  such,  could  ever  possess.  That  many  combinations  have 
not  worked  injuriously  to  the  interests  of  the  public  is 
unquestionably  true ;  that  many  others,  from  an  economic 
standpoint  are  essentially  vicious,  cannot  be  denied.  All 
combinations  should  be  controlled  and  regulated.  The  extent 
8 


PRELIMINARY  §    6 

to  which  they  should  be  suppressed  presents  the  serious  problem, 
legal  as  well  as  economic. 

The  validity  of  a  combination  depends  broadly  upon  whether 
it  is  prejudicial  to  the  public  welfare  —  whether  it  is  contrary 
to  public  policy.  But  public  policy  in  its  very  nature  is  un- 
certain and  fluctuating".  No  definite  standard  can  be  fixed 
unless  rules  of  public  policy  can  be  formulated.  When  a 
statute  relating  to  comljinations  exists  it  is  itself  the  rule  of 
public  policy.  When  no  statute  exists  the  rule  must  be  formu- 
lated from  the  decisions  of  the  courts.  Were  the  decisions  of 
the  courts  based  upon  a  uniform  course  of  reasoning  the  prepara- 
tion of  such  a  rule  would  merely  recjuire  the  classification  of 
governing  principles.  But  the  decisions  of  the  courts  with 
respect  to  the  validity  of  combinations  have  been  the  reverse  of 
uniform.  Courts  have  reached  the  same  conclusion  by  widely 
different  courses,  and  upon  similar  facts  have  reached  widely 
different  conclusions.  Some  combinations  go  so  far  in  the 
elimination  of  competition  that  they  are  unlawful  according  to 
all  the  decisions.  Others  are  so  innocuous  that  their  validity 
is  generally  recognized.  It  is  with  respect  to  the  combination 
which  is  neither  manifestly  lawful  nor  unlawful  that  the  deci- 
sions conflict.  To  frame  a  rule  of  pubUc  policy,  therefore,  is 
most  difficult.  It  can  only  be  accomplished  by  recognizing 
that  any  rule  to  have  general  application  must  furnish  a  con- 
servative standard.  It  must  rather  be  a  test  of  illegality 
than  of  legality.  It  must  be  so  framed  that  a  combination 
contravening  its  provisions  would  in  nearly  all  the  States  be 
held  invalid. 

Legislation  regarding  combinations  has  in  many  jurisdictions 
supplemented  the  rules  of  the  common  law.  The  Sherman  law 
—  the  federal  anti-trust  statute  —  enacted  in  pursuance  of  the 
power  conferred  by  the  commerce  clause  of  the  Constitution, 
has  proved  to  be  a  most  effective  instrument  in  dealing  with 
combinations  in  restraint  of  interstate  commerce.  But  the 
limitations  of  the  commerce  clause  prevent  its  reaching  produc- 
ing combinations  which  do  not  directly  restrain  such  commerce. 
Yet  such  combinations  may  operate  prejudicially  to  the  interests 
of  States  with  which  they  have  relations  only  by  means  of 
interstate  commerce.     The  present  federal  statute  reaches  the 

9 


§   6  INTERCORPORATE    RELATIONS 

constitutional  limit  in  the  removal  of  restraints  upon  commerce. 
It  may  be  necessary  to  proceed  in  the  direction  of  imposing 
restraints. 

The  State  anti-trust  statutes  when  first  enacted  were  some- 
times so  crudely  drawn  as  to  take  away  the  property  rights 
guaranteed  by  the  Fourteenth  Amendment,  and  contained 
exemptions  which  rendered  them  unconstitutional  as  class 
legislation.  Within  the  last  five  3^ears,  however,  several  of  the. 
leading  statutes  have  been  before  the  Supreme  Court  of  the 
United  States.  Some  have  been  sustained  and  others  declared 
unconstitutional.  The  States  legislatures  have  now  generally 
remedied  the  defects  shown  to  exist  in  the  earlier  statutes  by  the 
decisions  of  the  courts  and  have  eliminated  many  of  their 
crudities.  As  a  whole,  the  present  State  anti-trust  statutes 
afford  remedies  for  many  of  the  evils  of  the  combination.  They 
deal  with  the  domestic  combination  and  with  the  foreign  cor- 
poration which  does  a  localized  business.  But  the  States  can- 
not reach  the  evils  arising  from  foreign  corporate  combinations 
engaged  in  commerce  across  State  lines.  Whatever  evils  so 
exist  can  only  be  remedied  by  an  appropriate  federal  enactment 
supplementing  State  legislation. 


10 


PART   I 

CONSOLIDATION   OF  CORPORATIONS 

CHAPTER  I 

NATURE    OF    CONSOLIDATION 

I    7.  Term  "Consolidation  "  of  Uncertain  Meaning. 

§    8.  Uses  of  the  Term  distinguished. 

§    9.  Consolidation  as  a  Result  and  as  a  Process. 

§  10.  An  Analogy  in  the  Civil  Law. 

§  11.  Merger. 

§  12.  Amalgamation. 

§  13.  Distinction  between  Consolidation  and  Sale. 

§  14.  Distinction  between  Consolidation  and  Lease. 

§  15.  Distinction  between  Consolidation  and  Control. 

§  16.  Distinction  between  Consolidation  and  Combination. 

§7.    Term    "Consolidation"    of    Uncertain    Meaning. — The 

term  "consolidation"  as  used  in  statutes  and  charters  au- 
thorizing the  union  of  several  corporations  has  not  acquired, 
either  as  a  result  or  as  a  process,  a  recognized  judicial  defi- 
nition.^ Extended  discussion  of  its  meaning  has  only  served 
to  demonstrate  its  uncertain  signification. 

'  In  Meyer  v.  Johnston,  64  Ala.  603  be  attached  to  the  term  'consolida- 
(1879),  it  was  held  that  the  words  tion'  as  used  in  a  law  authorizing  the 
"con.soldate"  and  "consolidation,"  consolidation  of  two  or  more  cor- 
as  used  in  statutes  authorizing  and  porations  is  uncertain.  It  depends 
ratifying  the  union  or  combination  of  often  upon  the  particular  terms  of  the 
several  railroad  corporations  into  one,  act  giN-ing  the  power,  and  the  legal 
have  not  eicquired  a  recognized  judi-  effect  resulting  from  consolidation  will 
cial  construction,  importing  that  all  largely  depend  upon  the  character  of 
the  companies  are  dissolved  and  the  consolidation  authorized  by  the 
merged  into  one  new  company ;  on  permission  as  well  as  upon  the  con- 
the  contrary,  the  terms  are  generally  tract  actually  entered  into  by  the 
applicable  to  a  union  of  two  or  more  consoUdating  companies.  Generally 
companies  in  such  a  way  that  one  of  the  ^merging  of  the  companies  into  a 
them  is  continued  in  existence,  though  new  and  distinct  corporation  is  con- 
under  a  new  name,  and  with  enlarged  templated  and  is  the  legal  result, 
powers,  while  the  others  are  merged  Not  infrequently  the  absorption  of 
in  and  absorbed  by  it.  one  corporation   by  the  other  is  the 

Tod  V.  Kentucky  Union  Land  Co.,  consequence  of  consolidation." 
57  Fed.  50  (1893)  :   "The  meaning  to  In  Central,  etc.  Co.  v.  Georgia,  54 

11 


§7 


INTERCORPORATE   RELATIONS 


[part  I 


There  being  no  definition  of  the  word  generally  applicable,' 
its  meaning,  in  any  case,  will  depend  upon  the  terms  of  the 
particular  act  authorizing  the  consolidation,  and  the  legal  re- 
sult of  any  consolidation  will  be  determined  by  the  language 
of  the  statute  under  which  the  consolidation  took  place  and 
by  the  acts  and  agreements  of  the  contracting  corporations 
relating  thereto.^ 


Ga.  414  (1875),  (reversed  92  U.  S.  665 
(1875)),  Judge  McCay,  concurring,  dis- 
cusses the  meaning  of  "consolida- 
tion" and  distinguishes  it  from  the 
English  term  "amalgamation." 

'  The  following  definitions  of  "con- 
solidation" as  applied  to  corporations 
have  been  given  : 

"The  union  or  merger  into  one 
corporate  body  of  two  or  more  cor- 
porations which  have  been  separately 
created  for  similar  or  connected  pur- 
poses." Black's  Law  Diet,  sub  notn. 
"Consolidation  of  Corporations." 

"Any  conjunction  or  union  of  the 
stock,  property,  or  franchises  of  two 
or  more  corporations  whereby  the 
conduct  of  their  affairs  is  perma- 
nently, or  for  a  long  period  of  time, 
placed  under  one  management."  1 
Beach  on  Railways,  §  535 ;  1  Beach 
on  Corporations,  §  326. 

"  The  consolidation  of  corporations 
means,  generally,  the  combination  of 
two  or  more  corporations  of  the  same 
or  different  States,  by  an  agreement, 
between  them,  under  legislative  au- 
thority, by  wliich  their  rights,  fran- 
chises, privileges,  and  property  are 
united,  and  become  the  rights,  fran- 
tliises,  privileges,  and  property  of  a 
single  corporation,  composed  gener- 
ally, although  not  necessarilj'^,  of  the 
stockholders  of  the  original  corpora- 
tions." 2  Clark  &  Marshall  on  Cor- 
porations, §  348. 

"A  consolidation  of  corporations 
is  a  merger,  a  union,  or  amalgamation, 
by  which  the  stock  of  the  two  com- 
panies is  made  one,  by  which  their 
property  and  franchises  are  combined 
into  one,  by  wliich  their  powers  be- 

12 


come  the  powers  of  one,  by  which  the 
names  are  merged  into  one,  and  by 
which  the  identity  of  two  practically, 
if  not  actually,  runs  into  one."  State 
V.  Montana  R.  Co.,  21  Mont.  242 
(1898),  (53  Pac.  Rep.  623,  45  L.  R.  A. 
271). 

Consolidation  is  "a  method  pro- 
vided by  law  for  the  formation  of  a 
copartnership  between  railroad  cor- 
porations by  which,  if  the  expression 
may  be  used,  they  pool  their  fran- 
chises and  property  and  are  enabled 
to  act  in  complete  harmony  under 
one  head  as  a  unit."  Phinizy  v.  Au- 
gusta, etc.  R.  Co.,  62  Fed.  684  (1894). 

This  comparison  by  Judge  Simon- 
ton  of  a  consolidated  corporation  to 
a  partnership  should,  however,  be 
considered  merely  as  illustrating  some 
of  its  features,  and  not,  in  any  sense, 
as  defining  its  powers.  Wliile  the 
illustration  is  not  inapt  and  is  fre- 
quently used,  "  a  company  of  com- 
panies "  more  correctly  describes 
a  consolidated  corporation  than  a 
"  partnership  of  corporations." 

In  Baltimore,  etc.  R.  Co.  v.  Mus- 
selman,  2  Grant's  Cas.  (Pa.)  352 
(1856),  the  following  curious  illustra- 
tion of  the  nature  of  consolidation 
appears:  "It  is  not  a  case  of  death, 
for  the  new  corporation  lives  from 
the  life  of  the  old  one :  their  lives  are 
transferred  into  it;  and  unlike  or- 
dinary cases  of  metempsychosis  this 
translation  is  accompanied  by  full 
consciousness  of  the  former  state,  antl 
its  liabilities." 

2  Keokuk,  etc.  R.  Co.  v.  Missouri, 
152  U.  S.  305  (1894)  (14  Sup.  Ct. 
Rep.  592). 


CHAP.    I 


NATURE    OF   CONSOLIDATION 


§8 


The  term  "  consolidatioii "  as  used  in  constitutional  and 
statutory  inhibitions  is  also  said  to  have  a  different  meaning 
from  the  same  term  as  used  in  statutory  authorizations.^ 

§  8.  Uses  of  the  Term  Distinguished.  —  The  word  "  consolida- 
tion" is  applied  to  various  processes  by  which  corporations 
may  be  united  and  to  various  results  attained  thereby :  - 

A.  Two  corporations  may  be  combined  by  their  fusion  into 
a  third  corporation  created  in  their  stead.  This  results  in 
the  surrender  of  the  vitality  of  the  old  corporations,  the  ex- 
tinguishment of  their  special  privileges  and  exemptions,  and 
the  springing  into  existence  eo  instanti  of  a  new  corporation 
with  such  powers  and  privileges  as  may  be  conferred  upon  it  by 
the  act  authorizing  the  consolidation.^     The  dissolution  of  all 


For  full  consideration  of  this  sub- 
ject see  ch.  VI.,  post:  "Effect  of  Con- 
solidation upon  Status  of  Consolidat- 
ing Corporations  and  their  Stock- 
holders." 

'See  post,  §  33:  "Construction  of 
Prohibitions  —  (A)  Meaning  of  Term 
'Consolidation.'  " 

'  In  Railroad  Co.  v.  Georgia,  98 
U.  S.  362  (1878),  Mr.  .Justice  Strong 
said  :  "It  is  conceded  that  under  this 
act  a  consolidation  took  place.  It  is 
therefore  a  vital  question.  What  was 
its  effect  ?  Did  the  consolidated 
companies  become  a  new  corporation, 
holding  its  powers  and  pri\'ilegcs  as 
such  under  the  act  of  1863  ?  Or  was 
the  consoUdation  a  mere  alliance 
between  two  preexisting  corpora- 
tions, in  which  each  preserved  its 
identity  and  distinctive  existence? 
Or,  still  further,  was  it  an  absorption 
of  one  bj'  the  other,  whereby  the 
former  was  dissolved,  while  the  latter 
continued  to  exist?  The  answer  to 
these  inquiries  must  be  found  in  the 
intention  of  the  legislature  as  ex- 
pressed in  the  consolidation  act." 

'  The  effect  of  the  consolidation 
was  "the  dissolution  of  the  corpora- 
tions prc\-iously  existing,  and  at  the 
same  instant  the  creation  of  a  new 
corporation,  with  property,  liabilities, 
and  stockholders  derived  from  those 


then  passing  out  of  existence." 
McMahon  t\  Morrison,  16  Ind.  172 
(1861),  approved  in  Clearwater  r. 
Meredith,  1  Wall  (U.  S.)  40  (1863). 

In  Railroad  Co.  v.  Georgia,  98  U.  S. 
359  (1878),  the  Supreme  Court  also 
.said  :  "That  generally  the  effect  of 
consolidation,  as  distinguished  from 
a  union  by  one  company  into  another, 
is  to  work  the  dissolution  of  the  com- 
panies consolidating  and  to  create  a 
new  corporation  out  of  the  elements 
of  the  former  is  asserted  in  many 
cases  and  seems  to  be  the  necessary 
result." 

In  Vicksburg,  etc.  Telephone  Co. 
V.  Citizens  Telephone  Co.,  79  Miss.  341 
(1901)  (30  So.  Rep.  725,  89  Am.  St. 
Rep.  656),  the  Court  said:  "There 
seems  to  be  a  great  confusion  as  to  the 
difference  between  consolidation  and 
merger  and  sale.  Rightly  under- 
stood, there  never  can  be  a  consolida- 
tion of  corporations  except  where  all 
the  constituent  companies  cea.se  to 
exist  as  separate  corporations,  and 
a  new  corporation,  to  wit,  the  con- 
solidated corporation,  conies  into 
being." 

See  also  post,  §  60:  "As  a  General 
Rule  Effect  of  Consolidation  is  Crea- 
tion of  New  Corporation  and  Dissolu- 
tion of  Constituents." 

13 


§8 


INTERCORPORATE    RELATIONS 


[part  I 


the  old  corporations  and  the  creation  of  the  new  one  are  the 
essential  features  of  this  process,  which  has  been  said  to  con- 
stitute consolidation  according  to  the  "American  view."  * 

B.  There  may  be  an  absorption  of  one  company  by  another 
whereby  the  former  is  dissolved  and  passes  out  of  existence 
while  the  latter  continues  to  exist  with  enlarged  powers? 
The  word  "consohdation"  has  been  said  to  be  inapplicable 
to  a  union  of  this  character,'  but -such  use  of  the  term  is  gen- 
eral, and  is  supported  by  the  highest  authorities.* 


1  "In  the  American  view,  therefore, 
it  would  seem  that  the  dissolution  of 
all  the  corporations  and  the  creation 
of  one  new  one  are  essential  to  con- 
solidation." Green's  Brice's  Ultra 
Vires  (2d  ed.),  631. 

*  In  Central  R.  etc.  Co.  v.  Georgia, 
92  U.  S.  673  (1875),  it  was  said  that 
the  consolidation  there  under  con- 
sideration was  intended  to  effect  at 
most  a  "merger  of  the  .  .  .  Company 
with  the  other,  a  mode  of  transfer  of 
that  Company's  franchise  and  prop- 
erty and  payment  therefor  with 
stock  of  the  Central  Company." 

See  also  Meyer  v.  Johnston,  64  Ala. 
603  (1879). 

*  Green's  Brice's  Ultra  Vires  (2d 
ed.),  631. 

Vicksburg,  etc.  Telephone  Co.  v. 
Citizens  Telephone  Co.,  79  Miss.  341 
(1901)  (30  So.  Rep.  725,  89  Am.  St. 
Rep.  656)  :  "A  merger  rightly  un- 
derstood is  not  the  equivalent  of 
consolidation  at  all,  but  exists  where 
one  of  the  constituent  companies  re- 
mains in  being,  absorbing  or  merg- 
ing in  itself  all  the  other  constituent 
corporations." 

Lee  V.  Atlantic  Coast  Line  R.  Co., 
150  Fed.  787  (1906)  :  "When  two  or 
more  corporations  unite  by  way  of 
merger  the  result  is  not  the  same  as 
in  case  of  consolidation." 

^  Central  University  v.  Walter  (Ky. 
1906),  90  S.  W.  Rep.  1066:  "Some 
com-ts,  construing  somewhat  similar 
statutes,  have  noticed  a  distinction 
between    consolidation    and    merger; 

14 


the  former  term  being  used  to  de- 
scribe the  result  of  two  corporations 
being  combined  into  a  new  one, 
and  the  latter  to  describe  the  result 
where  one  corporation  absorbs  an- 
other. As  corporate  franchises  are 
generally  deemed  unassignable  with- 
out permission  of  the  State,  a  merger 
is,  after  all,  under  our  statute  at 
least,  a  consoUdation ;  for,  although 
the  old  name  of  one  may  be  retained 
and  the  other  dropped,  still  the  course 
to  be  pursued  under  the  statute  for  one 
corporation  to  acquire  the  property 
and  franchises  of  another  is  precisely 
the  same  as  though  a  new  name  were 
adopted.  The  result  is  a  merging  of 
corporate  property  and  constituents, 
as  where  two  streams  flow  together. 
At  the  junction  they  may  be  said  to 
constitute  a  new  stream,  but  essen- 
tially the  latter  takes  in  and  is  made 
up  of  all  that  formerly  flowed  in  and 
now  flows  out  of  the  two  from  which  it 
gets  its  being.  To  use  another  figure, 
it  is  a  marriage  of  two,  in  which 
neither  is  lost,  but  in  wliich  the  two 
are  blended  into  one  in  contempla- 
tion of  law.  The  original  corporate 
existence  is  merely  a  legal  status.  It 
is  not  a  thing  at  all.  The  power  that 
gave  it  its  so-called  existence  is  com- 
petent to  change  it  into  a  new  being, 
with  all  the  rights  and  attributes  of 
the  old.  No  physical  phenomenon  is 
involved.  The  legislative  purpose, 
and  the  practical  application  of  it, 
will  not  stagger  in  execution  at  an 
imaginary   difficultj'    in    harmonizing 


CHAP.    l] 


NATURE    OF   CONSOLIDATION 


§9 


C.  A  confederation  of  several  corporations  may  be  formed, 
in  which  each  preserves  its  legal  identity  and  distinctive  exist- 
ence/ as  exemplified  in  the  union  of  corporations  of  different 
States.^  Such  an  alliance  is  sometimes  called  a  "consolida- 
tion," but,  except  in  the  case  of  an  interstate  consolidation, 
it  would  seem  that  such  use  should  be  avoided  if  the  term 
"consolidation"  is  ever  to  have  a  well-defined  meaning.^ 

§  9.  Consolidation  as  a  Result  and  as  a  Process.  —  Consolida- 
tion may  be  regarded  both  as  a  result  and  as  a  process.  As 
a  result  the  meaning  of  the  term  is  uncertain,  because  it  is 
appUed  to  different  effects  produced  by  different  means;  as  a 
process  it  is  equally  indefinite,  because  it  is  employed  to  de- 
scribe different  means  for  producing  different  results.  As  a 
result  and  as  a  process,  consolidation  may  be  broadly  described, 
but  not  defined,  in  the  following  language  of  the  Supreme 
Court  of  Alabama : 

"  When  the  rights,  franchises,  and  effects  of  two  or  more  cor- 
porations are,  by  legal  authority  and  agreement  of  the  parties, 
combined  and  united  into  one  whole,  and  committed  to  a  single 


a  thing  dead  •svith  a  thing  which  is 
alive.  We  are  of  opinion,  and  hold, 
that  the  effect  of  the  consolidation 
was  to  continue  in  the  new  corpora- 
tion, all  the  franchises,  and  vest  in  it 
all  the  property  rights,  subject  to  the 
terms  on  which  it  was  acquired,  of 
the  two  constituent  corporations." 

'  Railroad  Co.  v.  Georgia,  98  U.  S. 
362  (1878)  :  "Nor  was  it  a  mere  alli- 
ance or  confederation  of  the  two.  If 
it  had  been  each  would  have  preserved 
its  separate  existence  as  well  as  its 
corporate  name." 

'Post,  ch.  X.:  "Interstate  Con- 
solidations." 

'  An  alliance  or  voluntary  union 
between  two  railroad  companies  with 
respect  to  traffic  docs  not  amount  to  a 
consolidation.  Shrewsbury,  etc.  R. 
Co.  V.  Stour  Valley  R.  Co.,  2  De  Gcx, 
M.  &  G.  880  (18.52),  21  Kug.  Law  &  I']q. 
628.  See  also  Mi.llan.l  Groat  W.-.stvm 
R.  Co.  V.  Leech,  .S  II.  L.  Cas.  872 
(1852). 

A  teinporarif  cooperation  under  one 


management  does  not  constitute  a 
consolidation.  Archer  v.  Terre  Haute 
R.  Co.,  102  111.  50.3  (1882)  (7  .\m.  & 
Eng.  R.  R.  Cas.  249),  where  the  Court 
said:  "Both  corporations  retained 
their  .separate  existence,  and  it  does 
not  appear  it  was  ever  contemplated 
the  two  roads  should  Ix'  merged  into 
one  and  both  corporations  pass  to 
one  management.  The  very  terms 
of  the  agreement  are  inconsistent 
with  the  idea  of  consolidation.  It 
follows,  then,  it  was  .simply  a  con- 
tract for  connecting  the  roads  of  the 
respective  companies,  .so  as  to  secure 
a  continuous  line  between  distant  ter- 
minal points." 

A  business  arrangement  made  under 
special  statutory  authority,  with  a 
\iew  to  operating  by  one  company 
the  road  of  another  as  a  branch  line, 
does  not  effect  a  consolidation.  Pin- 
gree  v.  Michigan  Central  R.  Co.,  118 
Mich.  314  (1898)  (76  N.  W.  Rep.  635, 
53  L.  R.  A.  274). 

15 


§    11  INTERCORPORATE    RELATIONS  [PART    I 

corporation,  the  stockholders  of  which  are  composed  of  those 
(so  far  as  they  chose  to  become  such)  of  the  companies  thus 
agreeing,  this  is  in  law  and  according  to  a  common  understand- 
ing, a  consolidation  of  such  companies;  whether  such  single 
corporation,  called  a  consolidated  company,  be  a  new  one  then 
created,  or  one  of  the  original  companies  continuing  in  existence 
with  only  larger  rights,  capacities,  and  property."  ^ 

§  10.  An  Analogy  in  the  Civil  Law.  —  The  nature  of  con- 
solidation may  be  indicated  by  adopting  the  terminology  of 
the  civil  law  and  describing  it  as  a  process  whereby  the  uni- 
versitas  juris  of  several  corporations  is  transferred  to  one. 
This  phrase  expresses  the  legal  conception  of  a  university  or 
bundle  of  rights  and  liabilities  belonging  to  one  person  and 
constituting  his  legal  personality;  and  when  these  are  trans- 
ferred to  another  he  is  said  to  take  per  universitatem,  that  is, 
he  succeeds  to  the  personality  of  the  other  and  is  clothed  with 
his  rights  and  duties.^  So,  by  consolidation,  one  corpora- 
tion acquires  the  rights  and  property  of  several  and  becomes 
responsible  for  their  obligations.  It  succeeds  to  their  legal 
personality,  and  may,  appropriately,  be  said  to  take  per 
universitatem. 

§  11.  Merger. — The  word  "merger"  is  used  in  statutes 
authorizing  the  union  of  corporations  to  describe  the  process 
whereby  the  property  and  franchises  of  one  or  more  corporations 
are  absorbed  by  another  which  continues  in  existence  with  its 

1  Mej^er   v.  Johnston,   64  Ala.   656  "Where    the    rights,    franchises    and 

(1879).  effects   of  two   or  more  corporations 

In  Chicago,  etc.  R.  Co.  v.  Ashling,  are  by  legal  authority  and  agreement 
160111.  382(1896),  (43  N.E.  Rep.  373),  of  the  parties  conferred  and  united 
the  Court  quoted  the  above  extract  into  one  whole,  and  committed  to  a 
from  Mej^er  v.  Johnston  and  said :  single  corporation,  the  stockholders 
"We  concur  in  this  \'iew  as  a  general  of  which  are  composed  of  those  of  the 
statement  of  the  law,  subject,  how-  companies  thus  agreeing,  this  is  in 
ever,  to  modification  by  the  statutes  law  a  consolidation,  whether  the  con- 
under  which  the  consolidation  is  solidated  company  be  a  new  one  then 
effected."  created  or  one  of  the  original  com- 

And  in  State  v.  Montana  R.  Co.,  panics   continuing  in   existence   with 

21  Mont.  241   (1898),    (53  Pac.   Rep.  only  larger  rights,  capacity  and  prop- 

623,     45    L.    R.   A.   271),    the    Court  erty." 

quotes   with   approval    the    following  ^  Compton  v.  Wabash,  etc.  R.  Co., 

definition  of  consohdation  from  Reese  45  Oliio  St.  592  (1888),  (16  N.  E.  Rep. 

on    Ultra    Vires,    §  142,    based    upon  110). 
the  language  of  Meyer  v.  Johnston : 

16 


CHAP.    l] 


NATURE    OF    CONSOLIDATION 


§  12 


original  powers  and  with  additional  rights  and  privileges  de- 
rived from  the  others.^  This  is  a  process  of  absorption  to  which, 
as  has  been  noted,  the  term  "  consolidation"  is  generally  applied, 
but  to  which  the  term  "merger"  is  equally  appropriate.  In 
fact,  had  the  word  "consolidation"  been  used  only  to  describe 
the  process  of  fusion  and  the  word  "merger"  been  applied  to 
the  process  of  absorption,  confusion  would  have  been  avoided. 
§  12.  Amalgamation.  —  In  England  the  union  of  several 
incorporated  companies  is  generally  effected  under  authority 
to  "amalgamate"  contained  in  the  different  Companies'  Acts.^ 
The  word  "amalgamation"  belongs  to  the  language  of  physical 
science,  so  that  its  use  to  denote  the  coalition  of  corporations 
is  inapt.  It  has  been  stated  that  "  nobody  really  knows  what 
amalgamation  means."  ^     But  it  is  said   to   take  place  when 


'  When  one  railroad  company  is 
merged  in  another  the  rights  and  pri\n- 
leges  of  the  former  are  transferred  to 
the  latter  companj-  to  be  holden  in  the 
same  manner  and  subject  to  the  same 
obligations  as  before,  except  "those 
corporate  rights  and  franchises  of  the 
old  company  which  appertain  to  its 
existence  and  functions  as  a  corpora- 
tion. These  become  merged  and 
extinct."  Tomlinson  v.  Branch,  15 
Wall.  (U.  S.)  465  (1872).  And  in 
Yazoo,  etc.  R.  Co.  v.  Adams,  180 
U.  S.  19  (1901),  (21  Sup.  Ct.  Rep. 
240),  Mr.  Justice  Brown  said:  "But 
if,  as  was  the  case  in  Tomlinson  v. 
Branch,  one  road  loses  its  identity 
and  is  merged  in  another,  the  latter 
preserving  its  identity  and  issuing 
new  stock  in  favor  of  the  stock- 
holders of  the  former,  it  is  not  the 
creation  of  a  new  corporation  but  an 
enlargement  of  the  old  one."  See 
also  Central  R.,  etc.  Co.  v.  Georgia,  92 
U.  S.  065  (1875). 

2  Railway  Clauses  Act,  1803  (26 
&  27  Vict.,  ch.  92,  §  37)  :  "For  the 
purpo.sos  of  this  part  of  this  .\ct,  com- 
panies shall  be  deemed  amalgamated 
by  a  special  Act,  in  either  of  the  fol- 
lowing cases:  (1)  When  by  the  special 
Act  two  or  more  companies  are  dis- 


solved, and  the  members  thereof 
respectively  arc  united  into  and  in- 
corporated as  a  new  company. 
(2)  When  by  a  special  Act  a  company 
or  companies  is  or  are  dissolved,  and 
the  undertaking  or  undertakings  of 
the  dissolved  company  or  companies 
is  or  are  transferred  to  another  exist- 
ing company,  with  or  without  a 
change  in  the  name  of  that  company." 

3  Dougan's  Case,  28  L.  T.  Rep.  62 
(1873),  42  L.  J.  Ch.  460  (on  appeal, 
8  Ch.  App.  540)  :  "On  the  general 
principle  the  case  seems  to  me  this: 
Two  companies  may  be  united  either 
by  fusion  into  a  tliird,  or  b}''  one  ab- 
sorbing the  other.  The  former  pro- 
cess seems  to  correspond  most  nearly 
with  the  popular  sense  of  the  word 
'amalgamation,'  and  I  believe  no- 
body really  knows  what  'amalgama- 
tion' means." 

The  remarks  of  the  English  judges 
and  the  uncertain  meaning  of  the  term 
"amalgamation"  are  discussed  in  an 
article  entitled  "Amalgamation  of 
Companies,"  17  Sol.  J.  &  Rep.  362: 
"Nearly  six  years  have  elapsed  since 
Lord  Hatherly  professed  himself 
utterly  at  a  loss  to  define  what  the 
'amalgamation'  of  Joint  Stock  Com- 
panies is.     The   words   to   which   wo 

17 


§13 


INTERCORPORATE   RELATIONS 


[part  I 


two  or  more  "  companies  agree  to  abandon  their  respective 
articles  of  association  and  to  register  themselves  under  new 
articles  as  one  body."  '  This  use  of  the  term  is  undoubtedly 
correct,  but  it  is  not  applied  by  the  English  courts  to  such 
instances  alone,  being  used  synonymously  with  the  American 
term  "consolidation."  ^  It  has  been  sought  to  draw  a  distinc- 
tion between  them  and  to  give  the  term  "'amalgamation"  a 
wider  meaning,^  but  no  such  distinction  exists  as  the  terms  are 
used  at  the  present  time.  A  comparison  of  recent  American 
and  English  cases  will  show  that  precisely  the  same  results  have 
been  obtained  under  authority  to  consolidate  in  America  as 
under  authority  to  amalgamate  in  England.* 

§  13.    Distinction  between  Consolidation  and  Sale.  —  A  con- 
tract between  two  corporations  for  the  purchase  and  sale  of 


refer  will  be  found  prefacing  the  judg- 
ment In  re  Empire  Assurance  Cor- 
poration L.  R.,  4  Eq.  341  (1867)  :  'It 
is  difficult, 'said  his  Honour,  then  Vice 
Chancellor  Wood,  'to  say  what  the 
word  "amalgamate"  means.  I  con- 
fess at  this  moment  that  I  have  not 
the  least  conception  of  what  the  full 
legal  effect  of  the  word  is.'  Six  years 
have  elapsed  and  so-called  'amalga- 
mations' we  have  had  by  the  score, 
but  from  a  definition  of  the  word,  or  a 
right  understanding  of  its  meaning, 
we  seem,  if  possible,  further  removed 
than  ever.  ...  '  Nobody, '  said  Lord 
AVestbury  in  Blundell's  Case  (17  Sol. 
J.  &  Rep.  87),  'uses  it  with  any  defi- 
nite meaning,'  and  the  word  which  his 
Lordship  has  suggested  to  replace  it 
.  .  .  is  a  'welding.'  " 

See  also  Wall  v.  London,  etc.  Assets 
Corp.  (No.  1),  67  L.  J.  Ch.  596  (1898), 
2  Ch.  469;  79  L.  T.  (n.s.)  249,  47 
Wkly.  Rep.  219. 

^  In  re  Bank  of  Hindustan,  Higg's 
Case,  2  Hem.  <fe  M.  666  (1865). 

2  In  Meyer  v.  Johnston,  64  Ala.  603 
(1879),  the  use  of  the  term  "amal- 
gamation" in  England  is  fully  dis- 
cussed. 

^  Green's  Brice's  Ultra  Vires  (2d 
ed.)    (1880),   631,   note:    "The   term 

18 


'amalgamation'  is  seldom  applied  to 
corporations  in  this  country.  That 
which  takes  its  place  as  much  as  any 
is  'consolidation.'  But  though  it  is 
difficult  accurately  to  define  amalga- 
mation as  commonly  used  in  Enghsh 
law,  it  certainly  has  a  wider  meaning 
than  consolidation  has  with  us.  Con- 
solidation would,  e.g.,  be  inapplicable 
to  a  union  of  two  or  more  companies, 
in  such  a  way  that  one  of  the  original 
corporations  only  was  continued  in 
existence,  while  the  others  were 
merged  or  absorbed  in  it.  An  absorp- 
tion of  one  corporation  by  another 
would,  according  to  some  of  the  deci- 
sions, be  an  amalgamation  in  Eng- 
land ;  but  it  would  not  be  a  consol- 
idation here."  On  the  other  hand, 
in  the  case  of  ^Powell  v.  North  Mis- 
souri R.  Co.,  42  Mo.  63  (1867),  it  was 
said  that  "an  amalgamation  implies 
such  a  consolidation  as  to  reduce  the 
companies  to  a  common  interest " 
and  that  where  "by  the  very  terms 
of  the  statute  and  the  deed  the  first 
corporation  was  extinguished  and 
the  second  only  continued  to  exist" 
it  was  something  more  than  a  mere 
amalgamation  or  consolidation. 

*  See  1  Beach  on  Railways,  §  535. 


CHAP.    l] 


NATURE    OF    CONSOLIDATION 


§13 


corporate  property  or  franchises  involves  no  coalition  of  inter- 
ests. The  vendor  corporation  parts  with  its  property.  The 
vendee  corporation  pays  the  consideration.  The  traasfer 
affects  in  no  way  the  status  or  continued  existence  of  either 
corporation. 

Consolidation,  on  the  other  hand,  involves  a  union  of  cor- 
porate interests,  is  without  consideration  as  between  the 
corporate  entities,  and  may  terminate  the  existence  of  one 
or  all  of  the  constituent  corporations.  "Consolidation  is  not 
sale."  ' 


*  Green  County  v.  Conness,  109 
W.  S.  106  (1883),  (3  Sup.  Ct.  Rep.  69), 
where  Mr.  •  Chief  Justice  Waite  said  : 
"If  only  a  sale  of  the  road  to  another 
company  had  been  authorized  and 
made,  then  it  might  very  plausibly 
have  been  contended  that  the  pur- 
chasing company  took  and  held  it 
under  its  own  charter  only,  without 
the  franchises  and  privileges  con- 
nected with  it  in  the  hands  of  the 
vendor  company;  but  'consolida- 
tion' is  not  sale,  and  when  two  com- 
panies are  authorized  to  consolidate 
their  roads,  it  is  to  be  presumed  that 
the  franchises  and  privileges  of  each 
continue  to  exist  in  respect  to  the 
several  roads  so  consolidatetl." 

In  re  Bank  of  Hindustan,  Higg's 
Case,  2  Hem.  &  M.  666  (1865): 
"Take  the  assets  and  liabilities — • 
that  I  can  understand ;  but  that  is 
not  any  such  amalgamation  as  Mr. 
Jcssel  suggests,  but  is  simply  a  sale 
of  its  business  by  one  company  to  the 
other.  .  .  .  The  actual  contract  in 
this  case  was  a  simple  sale  of  the 
business  of  one  company  to  the 
other,  and  not  an  amalgamation  in 
any  sense." 

Gulf,  etc.  R.  Co.  V.  Newell,  73  Tex. 
334  (1889),  (11  S.  W.  Rep.  342,  15 
.\m.  St.  Rep.  788)  :  "  \  railway  com- 
pany by  buying  the  .stock  of  another 
and  by  buying  the  corporate  franchise 
and  property  of  the  other,  it  ha\'ing 
the  power  to  buy,  only  becomes  the 


owner  of  such  franchise  and  property. 
Ownership  alone  does  not  operate  a 
consolidation  of  that  bought  with  the 
purcha-ser.  .  .  .  While  an  execution 
sale  of  the  franchise  and  property  of 
a  railwaj'  company  conveys  the  fran- 
chise and  property  to  the  purcha.ser, 
still  the  corporate  existence  of  the 
sold-out  company  remains." 

Hiles  I'.  Hiles  Co.,  120  111.  App. 
617  (1905)  :  "Where  one  corporation 
.sells  to  another  its  tangible  property, 
including  its  good  will,  retaining  its 
franchise,  its  .stockliolders,  and  a  con- 
sitlerable  amount  of  assets  and  receiv- 
ing the  consideration  arising  as  a 
result  of  the  transaction,  a  sale  and 
not  a  consolidation  is  cflFected."  See 
also  Sartison  v.  Baltimore,  etc.  R.  Co., 
103  111.  App.  507  (1902). 

Overstreet  v.  Citizens  Bank,  12 
Okl.  383  (1903),  (72  Pac.  Rep.  383)  : 
"One  corporation  may,  in  contempla- 
tion of  closing  up  its  business,  sell  its 
a-ssets,  property,  and  business  to  an- 
other corporation,  antl  make  arrange- 
ments for  the  Uquidation  of  its  liabili- 
ties, but  this  does  not  constitute  a 
consolidation."  See  also  Cha,se  v. 
Michigan  Telephone  Co.,  121  Mich. 
631  (1899),  (80  N.  W.  Rep.  717); 
Capital  Traction  Co.  v.  Offvit,  17  App. 
D.  C.  292  (1900);  Mackinto.sh  v. 
Flint,  etc.  R.  Co.,  34  Fed.  582  (1888) ; 
State  i:  Sherman,  22  Ohio  St.  428 
(1872);  Houston,  etc.  R.  Co.  v. 
Shirley,  54  Tex.  125  (1880) ;  Rafferty 

19 


§13 


INTERCORPORATE    RELATIONS 


[part  I 


In  Compton  v.  Wahash,  etc.  R.  Co}  the  Supreme  Court  of 
Ohio  said:  "Whilst  the  transaction  has  some  of  the  features, 
it  is  wanting  in  the  essential  elements,  of  a  sale.  A  sale 
implies  a  vendor  and  a  vendee,  and  by  it  the  former  sells  and 
transfers  a  thing  that  he  owns  to  the  latter  for  a  price  paid  or 
to  be  paid  to  himself.  The  vendor  parts  with  nothing  but  his 
property,  and  for  it  receives  a  quid  'pro  quo.  Such  is  not  the 
case  where  companies  are  consohdated  under  this  statute.  It 
is  true  that  the  owner  of  each  constituent  road  parts  with 
its  property.     But  it  does  much  more;    it  not  only  parts  with 


V.  Buffalo  City  Gas  Co.,  37  App.  Div. 
(N.  Y.)  618  (1899),  (56  N.  Y.  Supp. 
288). 

Compare  Chicago,  etc.  R.  Co.  v. 
Ashling,  160  111.  37.3  (1896),  (43  N.  E. 
Rep.  373),  where  it  was  held  that  a 
consolidation  and  not  a  sale  was 
effected  by  the  transfer  of  all  the 
stock,  property  and  franchises  of  one 
corporation  to  another  in  exchange 
for  its  stock  issued  to  the  stockholders 
of  the  former  corporation. 

Chicago,  etc.  R.  Co.  v.  Ferguson, 
106  111.  App.  358  (1903):  "A  con- 
soUdation,  not  a  purchase,  is  effected 
by  the  transfer  of  the  franchise  and 
all  the  property  of  one  corporation 
to  another,  under  an  arrangenaent  by 
which  the  stockholders  of  the  former 
company  exchange  their  stock  for 
stock    in    the    latter    company." 

In  Shadford  ?'.  Detroit,  etc.  R.  Co., 
130  Mich.  300  (1902),  (89  N.  W.  Rep. 
960) ,  it  was  held  that  a  transaction  by 
which  a  street  railway  company  ab- 
sorbed the  business  and  property  of 
other  similar  companies  through  the  is- 
sue of  its  stocks  and  bonds  in  exchange 
for  the  stocks  and  bonds  of  the  other 
companies  and  without  any  considera- 
tion passing  to  such  companies  was  a 
consolidation  and  not  a  sale,  and  that 
the  absorbing  companj'  was  liable  for 
the  debts  of  the  companies  absorbed. 
The  Court  said:  "We  are  of  the 
opinion  that  each  transaction  was  a 
consolidation  in  fact,  or  as  it  is  termed 
in     England      an       'amalgamation.' 

20 


The  law  will  not  permit  the  creditors 
of  two  corporations  to  be  deprived 
of  the  assets  of  such  corporations  in 
payment  of  their  debts  and  turn 
them  over  to  suits  in  equity  against 
the  stockholders  where  the  union  or 
consohdation  with  another  corpora- 
tion is  effected  without  the  passage  of 
a  dollar  or  other  valuable  considera- 
tion passing  between  the  corporations 
themselves.  The  effect  is  precisely 
the  same  as  though  the  stockholders 
of  the  .  .  .  [two  companies]  .  .  . 
had  united  to  form  the  electric  com- 
pany and  had  pooled  their  stock  and 
bonds  into  the  new  company." 

See  also  Howell  v.  Lansing,  etc. 
Traction  Co.,  146  Mich.  450  (1906), 
(109  N.  W.  Rep.  846).  Also  Appeal 
of  Fame  Hose  Co.,  6  Leg.  Gaz.  (Pa.) 
79  (1874). 

The  transactions  stated  in  the  Mich- 
igan cases  seem  clearly  to  have  been 
sales  —  or  more  properly  exchanges 
—  in  which  the  consideration  —  the 
stocks  and  bonds  —  was  distributed 
directly  to  the  stocklaolders  and  bond- 
holders of  the  vendee  corporation  and 
which  were  fraudulent  and  ^'oid  as  to 
creditors.  (Post,  §  124,  ''Fraudulent 
Sales.")  There  being  no  statutory 
authority  for  consohdation,  the  ab- 
sorbing corporation  was  not  even  a 
de  facto  consohdated  corporation. 

1  Compton  V.  "Wabash,  etc.  R.  Co., 
45  Oliio  St.  615  (1888),  (16  N.  E.  Rep. 
110). 


CHAP.    l]  NATURE    OF   CONSOLIDATION  §    14 

its  property,  but  ceases  to  be  a  juristical  entity,  capable  of 
owning  or  acquiring  property.  It  does  not,  and  could  not, 
receive  any  consideration  for  the  transfer,  because  it  is  extin- 
guished and  dissolved  by  the  act  of  its  stockholders  in  assent- 
ing to  the  proposed  agreement.  It  is  futile  to  attempt  to 
urge  that  the  consideration  is  received  by  the  stockholders. 
They  are  not  the  corporation,  nor  do  they  represent  it  in  its 
relation  to  its  creditors." 

§  14.  Distinction  between  Consolidation  and  Lease. — The 
same  distinction  may  be  drawn  between  a  lease  of  corporate 
property  and  franchises  and  a  consolidation  of  corporations  as 
between  a  sale  and  consolidation. 

In  the  case  of  a  lease  the  interests  of  the  corporations  as 
lessor  and  lessee  are,  to  an  extent,  antagonistic,  and  the  lessor 
"company  parts  with  the  control  of  its  property,  and,  for  the 
term,  receives  a  rental  in  lieu  thereof.  Consolidation,  on  the 
other  hand,  by  whatever  means  accomplished,  results  in  a 
union  of  corporate  interests  and  stockholders,*  and  the  stock- 
holders of  consolidating  companies,  through  their  acquisition 
of  shares  in  the  new  corporation,  still  retain,  to  a  certain 
extent,  control  of  their  original  corporate  property.  "  Power 
to  consolidate,"  said  the  Supreme  Court  of  New  Jersey  in 
Mills  V.   Central  R.   Co.,^  is  power  to  take  in  a  partner  or  go 

'  "The  distinguishing  feature  of  a  of  receipts  based  upon  a  contingent 
consoUdation  is  the  union  of  the  share-  measure  of  profit,  no  common  owner- 
holders  of  the  two  companies  thereby  ship  of  shares  of  stock,  no  joint- 
forming  one  company."  2  Morawetz  management,  and  no  yielding  up  of 
on  Priv.  Corp.,  §  939,  note  2,  citing  an  independent  corporate  existence 
Houston,  etc.  R.  Co.  v.  Shirlc}-,  54  by  the  lessor  to  tlie  lessee." 
Tex.  125  (1880).  ^  ^lills  v.  Central  R.  Co.,  41  N.  J. 

In   State    v.    Montana  R.   Co.,   21  E(i.  7  (1886),  (2  .Vtl.  Rep.  45.S). 

Mont.  243  (1898),  (53  Pac.  Rep.  623,  In  State  v.  Vantlerbilt,  37  Ohio  St. 

45  L.  R.  A.  271),  it  was  said  :   "Lease  6,38  (1882),  the  distinction  between  a 

does    not    imply    consolidation ;    nor  lease   and   consoliilation   is   presented 

consolidation,    lease.     The    power   to  from  a  different  point  of  \new  :    "  By 

consolidate,   a.s    we    have    seen,   is    a  force  of  such  lea.se,  the  right  to  the 

power  to  make  two  corporations  one ;  use  of  the  road  pa.s,setl  from  the  lessor 

the  power  to  lease  carries  with  it  no  t<i  the  lessee,  according  to  such  terms 

power   to   pass   anything   except   the  and  conditions  with  respect  to  the  use 

right  to  use  the  property  leased.     In  a-s  are  proper  in  a  lea.se;   but  nothing 

the  lease  under  consideration  there  is  else  pa.ssed.     The  les.see  is  the  as.signeo 

no    merger    of    ownership,    no    com-  for  a  term  or  period  of  the  les.sor,  — 

munion    of   interest,    no   distribution  his  bailee  to  hold  po.ssession  for  him. 

21 


§  15 


INTERCORPORATE     RELATIONS 


[cart  I 


in  as  a  partner,  while  power  to  lease  is  power  to  dispose  of 
the  whole  concern  to  a  stranger." 

§  15.    Distinction     between    Consolidation     and     Control.  — 

While  one  corporation  by  purchasing  a  majority  of  the  shares 
of  another  company  may  obtain  control  of  the  latter,  the 
result  is  radically  different  from  a  consolidation.^  In  consoli- 
dation there  is  a  union  of  corporate  interests  and  stockholders. 
In  the  case  of  the  acquisition  of  stock  the  purchasing  corpo- 
ration becomes  merely  a  stockholder  and  the  rights  of  the 
corporations,  as  such,  remain  unchanged.  Control  is  not 
consolidation;  it  is  not,  strictly  speaking,  even  a  conjunction 
of  corporate  properties.  As  said  by  Mr.  Chief  Justice  Waite 
in  Pullman  Car  Co.  v.  Missouri  Pacific  R.  Co.,"^  in  reference 
to  a  stockholding  corporation:  "Its  rights  and  its  powers 
are  those  of  a  stockholder  only.  It  is  not  the  corporation, 
in   the   sense   of   that   term   as   applied   to   the  management 


The  power  to  lease  does  not  implj'  a 
power  to  consolidate,  nor  does  the 
power  to  consolidate  imply  a  power 
to  lease,  but  these  powers  are  distinct 
and  independent." 

See  also  Commissioners  v.  La- 
fayette, etc.  R.  Co.,  50  Ind.  110 
(1875) ;  Gere  v.  New  York  Central  R. 
Co.,  19  Abb.  N.  C.  210  (1885)  ;  Archer 
V.  Terre  Haute,  etc.  R.  Co.,  102  111. 
493  (1882). 

Upon  the  principle  that  constitu- 
tional prohibitions  against  the  con- 
solidation of  competing  railroads  must 
be  liberally  construed  for  the  preser- 
vation of  competition,  it  has  been 
held  that  a  lease  of  a  competing  rail- 
road comes  within  such  a  prohibition. 
State  V.  Atchison,  etc.  R.  Co.,  24  Neb. 
143  (1888),  (38  N.  W.  Rep.  43;  8 
Am.  St.  Rep.  164  n.),  S.C.  38  Neb.  437 
(1893),  (57  N.  W.  20).  East  St.  Louis, 
etc.  R.  Co.  V.  Jar\ns,  92  Fed.  743 
(1899).  The  correctness  of  this  con- 
struction is  considered  in  another 
section.  See  post,  §  34:  "Construc- 
tion of  Prohibitions  —  {B)  Whether  a 
Lease  amounts  to  Consolidation." 

'  The  mere  fact  that  one  corpora- 
tion has  obtained  control  of  the  stock 

22 


in  another  corporation  is  not,  of  itself, 
sufficient  to  show  a  consolidation  of 
the  two  corporations.  Jes.sup  v. 
Illinois  Cent.  R.  Co.,  36  Fed.  735 
(1888). 

In  Chase  v.  Michigan  Telephone 
Co.,  121  Mich.  634  (1899),  (80  N.  W. 
Rep.  717),  the  Court  said  :  "Although 
one  person  owns  a  majoritj'  of  the 
stock  or  all  but  two  shares,  or  all  of 
it,  he  does  not  thereby  acquire  the 
right  of  acting  for  the  corporation, 
or  as  the  corporation,  independentlj- 
of  the  directors,  .  .  .  Nor  is  that 
fact  e^^dence  of  merger." 

In  Tod  r.  Kentucky  L'^nion  Land 
Co.,  57  Fed.  58  (1893),  (reversed  sub 
nom.  Marbury  v.  Kentuckj'  Union 
Land  Co.,  62  Fed.  335  (1894)),  the  ac- 
quisition of  substantially  all  the  stock 
of  one  corporation  by  another  was 
held,  under  the  circumstances  there 
sho^^Ti,  to  amount  to  a  "temporarj- 
consolidation." 

2  Pullman  Car  Co.  v.  Missouri  Pac. 
R.  Co.,  115  U.  S.  597  (1885),  (6  Sup. 
Ct.  Rep.  194).  Compare  Pennsyl- 
vania R.  Co.  V.  Commonwealth  (Pa. 
1886),  7  Atl.  Rep.  368.  See  also  post, 
§  294:   '^Meaning  of  term  'Control.'  " 


CHAP.    l] 


NATURE    OF    CONSOLIDATION 


§  16 


of  the  corporate  business  or  the  control  of  the  corporate 
property."  ' 

§  16.    Distinction  between  Consolidation  and  Combination.  — 

Combination  is  cooperation  and,  broadly  speaking,  a  consoli- 
dated corporation  illustrates  the  extreme  development  of  the 
idea  of  cooperation  with  reference  to  corporations.  In  this 
treatise,  however,  — following  the  common  usage,  — the  term 
"  combination  "  is  used  to  describe  any  union  of  corporations 
entered  into  by  mutual  agreement  for  supposed  mutual  advan- 
tage, not  amounting  to  consolidation.'^ 

The  distinction  may  be  sharply  drawn.  The  validity  of  a 
consolidation  depends  upon  the  existence  of  statutory  authority 
therefor.  Questions  of  public  policy  regarding  consolidation 
are  not  material.  Unless  authorized  by  statute  a  consolidated 
corporation  cannot  be  created;  if  authorized  it  is  not  against 
public  policy,  for  that  which  the  statute  permits  cannot  be 
against  public  poUcy. 

The  vahdity  of  a  combination,  on  the  other  hand,  generally 
depends  upon  considerations  of  pubUc  policy.  Statutes 
seldom  authorize,  but  often  prohibit,  the  combination  of 
corporations.^ 


'  For  consideration  of  question 
whether  control  of  several  corpora- 
tions by  another  amounts  to  an  un- 
lawful combination,  see  post,  §  397: 
"Form  of  Combination  Immaterial.  — 
Illegality  of  Corporate  Device." 

2  See  post,  Part  V,  "Combinations 
of  Corporations. " 

^  Distinction  between  consolidation 
and  reorganization. 

Sales,  leases  and  combinations, 
while  readily  distinguishable  from 
consolidations,  nevertheless  involve 
intercorporate  relations.  In  the  case 
of  a  reorganization,  however,  there  is 
no  connection  of  any  nature  between 
different  corporations.  Reorganiza- 
tion is  the  readjustment  of  the  affairs 


of  individual  corporations  —  "the 
carrjang  out  by  proper  agreements 
and  legal  proceedings  of  a  business 
plan  or  scheme  for  winding  up  the 
affairs  of,  or  foreclosing  a  mortgage 
or  mortgages  upon,  the  property  of 
insolvent  corporations,  more  fre- 
quently railroad  companies.  It  is 
usually  by  the  judicial  sale  of  the 
corporate  property  and  francliises, 
and  the  formation  by  the  purchasers 
of  a  new  corporation,  in  wliich  the 
property  and  franchises  are  there- 
upon vested,  and  the  stocks  and  bonds 
of  which  are  divided  among  such  of 
the  parties  interested  in  the  old  com- 
pany as  are  parties  to  the  reorganiza- 
tion plan."     Bouvier's'Law  Diet. 


23 


§   17  INTERCORPORATE   RELATIONS  [PART  I 


CHAPTER   II 

LEGISLATIVE    AUTHORITY    FOR    CONSOLIDATION 

I.    Necessity  for  Legislative  Authority 

§  17.    Consolidation  without  Legislative  Authority  ultra  vires. 
§  18.    Consolidation  of  Qitast-public  Corporations  without  Legislative  Au- 
thority against  Public   Policy. 

II.    Conferring  and  Withdrawal  of  Legislative  Authority 

§  19.    Power  of  Legislature  to  authorize  Consolidation. 

§  19  a.  Authorization  of  Consolidation  of  Interstate  Railroads  not  regulation 

of  Interstate  Commerce. 
§  20.    Legislative  Sanction  —  How  expressed. 

§  21.    Public   Policy  regarding  Consolidation  of  Non-competing  Railroads. 
§  22.    What  Railroads  n^ay  consoUdate  —  Statutory  Pro\'isions. 
§  23.    What  Corporations  other  than  Railroads  may  consolidate  —  Statutory 

Provisions. 
§  24.    Power  of  Legislature   to  withdraw  or  limit   Right   to  consolidate  — 

(A)  In  Absence  of  Reserved  Power. 

§  25.    Power  of  Legislature  to  withdraw  or  limit   Right   to  consoUdate  — 

(B)  In  Exercise  of  Reserved  Power. 

§  26.    Power  of  Legislature  to  withdraw   or  limit   Right   to   consolidate  — 

(C)  In  Exercise  of  Police  Power. 

III.    Construction  of  Statutes  authorizing  Consolidation 

§  27.    General  Rules  of  Construction. 

§  28.    Construction  of  Particular  Statutory'  Pro\'isions. 

§  29.    Construction   of   Statutes  authorizing   Consolidation   of   Railroads  — 

Connecting  or  Continuous  Lines. 
§  30.    Construction  of  Statutes  authorizing  Consolidation   of  Corporations 

other  than   Railroads. 

I.    Necessity  for  Legislative  Authority 

§  17.  Consolidation  without  Legislative  Authority  ultra  vires. 
—  The  charter  of  a  corporation,  read  in  connection  with  the 
general  laws  applicable  to  it,  is  the  measure  of  its  powers. 
The  enumeration  therein  of  the  powers  conferred  implies  the 
exclusion  of  other  powers,  and  a  corporation  can  exercise  no 
authority  not  granted  to  it,  expressly  or  by  necessaiy  im- 
plication, in  its  charter  or  other  legislative  act.* 

'  Central   Transp.    Co.    v.    Pullman  "A  charter  being  a  contract  giving 

Car  Co.,  139  U.  S.  24  (1891),  (11  Sup.        a  corporation  all  the  powers  wliich  it 
Ct.  Rep.  478).  can  exercise,  any  alteration  which  the 

24 


CHAP.    Il]         LEGISLATIVE    AUTHORITY    FOR    CONSOLIDATION 


§17 


There  is  also  said  to  be  an  implied  contract,  as  well  between 
the  corporation  and  the  State  as  between  the  corporation  and 
its  stockholders,  that  its  corporate  property  and  franchises 
shall  only  be  appropriated  to  uses  authorized  by  its  charter, 
and  any  acts  of  the  corporation  outside  the  limits  so  pre- 
scribed are  ultra  vires}  Consolidation  necessitates  the  em- 
barkation of  corporate  properties  upon  a  new  undertaking  — 
a  joint  adventure  instead  of  an  individual  enterprise  —  and 
is  ultra  vires  unless  authorized  by  legislative  authority.^ 

In  so  far,  also,  as  consolidation  involves  the  creation  of  a 


corporation  desires  to  make  therein 
must  in  the  first  place  have  the  sanc- 
tion of  the  legislature."  Green's 
Brice's  Ultra  Vires  (2d  ed.),  632. 

'  Black  V.  Delaware,  etc.  Canal  Co., 
24  N.  J.  Eq.  465  (1873);  Abbott  v. 
Johnston,  etc.  Horse  R.  Co.,  80  N.  Y. 
27  (1880),  (36  Am.  Rep.  572). 

-  In  Pearce  v.  Madison,  etc.  R.  Co., 
21  How.  (U.  S.)  442  (1858),  Mr.  Jus- 
tice Campbell  said:  "The  rights, 
duties,  and  obligations  of  the  de- 
fendants are  defined  by  the  acts  of 
the  Legislature  of  Indiana  imder 
which  they  were  organized,  and  refer- 
ence must  be  had  to  these  to  ascertain 
the  validity  of  their  contracts.  They 
empower  the  defendants  respectively 
to  do  all  that  was  necessary  to  con- 
struct and  put  in  operation  a  rail- 
road between  the  cities  which  are 
named  in  the  acts  of  incorporation 
There  was  no  authority  of  law  to  con- 
solidate these  corporations  and  to 
place  both  under  the  same  manage- 
ment, or  to  subject  the  capital  of  the 
one  to  answer  for  the  liabilities  of  the 
other. " 

See  also  New  York,  etc.  Canal  Co. 
V.  Fulton  Bank,  7  Wend.  (N.  Y.)  412 
(1831) ;  Blatchford  v.  Ro.ss,  54  Barb. 
(N.  Y.)  42  (1869);  Greenville  Com- 
press, etc.  Co.  V.  Planters'  Compress, 
etc.  Co.,  70  Miss.  669  (1893),  (13  So. 
Rep.  879;  35  Am.  St.  Rep.  681); 
Kavanaugh  r.  Omaha  Life  Assn.,  84 
Fe<l.  295  (1897)  ;  Home  Friendly  Soc. 
V.  Tyler  (Com.  PL),  9  Pa.  Co.  Ct.  Rep. 


617  (1891).  Overstreet  v.  Citizens 
Bank,  12  Okl.  383  (1903),  (72  Pac. 
Rep.  379) ;  Jones  v.  Missouri  Edison 
Electric  Co.,  135  Fed.  153  (1905), 
(reversed  on  other  points  144  Fed.  775 
(1906)),  Re  Era  Ins.  Soc,  30  Law  J. 
Eq.  (n'.s.)  137  (1860),  (6  Jur.  (x.s.) 
1334,  9  Wkly.  Rep.  67).  In  Clinch 
i\  Financial  Corp.,  L.  R.  4  Ch.  App. 
117  (1868),  it  was  held  that  an  ar- 
rangement for  amalgamation  by 
which  liabilities  were  imposed  on  the 
stockholders  was  void  as  tdtra  vires 
and  semble  that  such  an  arrangement 
would  be  void,  even  if  only  the  share- 
holders who  assented  to  it  were  bound 
by  it. 

Manj'  of  the  railroad  cases  cited  in 
note  to  §  18  post,  while  illustrat- 
ing the  principle  that  franchises  may 
not  be  transferred  without  legislative 
sanction  upon  grounds  of  public 
policy,  also  support  the  principle 
stated  in  the  text,  applicable  to  all 
corporations,  that  an  unauthorized 
consolidation  is  idira  vires. 

Religious  corporations  have  no 
common  law  right  to  consolidate, 
although  they  may  do  so  under  a 
consolidation  statute  broad  enough 
to  cover  them.  A  single  member  of 
the  corporation  may  maintain  an 
action  to  set  aside  such  an  agree- 
ment as  ultra  vires.  And  the  ultra 
I'ires  act  cannot  be  defended  upon 
the  ground  that  it  is  advantageous. 

Davis  V.  Cong.  Beth  Tephilas 
Israel,  57  X.  Y.  Supp.  1015  (1899). 

25 


§    18  INTERCORPORATE    RELATIONS  [PART   I 

new  corporation,  legislative  authority  is  as  essential  as  it  is 
to  the  creation  of  a  corporation  in  the  first  instance.  An 
attempt  at  the  organization  of  a  consoUdated  corporation  in 
the  absence  of  a  statutory  provision  for  consolidation  does 
not  even  create  a  corporation  de  facto,  since  corporations 
de  facto  can  only  exist  when  there  is  a  law  under  which  they 
may  be  incorporated.^ 

§  18.  Consolidation  of  Quasi-public  Corporations  without 
Legislative  Authority  against  Public  Policy.  —  There  is  another 
principle,  in  addition  to  that  of  ultra  vires,  why  a  railroad 
company  or  other  quasi-puhVic  corporation^  cannot  transfer 
its  franchises  to  another  corporation,  through  the  process  of 
consolidation,  without  the  sanction  of  the  legislature  which 
granted  them.  That  principle  is,  that  where  such  a  corpora- 
tion has  had  granted  to  it  by  its  charter  franchises  and  privi- 
leges to  enable  it  to  provide  facilities  for  the  benefit  of  the 
public,  it  assumes  the  due  performance  of  those  functions 
as  the  consideration  of  the  grant,  and  any  contract  or  ar- 
rangement which  disables  it  from  performing  them  —  which 
undertakes,  without  the  consent  of  the  State,  to  transfer  to 
others  the  rights  and  powers  conferred  by  the  charter  and  to 
relieve  the  grantee  of  the  burden  imposed  —  is  a  violation  of  the 
contract  with  the  State  and  against  pulilic  policy.^     An  at- 

'  American  Loan,  etc.  Co.  v.  Minne-  corporation.     Being   thiis   at   once   a 

sota,  etc.  R.  Co.,  157  III.  641  (1893),  public    corporation    existing    for    pri- 

(42  N.  E.  Rep.  153).  See"  Irregular  and  vate  gain  and  a  private  corporation 

Invalid  Consolidations,"  ch.  IX,  post.  owing  public  duties,  a  railroad  com- 

^  It  is  generally  held  that  a  railroad  pany  is  called,  with  proprietj^,  a  quasi- 

company   is   a   guast-public    corpora-  public       corporation.      See       United 

tion.     The  State  grants  it  extraordi-  States      v.      Trans-Missouri      Freight 

nary  powers  —  the  right  to  condemn  Ass'n.,  166  U.  S.  321  (1897),  (17  Sup. 

lands   and   take   tolls   for   the    public  Ct.  Rep.  540) ;  Black  v.  Delaware,  etc. 

benefit.     In  accepting  its   charter  it  Canal  Co.,  24  N.  J.  Eq.  469  (1873); 

assumes  obligations  to  the  State  and  Chicago,  etc.  R.  Co.  v.  Wabash,  etc. 

to  the  pubUc,  and  to  that  extent  is  a  R.    Co.,     61     Fed.    997    (1894).     In 

pubUc  corporation.      (Peoria,   etc.  R.  Pierce  v.  Commonwealth,  104  Pa.  St. 

Co.  V.  Coal  Valley  Mining  Co.,  68  111.  155    (1883),   however,   it   was   denied 

489  (1873)).     On  the  other  hand  the  that  a  railroad  companj-  is  a  quasi- 

stockholders  furnish  the  means  for  the  public   corporation,   and  it  was  said 

construction    and    equipment    of   the  to    be    "a    private    corporation    and 

railroad,  and  are  entitled  to  the  profits  nothing  more." 

derived  from  its  operation.     To  this  '  Thomas  v.  Railroad  Co.,  101  U.  S. 

extent,  a  railroad  company  is  a  private  71  (1879). 

26 


CHAP.    Il]         LEGISLATIVE   AUTHORITY    FOR    CONSOLIDATION 


§  19 


tempted  consolidation,  therefore,  without  legislative  sanction, 
is  opposed  to  public  policy  and  void.'^ 

An  unauthorized  consolidation  of  corporations  owing  public 
duties  is  also  invalid  as  involving  a  delegation  of  corporate 
powers.^ 

II.    Conferrinc]   and  Withdrawal  of  Legislative   Authority 

§  19.    Power  of  Legislature  to  authorize  Consolidation.  — So 

far  as  the  public  rights  are  concerned,  the  power  of  the  legis- 
lature to  authorize  a  consolidation  of  corporations  is,  in  the 
absence  of  special  constitutional  restrictions,  unquestioned.^ 
The  State  has  the  same  power  to  authorize  several  existing 
corporations  to  associate  together  and  organize  themselves 
into  a  new  corporation  as  it  has  to  incorporate  individuals.* 
It  has  been  held,  however,  that  corporations  are  not  such 
"persons"  as  may  themselves  form  corporations.^ 

As  a  consolidated  corporation  becomes  a  new  and  distinct 


'  United  States :  Clearwater  v. 
Meredith,  1  Wall.  30  (1863)  ;  Shields 
V.  Ohio,  95  U.  S.  322  (1877) ;  Louis- 
ville, etc.  R.  Co.  V.  Kentucky,  161 
U.  S.  677  (1896),  (16  Sup.  Ct.  Rep. 
714). 

Illinois:  American  Loan,  etc.  Co. 
V.  Minnesota,  etc.  R.  Co.,  157  111.  641 
(1895),  (42  N.  E.  Rep.  153). 

Indiana:  State  v.  Bailey,  16  Ind. 
46  (1861),  (79  Am.  Dec.  405) ;  Sholbv- 
■valle,  etc.  Turnpike  Co.  v.  Harne.s,  42 
Ind.  '498  (1873) ;  State  v.  Beck,  81 
[nd.  500  (1882);  Crawfords\dlle,  etc. 
Turnpike  Co.  v.  State,  102  Ind.  435 
(1885),  (1  N.  E.  Rep.  864). 

Mississippi :  Adams  v.  Yazoo,  etc. 
R.  Co.,  77  Miss.  194  (1899),  (24  So. 
Rep.  200,  60  L.  R.  A.  33n) ;  affirmed, 
180  U.  S.  1  (1901),  (21  Sup.  Ct.  Rep. 
240). 

New  Jersey:  Black  v.  Delaware, 
etc.  Canal  Co.,  24  N.  J.  Eq.  455  (1873) ; 
Mills  V.  Central  R.  Co.,  41  N.  J.  Eq. 
1  (1886),  (2  Atl.  Rep.  453). 

Pennsylvania  :  Lauman  v.  Lebanon 
Valley  R.  Co.,  30  Pa.  St.  42  (1858), 
(72  Am.  Dec.  685). 

Texas:    East  Line,  etc.  R.  Co.  v. 


State,  75  Tex.  434  (1889),  (12  S.  W. 
Rep.  690) ;  Gulf,  etc.  R.  Co.  v.  Newell, 
73  Tex.  334  (1889),  (11  S.  W.  Rep. 
342;  15  Am.  St.  Rep.  788);  Mi.s-souri 
Pac.  R.  Co.  V.  Owens,  1  White  &  W. 
Ci\n\  Cas.  Ct.  App.  §  385  (1883). 

England:  Charlton  v.  Newcastle, 
etc.  R.  Co.,  5.  Jur.  (n.  s.)  ld^6  (1859). 

The  principle  that  the  franchises  of 
Quasi-public  corporations  cannot  be 
transferred  by  the  process  of  consoli- 
dation applies  equally  to  any  form  of 
transfer  —  sale  or  lea.se  —  and  is  sup- 
ported by  cases  referring  to  any  form 
(see  post,  ch.  XII,  XVI.  An  attempt 
has  been  made,  however,  to  classify 
the  cases  under  their  distinctively  ap- 
propriate heads. 

2  See  post,  ch.  XII :  "Sales  of  Cor- 
poratc  Franchises." 

^  Clearwater  v.  Meredith,  1  ^V'all. 
(U.  S.)  39  (1863) ;  Black  v.  Delaware, 
etc.  Canal  Co.,  24  N.  J.  Eq.  455  (1873). 

*  State  Trea.surer  ?'.  Auditor  Gen- 
eral, 46  Mich.  233  (1884),  (9  N.  W. 
Rep.  258). 

*  Factors,  etc.  Ins.  Co.  v.  New 
Harbor  Protection  Co.,  37  La.  Ann. 
233  (1885).     See  also  post,  §  266. 

27 


§  19 


INTERCORPORATE    RELATIONS 


[part  I 


corporation,  a  special  statute  authorizing  consolidation  con- 
travenes a  constitutional  provision  against  the  creation  of 
corporations  by  special  act.^  For  the  same  reason  a  coasoli- 
dated  corporation  may  be  organized  for  the  full  statutory 
period  irrespective  of  the  terms  of  existence  of  the  constituent 
corporations,  and  it  cannot  be  objected  that  the  consolidation 
in  effect  extends  the  existence  of  such  corporations  beyond 
the  period  fixed  by  law.^ 

The  existence  of  an  outstanding  contract  between  a  con- 
stituent corporation  and  an  individual  does  not  prevent  the 
legislature  from  authorizing  a  consolidation  upon  the  ground 
that  the  obligation  of  such  contract  would  be  impaired,  where 
the  act  of  consolidation  provides  that  the  consolidated  com- 


'  Shields  V.  Ohio,  95  U.  S.  323 
(1877):  "If  the  argument  of  the 
learned  counsel  for  the  plaintiff  in 
error  be  correct,  the  constitutional  re- 
strictions can  be  readily  evaded. 
Laws  may  be  passed  at  any  time, 
enacting  that  all  the  valuable  fran- 
chises of  designated  corporations 
antedating  the  Constitution  shall, 
upon  their  dissolution,  voluntary  or 
otherwise,  pass  to  and  vest  in  certain 
newly  created  institutions  of  the  like 
kind.  The  claim  of  the  inviolability 
of  such  franchises  should  rest  on  the 
same  foundation  as  the  affirmation 
in  the  present  case.  The  language  is 
broad  and  clear,  and  forbids  a  con- 
struction which  would  permit  such  a 
result." 

A  statute  entitled  "An  act  in  rela- 
tion to  gas  companies"  and  authoriz- 
ing the  consolidation  of  such  com- 
panies in  a  certain  city  is  not  invalid 
because  the  title  does  not  refer  to 
the  particular  subject  of  consolidation, 
that  being  germane  to  its  general 
subject.  Nor  is  such  a  statute  un- 
constitutional as  granting  a  corpora- 
tion special  privileges  and  franchises 
—  it  applying  to  all  companies 
organized  or  to  be  organized  in  the 
particular  territory.  Nor  is  it  in 
violation  of  a  constitutional  pro\dsion 

28 


that  the  charter  of  no  corporation 
shall  be  amended  or  changed  except 
by  a  general  law  —  the  consolidated 
corporation  taking  only  the  powers 
and  privileges  of  its  constituents. 

People  V.  People's  Gas  Light  Co. 
205  111.  482  (1903),  (68  N.  E.  Rep. 
950,  98  Am.  St.  Rep.  244). 

The  Court  said  in  this  case  regard- 
ing the  point  last  stated  :  "Although 
the  general  rule  is  that  the  consolida- 
tion of  several  corporations  into  a  new 
one  invests  the  latter  with  all  the 
rights  and  pri\-ileges  of  the  several 
constituent  companies,  such  is  not 
the  result  of  consolidation  or  merger 
under  this  statute." 

^  The  consolidated  corporation  be- 
comes a  new  and  distinct  corporation 
which  may  be  organized  for  the  term 
of  fifty  years,  irrespective  of  the  term 
of  existence  of  the  constituent  cor- 
porations, and  it  cannot  be  objected 
to  the  consolidation  that  it  has  the 
effect  to  extend  the  existence  of  the 
constituent  corporations  beyond  the 
period  of  fifty  years  fixed  for  each  of 
them.  Market  St.  R.  Co.  v.  Hellman, 
109  Cal.  571  (1895),  (42  Pac.  Rep. 
225).  See  also  New  York  Central 
etc.  R.  Co.  V.  City  of  Yonkers,  103 
N.  Y.  Supp.  252  (1907). 


CHAP.    Il]         LEGISLATIVE    AUTHORITY    FOR    CONSOLIDATION'  §    I9a 

pany  shall  assume  and  discharge  the  liabiUties  of  the  con- 
stituent corporations.  In  such  a  case  it  was  said  by  the 
Supreme  Court  of  the  United  States  that  "proper  care  was 
taken  by  the  legislature  to  protect  the  rights  of  these  com- 
plainants by  incorporating  into  the  act  uniting  the  two  col- 
leges a  provision  that  the  new  corporation  should  discharge 
and  perform  those  liabilities  without  diminution  or  abate- 
ment. Such  contracts  were  made  with  the  trustees,  and  not 
with  the  State,  and  it  is  a  mistake  to  suppose  that  the  ex- 
istence of  such  a  contract  between  the  corporation  and  an 
individual  would  inhibit  the  legislature  from  altering,  modi- 
fying, or  amending  the  charter  of  the  corporation  by  virtue 
of  a  right  reserved  to  that  effect,  or  with  the  assent  of  the 
corporation,  if  in  view  of  all  the  circumstances  the  legislature 
should  see  fit  to  exercise  that  power."  ^  In  a  still  earlier 
case  it  was  intimated  by  the  same  Court  that  a  consolida- 
tion might  be  authorized  without  special  provision  being 
made  for  the  creditors  of  the  constituent  companies.^ 

§  19  a.  Authorization  of  Consolidation  of  Interstate  Railroads 
not  Regulation  of  Interstate  Commerce.  —  Tlie  fact  that  a 
railroad  company  engages  in  interstate  commerce  does  not 
affect  its  status  as  a  State  corporation.  Its  one  source  of  cor- 
porate power  is  the  State  which  created  it.  Authority  for  its 
consolidation  with  domestic  or  foreign  railroad  corporations 
can  be  obtained  from  the  State  alone.  While  Congress  might 
prevent,  it  could  not  authorize  such  a  coiLsolidation.^     State 

^  Pennsylvania    College    Cases,    13  him  in  a  worse  position  in  regard  to 

Wall.  (U.  S.)  222  (1871).  his  demand.     The  means  of  payment 

-  Smith  V.  Chesapeake,  etc.  Canal  possessed    by    the    old   company    are 

Co.  14  Pet.  (U.  S.)  48  (1840)  :   "There  carefully  preserved  and,  indeed,  guar- 

can  be  no  doubt  that  the  States  of  antccd  by  the  new  corporation.     And 

Virginia  and  Maryland  in  granting  the  if  the  fact  can  be  established,  which 

charter  of  the  Chesapeake  and  Ohio  is    denied    by    the    defendants,    that 

Canal    Company    had    the    power    to  some  bo7ia  fide  creditors  of  the  Poto- 

authorize  a  surrender  of  the  charter  of  mac  Company  were  unprovided  for  in 

the  Potomac  Company,  with  the  con-  the    new    charter,    and    consequently 

sent    of    the    stockholders;     and    to  liave  no  redress  against  the  defendant, 

make  the   provision   which   they  did  it  does  not  follow  that  they  are  witli- 

make  for  the  creditors  of  the  com-  out  remedy." 

pany.     This  assignment  does  not  im-  ^  The  authorization  of  consolidation 

pair  the  obligation  of  the  contract  of  and  its  prohibition  stand  upon  essen- 

any  creditor  of  the  compan J',  nor  place  tiallj-  difTerent  grounds.     In  the  one 

29 


§    19a  INTERCORPORATE   RELATIONS  [PART    I 

consolidation  statutes  although  applying  to  interstate  railroads 
are  not  regulations  of  interstate  commerce  in  violation  of  the 
federal  Constitution.     They  relate  rather  to  the  instrumentali-  ^ 
ties  of  commerce  than  to  commerce  itself. 

In  Louisville,  etc.  R.  Co.  v.  Kentucky,^  the  Supreme  Court  of 
the  United  States  said:  "It  has  never  been  supposed  that  the 
dominant  power  of  Congress  over  interstate  commerce  took 
from  the  States  the  power  of  legislation  with  respect  to  the 
instruments  of  such  commerce,  so  far  as  the  legislation  was 
within  its  ordinary  police  powers.  Nearly  all  the  railways 
in  the  countiy  have  been  constructed  under  State  authority, 
and  it  cannot  be  supposed  that  they  intended  to  abandon  their 
power  over  them  as  soon  as  they  were  finished.  The  power  to 
construct  them  involves  necessarily  the  power  to  impose  such 
regulations  upon  their  operation  as  a  sound  regard  for  the 
interests  of  the  public  may  seem  desirable.  In  the  division  of 
authority  with  respect  to  interstate  railways  Congress  reserves 
to  itself  the  superior  right  to  control  their  commerce  and  forbid 
interference  therewith;  while  to  the  States  remains  the  power 
to  create  and  to  regulate  the  instruments  of  such  commerce, 
so  far  as  necessary  to  the  conservation  of  the  public 
interests."  ^ 

While  the  States  alone  can  authorize  State  corporations  to 
consolidate  it  does  not  follow  from  the  decision  in  the  Louisville 
case  that  they  have  exclusive  power  over  corporations  as  instru- 
ments of  interstate  commerce.  Congress,  undoubtedly,  has 
power  to  provide  that  interstate  railroads  shall  be  operated 
solely  by  federal  corporations.  Such  an  enactment  while 
leaving  in  the  State  full  authority  over  its  corporations  would 
take  away  their  character  as  instruments  of  interstate  commerce. 
The  power  of  the  State  to  authorize  the  consolidation  of  the 

case  the  powers  of  a  State  corpora-  -  The  fee  required  for  filing  cer- 
tion  are  extended  ;  in  the  other,  inter-  tificates  of  the  consoHdation  of  inter- 
state commerce  is  kept  free  from  the  state  railroad  corporations  is  not 
effects  of  combination.  See  post,  §  a  tax  upon  the  right  to  engage  in 
38,  "Prohibition  of  Consolidation  of  interstate  commerce,  biit  upon  the 
Competing  Railroads  not  Regulation  of  right  to  incorporate. 
Interstate  Commerce."  Chicago,  etc.  R.  Co.  v.  State, 
>  Louisville  etc.  R.  Co.  v.  Ken-  153  Ind.  134  (1899),  (51  N.  E.  Rep. 
tucky,  161  U.  S.  677,  702  (1895),  (16  924). 
Sup.  Ct.  Rep.  714). 

30 


CHAP.    Il]         LEGISLATIVE    AUTHORITY    FOR    CONSOLIDATION 


§  20 


corporations  would  remain  but  they  could  not  operate  interstate 
railroads.  But  in  absence  of  adverse  federal  legislation  both 
the  powers  of  the  State  corporation  and  of  the  State  itself  are 
unaffected.* 

§  20.  Legislative  Sanction  —  How  expressed.  —  Legislative 
approval  of  consolidation  may  be  expressed  in  various  ways. 
A  grant  of  power  to  consolidate  contained  in  the  charters  of  the 
constituent  corporations  or  in  general  laws  passed  prior  to  their 
incorporation  furnishes  undoubted  authority.^  Acts  passed 
subsequent  to  the  incorporation  of  the  companies  but  prior  to 
their  consohdation  are,  subject  to  constitutional  objections  to 
be  hereafter  noticed,^  sufficient.^ 

It  is  not  essential  that  authority  should  be  granted  before 
consolidation.  The  legislature  can  validate  after  the  fact  that 
which  it  may  authorize  in  the  first  instance,  and  a  subsequent 
act  ratifying  an  informal  consolidation  has  the  same  effect  as 


'  In  Boardman  v.  Lake  Shore,  etc. 
R.  Co.,  84  N.  Y.  185  (1881)  State 
legislation  authorizing  the  consoli- 
dation of  railroad  corporations  of 
adjoining  States  was  held  not  to  be 
a  regulation  of  interstate  commerce 
in  violation  of  the  commerce  clause. 
The  ground  upon  which  the  decision 
was  placed  was  that,  in  the  absence 
of  action  by  Congress,  the  States 
have  power  to  enact  such  legislation 
—  that  not  the  power  in  Congress, 
but  its  exercise,  is  inconsistent  with 
the  exercise  of  the  same  power  by 
the  State  legislatures. 

The  Court  said :  "There  is,  we 
think,  no  force  in  the  position  that 
the  acts  of  the  legislatures  of  the 
.several  States  through  which  the 
railroads  run,  so  far  as  they  relate 
to  or  authorize  the  consolidation  in 
the  adjoining  States  are  in  ^nola- 
tion  of  subdivision  3  of  section  8 
of  the  first  article  of  the  Constitu- 
tion of  the  United  States  which 
confers  upon  Congress  the  power  to 
regulate  commerce  with  foreign  na- 
tions and  with  the  several  States. 
It  is  not  claimed  that  Congress  ha-s 
legislated  in  respect  to  the  subject,  or 


assumed  to  exercise  the  power  con- 
ferred by  the  Con.stitution,  and  it 
has  not  j'et  been  decided  that  the 
provision  cited  requires  that  the  power 
conferred  should  be  exercised  by 
Congress  alone  and  is  taken  away 
entirely  from  the  control  of  the  State 
legislatures.  The  conclusion,  there- 
fore, is  inevitable  that  in  the  absence 
of  such  legislation  by  Congress  the 
power  exists  in  the  State  to  legislate 
upon  the  subject." 

This  language  can  only  be  justified 
upon  the  broad  ground  stated  in 
the  text  that  Congress  ha\'ing  the 
paramount  power  over  the  whole 
subject  of  interstate  railroads  may 
create  its  own  instrumentalities  and 
thereby  deprive  State  statutes  of 
effective  force.  It  cannot  be  justi- 
fied upon  the  ground  that  Congress 
has  the  superior  right  —  or  any 
right  whatever  —  to  authorize  the 
consolidation  of    State    corporations. 

2  Fisher  v.  Evansville,  etc.  R.  Co., 
7  Ind.  407  (1856). 

3  Post,  §  43. 

*  Sparrow    v.    Evansville,    etc.    R. 
Co.,  7  Ind.  369  (1856). 

31 


§  21 


INTERCORPORATE    REI..VTIONS 


[tart  I 


a  prior  grant  of  power.^  Express  ratification  is  not  neces- 
sary'. Recognition  by  the  legislature  of  the  consoUdated  cor- 
poration cures  any  defect  arising  from  the  want  of  legislative 
authority  to  consolidate.^  Legislative  recognition  amounts  to 
legislative  ratification.  General  statutes  authorizing  the  con- 
solidation of  corporations  are,  however,  not  retroactive  and  do 
not  apply  to  consolidation  agreements  made  prior  to  their 
enactment.^ 

§  21.  Public  Policy  regarding  Consolidation  of  Non-compet- 
ing Railroads.  —  Although  authority  to  amalgamate  has  been 
granted,  by  special  act,  to  railroad  companies  in  England,  it 
may  be  said  that  the  public  policy  of  that  nation,  as  mani- 
fested by  acts  of  Parliament  and  by  the  appointment  of  parUa- 
mentary  committees  to  investigate  the  subject,  is  opposed  to 
the  consolidation  of  such  companies.* 

In  America,  however,  the  public  policy  of  nearly  all  the 
States,  as  indicated  by  the  enactment  of  general  consolida- 
tion acts,  is  in  favor  of  the  consolidation  of  non-competing 


1  Mitchell  V.  Deeds,  49  111.  416 
(1867),  (95  Am.  Dec.  621):  "The 
legislature  has  the  same  power  to 
ratify  and  confirm,  an  irregularly 
organized  corporate  body  that  they 
have  to  create  a  new  one.  And 
by  the  act  confirming  the  consoUda- 
tion  before  then  entered  into,  the 
corporate  body  which  was  organized 
in  accordance  with  the  act  of  con- 
sohdation,  became  legal,  notwith- 
standing such  organization  may  have 
been  irregular." 

See  also  Racine,  etc.  R.  Co.  v. 
Farmers  Loan,  etc.  Co.,  49  111.  331 
(1868),  (95  Am.  Dec.  595).  Bishop 
V.  Brainerd,  28  Conn.  289  (1859). 

2  The  passage  of  a  legislative  act 
whereby  the  existence  of  a  consoli- 
dated corporation  is  expressly  recog- 
nized is  a  ratification  of  and  legalizes 
the  consolidation.  Louisville  Trust 
Co.  7).  Louisville,  etc.  R.  Co.,  75  Fed. 
433  (1896).  See  also  United  States 
V.  Southern  Pac.  Co.,  45  Fed.  596 
(1891);  Mead  v.  New  York,  etc. 
R.  Co.,  45  Conn.  199  (1877) ;  Atlantic, 

32 


etc.  R.  Co.  V.  St.  Louis,  66  Mo.  228 
(1877);  McCauley  v.  Columbus,  etc. 
R.  Co.,  83  111.  352  (1876). 

^  Hatcher  v.  Toledo,  etc.  R.  Co., 
62  111.  480  (1872)  :  "The  law  is  not 
retrospective  in  terms  and  cannot  be 
made  so  bj^  any  fair  construction. 
...  It  is  manifest  that  this  act  was 
intended  to  apply  to  companies  which 
might  effect  a  consolidation  after 
its  passage." 

*  One  ground  of  objection  is  indi- 
cated in  East  Anglian  R.  Co.  v. 
Eastern  Counties  R.  Co.,  11  Com.  B. 
812  (1851)  :  "The  public  also  has  an 
interest  in  the  proper  adnoinistration 
of  the  powers  conferred  by  the  act. 
The  comfort  and  safety  of  the  line 
may  be  seriously  impaired  if  the 
money  supposed  to  be  necessary 
and  destined  by  ParUament  for  the 
maintenance  of  the  railway,  be  ex- 
pended in  other  undertakings  not 
contemplated  when  the  act  was  ob- 
tained and  not  express!}'  sanctioned 
by  the  legislature." 


CHAP.    Il]         LEGISLATIVE   AUTHORITY    FOR    COXSOLIDATIOX 


§22 


railroad  corporations.  The  Court  of  Appeals  of  New  York  has 
said  that  "  whatever  may  be  the  rule  in.  oth^r  States  or  in 
England,  the  pubUc  policy  of  this  State,  as  manifested  by 
numerous  acts  of  the  legislature,  has  always  been  not  only  to 
afford  the  fullest  scope  for  the  consolidation  and  reorganiza- 
tion of  non-competing  railroads  and  railroad  corporations,  but 
also  for  the  traasfer  of  the  use  of  such  roads  and  their  fran- 
chises by  one  corporation  to  another."  *  It  has,  also,  been 
said  in  regard  to  the  Illinois  statutes  authorizing  consolidation 
and  their  construction  by  the  courts  of  that  State  that  "great 
encouragement  has  been  given  to  the  union  of  lines  of  rail- 
road for  the  purpose  of  having  them  operated  under  some 
general  management,  the  result  of  which  has  been  the  con- 
sohdation  of  many  lines  of  road  which  were  originally  separate 
and  distinct,  but  which  are  now  operated  under  a  uniform 
system."  ^ 

The  public  policy  of  Illinois  has,  however,  been  adverse  to 
the  consolidation  of  domestic  railroad  companies  with  those 
of  other  States.^ 

§  22.  What  Railroads  may  consolidate  —  Statutory  Provi- 
sions. —  Nearly  all  the  States  have  general  railroad  consolida- 
tion statutes,  of  which  an  abstract  is  printed  in  the  subjoined 
note.* 


»  Woodruff  V.  Erie  R.  Co.,  93  N.  Y. 
615  (1883). 

2  Dimpfel  v.  Ohio,  etc.  R.  Co., 
9  Biss.  (U.  S.)  127  (1879),  (8  Rep. 
641,  7  Fed.  Cas.  722). 

'  In  American  Loan,  etc.  Co.  v. 
Minnesota,  etc.  R.  Co.,  157  III.  641 
(1895),  (42  N.  E.  Rep.  153),  the  Su- 
preme Court  of  Illinois  said:  "This 
legislation  taken  in  connection  with 
the  specific  repeal  of  the  act  of  1854 
seems  to  indicate  a  legislative  public 
policy  adverse  to  the  con.solidation 
of  railroad  companies  organized  under 
the  laws  of  this  State  with  railroad- 
companies  formed  in  other  States. 
And  the  same  general  policy  seems 
to  be  denoted  by  the  proviso  to  the 
act  approved  March  30,  1875.  .  .  . 
The  proviso  is,  that  nothing  in  that 


act  shall  be  so  construed  as  to  au- 
thorize any  corporation  acting  by  or 
organized  under  the  laws  of  any 
other  State  to  purchase  or  otherwise 
become  the  owner  of  any  railroad 
in  this  State." 

*  Alabama.  Civil  Code  1896,  ch. 
28,  §  1166  (as  amended  by  acts  1900- 
01,  p.  237)  :  "Whenever  the  lines  of 
any  two  or  more  railroads,  or  con- 
templated railroads,  chartered  under 
the  laws  of  this  or  anj'  other  State 
which,  when  completed,  may  admit 
pa.ssage  of  cars  over  any  two  or  more 
of  such  roads  continuously  without 
break  or  interruption,"  such  com- 
panies may  consolidate. 

Arizona.  Rev.  Stat.  1901,  par. 
864  :  Railroad  corporations  shall  have 
power   "to   consolidate    with    one    or 

33 


§22 


INTERCORPORATE    RELATIONS 


[part  I 


These  statutes,  as  a  general  rule,  provide  only  for  the  con- 
solidation  of   corporations   owning   connecting   or   continuous 


more  corporations  formed  under  this 
title,  or  under  the  laws  of  any  other 
State  or  Territory." 

Arkansas.  Kirby's  Dig.  1904, 
§  6735:  "Any  two  or  more  railroad 
companies  in  this  State  .  .  .  owning 
railroads  .  .  .  which  .  .  .  form  one 
continuous  line  of  railroad,  continu- 
ing and  running  in  the  same  general 
direction  are  hereby  authorized  to 
consolidate  their  stock  and  make 
joint  stock  with  any  connecting  rail- 
road company  whether  within  or 
without  this  State,  and  form  one 
company,  owning  and  controlling 
such  continuous  line  of  road." 

Sections  6740  and  6741  pro\'ide  for 
the  consolidation  of  domestic  cor- 
porations with  those  of  an  adjoining 
State  making  a  "continuous  line." 
See  also  ib.  §  6752. 

California.  Pomeroy's  Civil  Code 
1901,  §  473 :  "Any  railroad  com- 
pany incorporated  under  the  laws  of 
this  State  may  consolidate  with  one  or 
more  railroad  companies  incorporated 
under  the  laws  of  this  Slate,  or  under 
the  laws  of  any  other  State  or  Terri- 
tory of  the  United  States." 

Colorado.  Jlill 's  Anno.  Stat . ,  §  604 : 
"Any  railroad  company  ...  of  this 
State  whose  .  .  .  road  is  made  .  .  . 
to  the  boundary  line  of  the  State,  or 
to  any  point  either  in  or  out  of  the 
State"  may  merge  and  consolidate 
with  "any  railroad  company  or  com- 
panies ...  of  any  adjoining  State 
or  Territory  whenever  the  two  or 
more  railroads  of  the  companies  or 
corporations  .  .  .  shall  or  may  form 
a  continuovis  line  of  railroad  with 
each  other  or  by  means  of  an  inter- 
vening railroad." 

Co7inecticut.  Gen.  Stat.  1902, 
§  3674:  "Any  railroad  corporation 
incorporated  under  the  laws  of  this 
State  for  the  purpose  of  building 
and   operating    railroads   within    this 

34 


state  extending  to  or  beyond  the 
boundary  line  of  this  State  may  con- 
solidate .  .  .  with  .  .  .  any  other 
incorporated  railroad  company  whose 
line  of  road  ...  is  situated  wholly 
outside  this  State." 

Delaware.  Laws  1903  (Corp.  Law), 
§  91  :  "Any  railroad  of  this  State" 
may  "con.solidate  with  any  other  rail- 
road company  incorporated  under  the 
laws  of  this  State,  or  any  other  State 
of  the  United  States,  whose  railroads 
within  or  without  this  State  shall 
connect,  or  form  a  continuous  line, 
with  the  railroad  of  the  company  so 
consolidated. " 

For  other  railroad  consolidation 
statutes  see  Laws  1903  (Corp.  Law), 
§  123. 

Florida.  Gen.  Stat.  1906,  §  2812: 
"Any  railroad  ...  in  this  State 
shall  have  the  power  ...  to  make 
and  enter  into  contracts  with  any 
railroad  .  .  .  which  has  constructed 
or  shall  hereafter  construct  any  rail- 
road .  .  .  within  this  State  or  in 
another  State,  as  will  enable  said 
companies  to  run  their  road  in  con- 
nection with  each  other,  and  to  merge 
their  stock,  or  to  consolidate  with  any 
company  within  or  without  tliis 
State." 

Georgia.  Code  1895,  vol.  2,  §  2179 : 
"Any  railroad  company  incorporated 
under  the  provisions  of  this  article 
shall  have  authoritj'  ...  to  consoli- 
date the  same  with  those  of  any  other 
railroad  company  incorporated  under 
the  laws  of  this  or  any  other  State 
of  the  United  States  whose  railroad 
w-itliin  or  without  this  State  shall 
connect  with  or  form  a  continuous 
Une  with  the  railroad  of  the  company 
incorporated  under  tliis  law  upon 
such  terms  as  may  be  agreed  upon." 

See  also  Code,  §  2173. 

Idaho.  Code  1901,  §  2178:  "Anj 
such    railroad  corptoration  [chartered 


CHAP.    Il]         LEGISLATIVE    AUTHORITY    FOR   COXSOLIDATION 


§22 


lines  of  railroad,  although  a  vary-ing  phraseology  is  employed 
in  expressing  the  legislative  intention.     The  reason  for  pro- 


by  or  organized  under  the  laws  of 
this  State,  or  of  any  State  or  Territory 
or  under  the  laws  of  the  United  States, 
and  authorized  to  do  business  in  this 
State],  may  consolidate  its  stock  .  .  . 
with  any  other  railroad  corporation 
wliether  within  or  without  the  State, 
wlten  such  other  railroad  corporation 
does  not  own  any  competing  line 
of  railroad. " 

Illinois.  Kurd's  Rev.  Stat.  1901, 
p.  1376,  §  39:  "Whenever  any  rail- 
road which  is  situated  partly  in  this 
State,  and  partly  in  one  or  more  other 
States ;  and  heretofore  owned  by  a 
corporation  formed  by  consolidation 
of  railroad  corporations  of  this  or  any 
other  States,  has  been  sold  pursuant 
to  the  decree  of  any  court  .  .  .  and 
the  same  has  been  purchased  as  an 
entirety,  and  is  now,  or  .  .  .  may 
be  held  in  the  name  or  as  tlie 
property  of  two  or  more  corpo- 
rations, incorporated  respectively 
under  the  laws  of  two  or  more  of 
the  States  in  which  said  railroad  is 
situated,  it  shall  be  lawful  for  the 
corporation  so  created  in  this  State 
to  consolidate  .  .  .  with  the  .  . 
corporation  or  corporations  of  such 
other  State  or  States.  .  .  .  Pro- 
\'ided,  that  no  consolidation  shall  take 
place  with  any  railroad  owning  a  par- 
allel or  competing  line." 

For  act  ratifjdng  existing  consoli- 
dations and  mergers  see  Laws  1907, 
p.  473. 

Indiana.  Burns'  Anno.  Stat.  Rev. 
1901,  §  5215:  ".\nj'  railroad  corn- 
pan  j'  incorporated  under  the  pro- 
visions of  this  act  shall  also  have 
power  to  consolidate  with  other 
railroad  corporations  in  a  continuous 
line  either  witliin  or  without  this 
State  upon  such  terms  a.s  may  be 
agreed  upon  by  the  corporations 
owning  the  same."  This  act  does 
not   permit   con.solidation  with  other 


Indiana    railroads    equipped    and    in 
oj)cration. 

For  statutes  permitting  consolida- 
tion generally  of  steam  or  electric 
railroads  see  ib.  §§  5257,  5258,  52C2. 
See  also  §  54G8i. 

Iowa.  Code  1897,  §  203G :  "Any 
corporation  organized  under  the  laws 
of  this  State  for  the  purpose  of  con- 
structing and  operating  a  railway  may 
join,  intersect,  and  unite  its  railway 
with  that  of  any  other  corporation  at 
such  point  upon  the  boundary  line 
of  this  State  as  may  be  agreed  upon, 
and  .  .  .  may  merge  and  consili- 
datc  the  stock,  property,  franchises, 
and  liabilities  of  such  corporatioi.s, 
making  the  same  one  corporation 
upon  such  terms  as  may  be  agreed 
upon  not  in  conflict  with  the  law." 

Kansas.  Gen.  Stat.  1905,  §  C325: 
"Any  two  or  more  railroad  companies 
in  this  State,  existing  under  generrd 
or  special  laws,  anil  owning  connect- 
ing lines  of  railroad  in  this  State  .  .  . 
and  any  railroad  organized  as  afore- 
said and  any  railroad  company  duly 
organized  and  existing  under  the  laws 
of  any  other  State  or  Territory,  whose 
lines  of  railroad  shall  connect  at  the 
State  line  ' '  may  con.solidate. 

Kentucky.  St.at.  1903,  eh.  32: 
".\ny  two  or  more  railroad  com- 
panies ...  of  this  or  any  other  State 
may  .  .  .  con.'^olidate  into  a  single 
company  in  the  manner  provided 
by  article  one  of  this  chapter  as 
amended." 

Loui.'iiana.  Const,  and  Rev.  Laws 
1904,  p.  1486:  "Any  railroad  com- 
pany or  companies  organized  under 
the  laws  of  this  State,  general  or 
special,  shall  have  the  riglit  and  power 
to  consolidate  with  any  railroad  com 
pany  or  companies  organized  imder 
the  laws,  general  or  special,  of  any 
other  State  and  form  thereby  a  m  w 
corporation.   ..." 

35 


§22 


INTEKCOUPOHATE    RELATIONS 


[I'AUT    I 


visions  of  this  character  is  that  the  creation  of  the  through 
line  conduces  to  the  pubhc  convenience  and  welfare  by  in- 


Louisiana.  Const,  and  Rev.  Laws 
1904,  p.  1484:  "Every  railroad  cor- 
poration in  this  State  whether  created 
under  a  general  or  special  law,  or 
e.xisting  by  virtue  of  a  charter  or 
law  of  this  or  any  other  State,"  may 
consolidate  with  "any  other  railroad 
corporation  of  this  or  any  other  State 
who.se  road  shall  connect  with  or 
intersect  the  road  of  such  railroad 
corporation  or  any  branch  thereof." 
lb.  p.  1487  authorizes  the  consoli- 
dation of  street  railway  companies. 

Maine.  Rev.  Stat.  1903,  §  30, 
p.  531.  No  railroad  corporation  can 
assign  its  charter  or  any  rights  under 
it ;  lease  or  grant  the  use  or  control 
of  its  road  or  any  part  of  it,  or  divest 
itself  thereof,  without  the  consent 
of  the  legislature.  But  these  provi- 
sions are  not  to  be  construed  to  prevent 
contracts  between  corporations  allow- 
ing the  trains  of  one  to  run  over  the 
road  of  another,  both  corporations 
assenting  thereto. 

Maryland.  Pub.  Gen.  Laws,  §  265, 
p.  650:  "Any  railroad  company  .  .  . 
of  this  State"  niaj^  "consolidate  with 
any  other  railroad  company  incor- 
porated under  the  laws  of  this  or  any 
other  State,  or  of  the  United  States, 
whose  railroad  within  or  without  this 
State  shall  connect  with  or  form  a 
continuous  line  with  the  railroad  of 
the  company  so  consolidating." 

Ih.  §  278,  p.  656:  "Any  railroad 
company  incorporated  under  the  three 
preceding  sections  shall  have  power 
to  sell,  lease,  assign  or  transfer  its 
stock,  property  and  franchises  to, 
or  to  consolidate  the  same  with 
those  of  any  other  railroad  com- 
pany ...  of  this  or  any  other  State, 
or  of  the  United  States,  whose  rail- 
road within  or  without  this  State  shall 
connect  with  or  form  a  continuous 
line  with  the  railroad  of  the  Company 
incorporated    under    said    sections." 

36 


Massachusetts.  Supp.  to  Rev. 
Laws,  1902-06,  p.  579,  §  67:  "A 
lease  or  purchase  and  sale  of  the 
franchise  and  property  of  a  railroad 
corporation,  or  street  railway  com- 
pany, and  a  consolidation  of  two  or 
more  railroad  corporations,  or  street 
railway  companies,  whether  author- 
ized by  general  laws  or  a  special  act 
shall  not  be  binding  until  .  .  .  ap- 
proved by  board  of  railroad  com- 
missioners. .    .    . 

"  Said  board  shall  announce  its 
decision  within  thirty  days  after  the 
final  hearing  upon  the  application 
.  .  .  for  permission  to  lease  or  sell 
to,  consolidate  with  or  purchase  the 
franchise  and  other  property  of,  any 
other  railroad  corporation  or  street 
railway  company." 

Michigan.  Pub.  Acts  1899,  p.  450, 
§  29  :  "Any  railroad  company  in  this 
State  forming  a  continuous  or  con- 
necting line  with  any  other  railroad 
company,  may  consolidate  with  such 
other  company,  either  in  or  out  of 
this  State,  or  partly  within  or  partly 
without  this  State." 

Minnesota.  Rev^  Laws  1905,  § 
2897  :  "Any  domestic  or  foreign  rail- 
road corporation  .  .  .  may  consoli- 
date its  stock  and  franchises  with 
any  other  railroad  corporation  whose 
lines  of  railroad  .  .  .  within  or  with- 
out this  State  can  be  lawfully  con- 
nected and  operated  with  such  first 
named  corporation,  so  as  to  consti- 
tute one  continuous  main  line,  .  .  . 
and  admit  of  the  passage  of  trains 
over  them  without  break  or  inter- 
ruption, and  may  become  one  cor- 
poration under  any  name  selected 
by  them." 

Mississippi.  Code  1906,  §  4079: 
"Every  railroad  corporation  organized 
under  the  provisions  of  this  chapter 
shall  have  and  exercise  the  follow- 
ing powers:    (§  4089)  To  consolidate 


n] 


LEGISLATIVE    AUTHORITY    FOR    CONSOLIDATION 


§  22 


creasing  facilities  for  travel  and  permitting  lower  rates,  while 
the   combination   of   separate   and   disconnected   roads  would 


with  any  other  railroad  company 
in  or  out  of  this  State,  with  tlie  con- 
sent of  the  railroad  commission,  upon 
such  terms  as  the  consolidating  com- 
panies may  agree  upon;  but  a  con- 
solidation shall  not  be  made  with  a 
parallel  or  competing  road." 

Missouri.  Anno.  Stat.  1900, 
§  1059:  "Any  two  or  more  railroad 
companies  in  this  State,  existing 
imder  either  general  or  special  laws, 
and  owning  railroads  wholly  or  in 
part  which,  when  completed  and 
connected,  will  form  in  whole  or  in 
the  main,  one  continuous  line  of 
railroad,"  are  authorized  to  con- 
solidate. 

Jh.  §  lOGO  provides  for  furni.'shing 
aid  to  and  consolidating  with  con- 
necting railroads. 

Montana.  Civil  Code  1895,  vol.  2, 
§911:  "Any  two  or  more  railroad 
corporations  whose  respective  lines, 
not  being  parallel  or  competing  lines, 
are  wholly  or  partly  within  this  State, 
wliether  chartered  by  or  organized 
under  the  laws  of  the  State  or  Terri- 
tory of  Montana  or  of  the  United 
States,  or  of  any  other  State  or  Ter- 
ritory, when  their  respective  lines 
of  road,  or  any  branch  thereof,  so 
connect  within  this  State  that  they 
may  operate  together  as  one  prop- 
erty, may  consolidate." 

Ih.  §  890:  "Any  railroad  cor- 
poration .  .  .  may  consolitlate  with 
any  road  not  a  parallel  or  competing 
line." 

Ih.  §  923  provides  for  consolida- 
tion of  domestic  with  domestic  or 
foreign  railroads. 

Nebraska.  Comp.Stat.  1905,  §2023, 
p.  528:  "Whenever  the  lines  of  rail- 
road of  any  railroad  companies  in 
this  State,  or  any  portion  of  such 
lines,  have  been  or  may  be  con- 
structed, so  as  to  admit  pas.sage  of 
burden   or  passenger  cars  over  any 


two  or  more  of  such  roads  continu- 
ously, without  break  of  gauge  or 
interruption,"  such  companies  may 
consolidate. 

Nevada.  Comp.  Stat.  (1861-90, 
Cutting),  §  1011:  "Two  or  more 
railroad  companies"  may  "amal- 
gamate and  consolidate  their  capital 
stock,  debts,  property,  assets,  and 
franchises." 

New  Hampshire.  Pub.  Stat.  1901, 
ch.  156,  §  22  (p.  503):  "If  two  or 
more  railroad  corporations  at  meet- 
ings of  their  respective  stockholders 
.  .  .  have  agreed  by  a  two-thirdg 
vote  of  the  stock  represented  and 
voting  at  such  meeting.s,  to  unite 
and  form  a  single  corporation,"  a 
petition  is  presented  to  the  Supreme 
Court  to  see  whether  the  public  good 
will  be  promoted  by  such  a  union, 
and  if  the  court  determine  that  the 
public  good  requires  it,  the  other 
conditions  being  complied  with,  it 
shall  authorize  the  union  to  be  made. 

New  Jersey.  Laws  1906,  ch.  141, 
§  2:  "Any  railroad  compan3'  of  this 
State  may  lease  its  road,  or  any  part 
thereof,  to  any  other  railroad  com- 
pany of  this  or  any  other  State,  or 
may  take  a  lease  of  the  road,  or  any 
part  thereof,  of  any  other  railroad 
company  of  this  or  any  other  State, 
or  may  unite  and  consolidate  as  well 
as  merge  its  stock,  property,  fran- 
chises and  road  with  those  of  any 
other  company  or  companies  of  this 
or  any  other  State,  or  may  ilo  both, 
.  .  .  ;  such  leasing  or  consolidation 
may  be  made  where  the  roads  of 
the  said  companies  connect  either 
directly  or  over  the  intervening  line 
of  one  or  more  other  railroad  com- 
panies; no  such  lea-se,  union,  con- 
solidation or  merger  shall  take  effect 
until  the  parties  thereto  file  in  the 
office  of  the  Secretary  of  State  an 
agreement  surrendering  to  the  State 

37 


00 


INTERCORPORATE    RELATIONS 


[part  I 


not  only  serve  no  public  purpose  but  might  tend  to  prevent 
competition. 


all  rights  of  exemption  and  contract 
privileges  with  respect  to  taxation, 
and  reserving  to  the  State  any  exist- 
ing right  to  take  the  property  of  any 
of  the  parties." 

New  Mexico.  Comp.  Laws  1897, 
§  3S92:  "Any  railroad  company 
.  .  .  organized  under  the  law  of  this 
Territory  or  of  this  Territorj'  and  anj' 
other  Territory  or  State  .  .  .  oper- 
ating .  .  .  either  wholly  within  or 
partly  witliin  and  partly  without  this 
Territory,"  may  consolidate  with 
"any  other  railroad  com|)any  or 
companies  organized  under  the  laws 
of  this  Territory,  or  under  the  laws 
of  this  Territory  and  any  other  Ter- 
ritory or  State  whenever  the  two 
or  more  railroads  .  .  .  shall  or  maj- 
form  a  continuous  line  of  railroad 
with  each  other,  or  by  means  of 
an  intervening  railroad,  bridge,  or 
ferry." 

New  York.  Birdse3'e's  Rev.  Stat. 
3d  ed.,  p.  2961  (Railroad  Law  §  70) 
"Any  railroad  or  other  corporation 
organized  under  the  laws  of  this  State 
or  of  this  State  and  any  other  State 
and  owning  or  operating  a  railroad 
either  wholly  within  or  partly  within 
and  partly  without  the  State,  or  whose 
lines  or  routes  of  road  have  been  lo- 
cated but  not  constructed,  may  merge 
and  consolidate  its  capital  stock,  fran- 
chises, and  property  with  the  capital 
stock,  franchises,  and  property  of 
any  other  railroad  .  .  .  corporation 
or  corporations  organized  under  the 
laws  of  this  State,  or  of  this  and  any 
other  State,  or  under  the  laws  of 
any  other  State  or  States,  whenever 
the  two  or  more  railroads  of  the  com- 
panies or  corporations,  so  to  be  con- 
solidated, ...  or  branches  of  any 
part  thereof,  or  the  line  or  routes 
of  their  roads  if  not  constructed,  shall 
or  may  form  a  continuous  or  con- 
nected line  of  railroad  with  each  other 


or  by  means  of  an  intervening  rail- 
road bridge,  tunnel,  or  ferry." 

lb.  (Railroad  Law,  §  80)  p.  2966: 
"No  railroad  corporation  or  corpora- 
tions owning  or  operating  railroads 
whose  roads  run  on  parallel  or  com- 
peting lines,  except  street  surface 
railway  corporations,  shall  merge 
or  consolidate  or  enter  into  any 
contract  for  the  use  of  their  respective 
roads  or  lease  the  same,  the  one  to 
the  other,  unless  the  board  of  rail- 
road commissioners  of  the  State 
or  a  majority  of  such  board  shall 
consent  thereto." 

North  Dakota.  Rev.  Codes  1899, 
§  2954:  "Any  railroad  corporations, 
organized  and  existing  under  the 
laws  of  the  Territory  of  Dakota  or 
State  of  North  Dakota  or  existing 
b}'  consolidation  of  different  railway 
companies  under  the  laws  of  such 
Territory  or  State,  and  of  any  other 
Territorjr  or  State,  may  consolidate 
.  .  .  with  any  other  railroad  cor- 
poration, whether  within  or  with- 
out the  State,  when  their  respective 
railroads  can  be  lawfully  connected 
and  operated  together  to  constitute 
one  continuous  main  line." 

Ohio.  Bates  Anno.  Stat.  (1787- 
1906),  §  3379:  "When  the  lines  of 
road  of  any  railroad  companies  in 
this  State,  or  any  portion  of  such 
lines,  have  been  or  are  being  so  con- 
structed as  to  admit  the  passage  of 
burthen  or  passenger  cars  over  any 
two  or  more  of  such  roads  contin- 
uously, without  break  or  interruption, 
such  companies  may  consolidate." 

lb.  §  3380:  "A  companj-  organ- 
ized in  this  State  .  .  .  whose  line 
of  road  is  made  or  is  in  process  of 
construction  to  the  boundarj'  line 
of  this  State,  or  to  any  point  either 
in  or  out  of  this  State,  may  consoli- 
date .  .  .  with  .  .  .  anj-  company  in 
an    adjoining   State  .  .  .  whose   line 


CHAP.    Il]  LEGISLATIVE    AUTHORITY   FOR    CONSOLIDATION 


§  22 


With  few  exceptions  these  statutes  permit  corporations  of 
the  State  to  consohdate  with  corporatioas  of  other  States  own- 


of  road  has  been  projected  ...  or 
is  in  process  of  construction,  to  the 
same  points  when  the  several  roads 
so  unitefl  or  constructed  will  form  a 
continuous  line  for  the  passage  of  cars." 

lb.  3380a  authorizes  a  corporation 
formed  by  consolidation  to  further 
consolidate. 

Oklahoma.  Rev.  and  Anno.  Stat. 
1903,  §  99,  p.  3G0:  "Any  railroad 
corporation  may  consolidate  its  stock, 
franchises,  and  property  with  any 
other  railroad  corporation,  whether 
within  or  without  the  Territory, 
when  their  respective  railroads  can 
be  lawfully  connected  and  operated 
together  to  constitute  one  continuous 
main  line  with  or  without  branches." 

Oregon.  Bellinger  &  Cotton's 
Anno.  Codes  and  Stat.  (1902),  § 
5056:  "Any  two  or  more  railroad 
companies  whose  lines  are  connected 
may  perfect  any  arrangement  for 
their  common  benefit  to  assist  and 
promote  the  object  for  which  they 
were  created." 

Pennst/lvanin.  Bright.  Purd.  Dig. 
1S04,  §  107,  p.  1801:  "It  shall  be 
lawful  for  any  railroad  company  char- 
tered by  this  commonwealth  to  merge 
its  corporate  rights  .  .  .  into  anj^ 
otlier  railroad  company  so  cliartcred, 
connecting  therewith." 

lb.  §  114,  p.  1803:  "Any  railroad 
company  or  corporation,  organized 
under  the  laws  of  this  commonwealth, 
and  operating  a  railroad,  either  in 
whole  within,  or  partly  within  and 
partly  without  this  State,"  may 
"merge  and  consolidate  .  .  .  with 
any  other  railroad  company  or  com- 
panies or  corporations  organized  and 
operated  under  the  laws  of  this  or 
any  other  State,  whenever  the  two 
or  more  railroads  .  .  .  shall  or  maj' 
form  a  continuous  line  of  railroael 
with  each  other,  or  by  means  of  an 
intervening  railroad." 


76.  §  126,  p.  1805:  "Any  rail- 
road company  or  corporation  duly 
organized  under  the  laws  of  this  State 
.  .  .  operating  a  railroad  either 
wholly  or  partly  within  and  partly 
without  this  State,"  may  "consoli- 
date .  .  .  with  any  other  railroad 
companies  or  corporations  organized 
under  the  laws  of  this  or  any  other 
State,  whenever  the  two  or  more 
railroads  of  the  companies  or  corpora- 
tions .  .  .  shall  or  may  form  .  .  . 
a  continuous  line  of  railroad  with 
each  other,  or  by  means  of  any  inter- 
vening railroad ;  and  such  consolida- 
tion may  be  effected  in  accordance 
with  the  laws  of  this  commonwealth, 
and  either  under  special  or  general 
statutes  of  other  States." 

lb.  §  182,  p.  1814,  authorizes  con- 
solidation of  particular  railroads. 

South  Carolina.  Code  1902,  §  2050: 
"Any  railroad  company  ...  of  this 
State,  operating  a  railroad  whether 
wholly  within,  or  partly  within  and 
partly  without,  this  State,"  may 
"merge  and  consolidate  .  .  .  with 
.  .  .  anj'  other  railroad  company 
or  companies  organized  and  operated 
under  the  laws  of  this  or  any  other 
State,  whenever  two  or  more  rail- 
roads of  the  companies  .  .  .  are  con- 
tinuous or  are  connected  with  each 
other  or  by  means  of  an  intervening 
railroad." 

lb.  §  2034:  "Such  company  [rail- 
road] sliall  have  full  power  and  au- 
thority ...  to  purchase,  lease,  or 
con.solidate  with  any  other  railroad 
or  railroads  in  or  out  of  tliis  State 
in  such  manner  and  upon  such  terms 
as  may  be  agreed  between  such  rail- 
road companies." 

South  Dakota.  Rev.  Code,  §  494, 
p.  649:  "Any  comjiany  owning  or 
operating  a  railroad  within  this  State 
may  extend  its  road  into  any  other 
State   or   Territory,    and   may    build, 

39 


§22 


INTERCORPORATE    RELATIONS 


[part  I 


ing  connecting  roads,  as  well  as  with  other  domestic  railroad 
corporations. 


buy,  lease,  or  be  consolidated  with 
any  railroad  or  railroads  in  such  other 
State  or  Territory." 

Tennessee.  Code  1896,  §  1522: 
"Every  railroad  corporation  existing 
in  this  State  ...  or  ...  of  any 
other  State  .  .  .  and  having  author- 
ity to'  operate  and  maintain  a  rail- 
road in  this  State,  shall  have  power 
to  consolidate  itself  with  any  other 
railroad  corporation,  whose  road 
shall  connect  with  or  intersect  the 
road  of  such  existing  railroad  cor- 
poration or  branch  thereof." 

lb.  §  1532  also  authorizes  consoli- 
dation. 

Texas.  Sayles'  Texas  Civil  Stat. 
1897  (Supp.  to  1900),  Art.  4531 :  "No 
railroad  company  organized  under 
the  laws  of  this  State  shall  consoli- 
date .  .  .  with  any  railroad  com- 
pany organized  under  the  laws  of  any 
other  State  or  of  the  United  States." 
Utah.  Laws  1901.  ch.  26,  §  6: 
"Any  railroad  company  organized 
or  existing  under  the  laws  of  this 
State"  may  "merge  or  .  .  .  con- 
solidate with  any  other  railroad  com- 
pany or  companies  organized  or  exist- 
ing under  the  laws  of  this  or  any  other 
State  or  Territory  or  of  the  United 
States;  provided  that  the  lines  of 
such  companies  shall  not  be  compet- 
ing, but  shall  be  substantially  con- 
tinuous or  connective,  either  by  means 
of  actual  union  of  track  or  through 
the  medium  of  any  bridge,  ferry,  or 
line  of  railroad,  leased." 

Vermont.  Stat.  1894,  §  3975: 
"When  a  railroad  in  this  State"  is 
ordered  sold  by  decree  or  judgment 
of  a  court,  "any  railroad  company  in 
this  State,  whose  railroad  connects 
with  that  ordered  to  be  sold,  may 
purchase  the  same,  and  upon  acquir- 
ing title  to  said  railroad,  consolidate 
it  with  its  own  railroad  and  make 
it  a  part  thereof." 

40 


Virginia.  Code  1904,  §  1105b: 
"A  railroad  company  shall  have 
power:  .  .  .  (e)  To  consolidate  or 
merge  itself,  purchase  or  lease  the 
works,  property  and  franchises,  .  .  . 
of  any  railroad  company  incorporated 
under  the  laws  of  this  State  or  another 
State,  or  of  this  State  and  anotlier, 
or  other  States,  or  under  the  laws  of 
the  United  States,  and  to  sell  or  lease 
its  works,  property,  and  franchises 
or  any  part  thereof,  to  any  other 
such  corporation  ...  of  this  State; 
provided,  however,  that  nothing  in 
this  act  shall  authorize  or  be  con- 
strued to  permit  the  purchase,  lease, 
sale,  consolidation  or  merger  of  the 
works,  property  or  franchise  of  rail- 
roads competitive  with  it  between 
points,  both  of  which  are  in  this 
State,  or  lines  between  the  same  ter- 
minal points,  both  of  which  are 
within  this  State,  whether  such  lines 
be  operated  by  the  same  or  different 
motive  power." 

Washington.  Ballinger's  Anno. 
Code  1897,  §§  4303,  4304:  "Any 
railroad  corporation  chartered  by  or 
organized  under  the  laws  of  the  State, 
or  of  any  State  or  Territory,  or  under 
the  laws  of  the  United  States  .  .  . 
may  consolidate  .  .  .  with  any  other 
railroad  corporation,  whether  witliin 
or  without  the  State,  when  such  other 
railroad  does  not  own  any  competing 
line." 

West  Virginia.  Code  1906,  §  2346: 
"No  railroad  corporation,  owning  or 
operating  a  railroad  wholly  or  in  part 
within  this  State,  shall  consolidate  its 
capital  stock  with  any  other  railroad 
corporation  owning  a  parallel  .  .  . 
line,  .  .  .  but  any  such  railroad  cor- 
poration whose  line  of  railroad  is 
made,  or  is  in  process  of  construc- 
tion," may  consolidate  with  "any 
other  corporation  of  this  or  of  an  ad- 
joining State,  owning  or  operating  a 


CHAP.    Il]        LEGISLATIVE    AUTHORITY    FOR    CONSOLIDATION 


§23 


The  statutes,  generally,  contain  provisions  against  the  con- 
sohdation  of  competing  or  parallel  railroads. 

§  23.  What  Corporations  other  than  Railroads  may  consoli- 
date —  Statutory  Provisions.  —  Statutes  authorizing  the  con- 
solidation of  private  corporations  and  of  other  public  service 
corporations  than  railroad  companies  have  been  adopted  in 
many  of  the  States.  An  abstract  of  them  is  printed  in  the 
footnote.* 


line  of  railroad  .  .  .  wholly  or  partly 
within  this  or  an  adjoining  State,  and 
connected  directly,  or  by  means  of 
an  intervening  railroad  or  railroads, 
in  order  to  make  a  continuous  line  of 
railroad  to  be  run  and  operated  with- 
out change  of  cars,  break  of  bulk  or 
exchange  of  passengers  or  freight." 

"It  shall  be  lawful  for  any  rail- 
road companj'  created  under  the  laws 
of  this  State,  or  of  this  and  any  other 
State  or  States,  to  consolidate  with 
any  railroad  or  railroads  in  this  State 
or  other  States." 

"Where  two  or  more  railroad  com- 
panies have  been  heretofore  incor- 
porated under,  and  by  virtue  of  the 
laws  of  this  State,  for  the  construc- 
tion of  two  or  more  lines  of  railroad, 
which  have  been  located  or  surveyed 
along  the  same  line  between  any 
points  and  places,  .  .  .  the  Boards  of 
Directors  of  said  corporations"  may 
"consolidate  the  capital  stock  of  their 
respective  companies,  or  .  .  .  consoli- 
date different  interests  in  the  same 
road." 

Wisconsin.  Sanborn's  Stat.  Supp. 
(1899-1906),  vol.  3,  §  18.33,  p.  919: 
"Any  railroad  corporation  organized 
and  existing  under  the  laws  of  the 
Territory  or  State  of  Wisconsin,  or 
existing  by  consolidation  of  different 
railway  companies  imder  said  laws 
and  the  laws  of  any  other  Territory 
or  Territories,  State  or  States,  may 
consolidate  .  .  .  with  any  other  rail- 
road corporation  wliether  witliin  or 
without  the  State,  when  their  respec- 
tive railroads   can   be  lawfully  con- 


nected and  operated  together  to  con- 
stitute one  continuous  main  line, 
with  or  without  branches." 

Wyomirig.  Rev.  Stat.  1899,  §  3202: 
"Whenever  a  line  of  railroad  of  any 
railroad  company  in  this  State,  or 
any  portion  of  said  line,  has  been 
constructed  so  as  to  connect  with 
any  two  or  more  of  such  roads,"  said 
companies  may  consolidate. 

lb.  §  3206:  "Any  company  own- 
ing or  operating  a  railroad  within  this 
State  may  extend  the  same  into  any 
other  State  or  Territory,  and  may  .  .  . 
consolidate  with  any  other  railroad  or 
railroads  in  such  other  State  or  Terri- 
tory, or  with  any  other  railroad  in 
this  State,  and  may  operate  the 
same." 

'  Alabama.  Gen.  Laws  1903, 
p.  132:  "Any  two  or  more  existing 
corporations  other  than  corporations 
having  the  right  to  condemn  to  their 
use  rights  of  way  and  other  easements 
over  the  property  of  others  whether 
created  by  special  acts  or  organized 
under  the  general  -incorporation  laws 
of  this  State,  may  consolidate  so  as 
to  form  a  single  corporation.   .   .   ." 

California.  Stat,  and  Am'n'dts.  to 
Codes  1905,  p.  585,  §  587a,  author- 
izes the  consolidation  of  corporations 
organized  for  "mining  purposes." 

lb.  p.  598,  §  053i,  authorizes  con- 
•solidation  of  "cooperative  business 
a.ssociations." 

Colorado.  Gen.  Stat.  1891,  §  628: 
"Any  corporations  existing  for  anj' 
of  the  purposes  enumerated  in  this 
(general)  act"  may  consolidate. 

41 


23 


INTERCORPORATE    RELATIONS 


[part  I 


These  statutes  vary  in  their  provisions  and  relate  to  many- 
different  kinds  of  corporations.     As  a  general  rule  those  relat- 


Connccticut.  Pub.  Acts  190.3,  ch. 
194,  §  75,  provides  that  corporations 
"carrying  on  business  of  the  same  or 
a  similar  nature  may  merge  or  con- 
solidate." 

Delaware.  Gen.  Corp.  Law  1903, 
§  59:  "Any  two  or  more  corpora- 
tions organized  .  .  .  for  the  purpose 
of  carrj'ing  on  any  business  may 
consolidate.  ..." 

Laws  1905,  ch.  155,  §  2,  authorizes 
the  consolidation  of  telegraph  and 
telephone    companies. 

Idaho.  Rev.  Stat.  1887,  §  2S04: 
"Any  two  or  more  such  corpora- 
tions (land  and  building)  may  unite 
and  become  incorporated  in  one 
body." 

Illinois.  Starr  &  Curtis'  Anno. 
Stat.  1903,  Supp.  p.  129,  provides 
that  it  shall  apply  only  "to  corpora- 
tions of  the  same  kind  and  engaged  in 
the  same  general  business  and  carrj^- 
ing  on  their  business  in  the  same 
vicinity  and  that  no  more  tlian 
two  corporations  now  existing  shall 
be  consolidated  into  one,"  under  its 
provisions. 

Ih.  1902  Supp.  authorizes  gas 
companies  to  consolidate. 

lb.  vol.  1,  p.  518,  §  15,  authorizes 
the  consolidation  of  corporations  with 
banking  powers. 

Indiana.  Burn's  Rev.  Stat.  1901, 
§  4662.  Bridge  companies  may  by 
a  vote  of  a  majority  of  its  directors 
consolidate  with  any  other  bridge 
companies  of  any  other  State  having 
authority  to  construct  a  bridge  at 
same  point. 

Ih.  §  4790.  Plank,  macadamized 
or  gravel  road  companies  may  con- 
solidate. 

Ih.  §  4836.  A  hydraulic  company 
may  consolidate  with  any  other 
hydraulic  company  in  any  case  where 
the  hvdraulic  works  form  a  continu- 
ous line. 

42 


Ih,  §  5423.  River  navigation  com- 
panies may  con.solidate. 

Acts  1907,  ch.  150,  §  2.  Electric 
light  and  power  company  may  merge 
with  any  hydraulic  company  where 
purpose  of  merger  is  to  use  the  water 
power,  etc.  of  hydraulic  company  for 
generation  of  electricity. 

Iowa.  Supp.  to  Code  1902,  §  1907b, 
authorizes  the  consolidation  of  build- 
ing and  loan  associations. 

Kansas.  Gen.  Stat.  1905,  §  1414: 
"Any  telegraph  company  ...  of  this 
State,  may  .  .  .  unite  or  consolidate 
with  any  other  company  or  compa- 
nies ...  of  any  State.   ..." 

Ih.  §  1492.  Anj'  two  or  more 
building  and  loan  associations  may 
consolidate. 

Ih.  §  1510.  Bridge  company  of 
this  State  and  one  of  adjoining  State 
may  consolidate  where  they  have 
authority  to  build  bridge  at  same 
point. 

Kentucky.  Acts  1902,  ch.  58,  §  2: 
"Any  two  or  more  corporations  or- 
ganized under  this  charter,  or  the  laws 
of  this  or  any  other  State  may  con- 
solidate into  a  single  corporation." 

Louisiana.  Rev.  Laws  1904,  p. 
246:  "Any  two  business  and  manu- 
facturing companies  now  existing 
under  general  or  special  law,  whose 
objects  and  business  are,  in  general, 
of  the  same  nature"  may  amalga- 
mate. 

Maine.  Rev.  Stat.  1903,  §  56, 
p.  443:  "No  corporation  shall  sell, 
lease  or  in  any  manner  part  vnth.  its 
franchises  except  with  the  consent  of 
its  stockholders  at  an  annual  or  spe- 
cial meeting,  the  call  for  which  shall 
give  notice  of  the  subject-matter  of 
the  proposed  sale,  lease  or  consolida- 
tion. All  such  sales,  leases  and  con- 
solidations shall  be  made  subject  to 
the  provisions  of  this  and  the  eleven 
following  sections.   .   .   ." 


CHAP.    Il]  LEGISLATIVE    AUTHORITY    FOR    CONSOLIDATION 


§23 


ing  to  business  corporations  limit  the  right  of  consoUdation  to 
corporations  of  a  particular  kind,  e.g.,  mining  or  manufacturing 


Maryland.  Pub.  Gen.  Laws  (1904), 
p.  552,  §  45,  authorize  con.solidation 
"when  the  corporators  have  been 
originally  incorporated  in  whole  or  in 
part  for  the  same  purpose." 

Ih.  p.  673,  §  327,  authorizes  the 
consolidation  of  telegraph  companies 

Michigan.  Laws  of  1903,  Art. 
50,  authorizes  the  consolidation  of 
street  railway,  electric  and  gas  light 
companies  or  any  two  thereof. 

Missouri.  Anno.  Stat.  1900,  § 
1334,  provides  that  "any  two  cor- 
porations now  existing  .  .  .  whose  ob- 
jects and  business  are  in  general  of  the 
same  nature  may  amalgamate,"  but 
the  statute  applies  "only  to  corpora- 
tions organized  or  created  solely  for 
manufacturing  purposes." 

76.  §  1221  authorizes  the  consoli- 
dation of  macadam,  gravel  and  plank 
road  companies. 

7b.  §  12G2  authorizes  the  con- 
solidation of  telegraph  companies. 

lb.  §  1353  authorizes  tlie  consoli- 
dation of  bridge  companies  whose 
bridges   connect. 

lb.  §  1370  authorizes  consolidation 
of  building  and  loan  associations. 

76.  §  7889  relates  to  the  consolida- 
tion of  insurance  companies. 

Montana.  Civ.  Code  1895,  §  527: 
"It  is  lawful  for  two  or  more  com- 
panies formed  .  .  .  for  mining  pur- 
poses, which  own  or'pos.sess,  raining 
claims  or  lands  adjoining  each  other, 
or  lying  in  the  same  vicinity,  to  con- 
solidate." 

lb.  §  817  authorizes  consoliilation 
of  building,  loan  and  savings  corpora- 
tion. 

76.  §  1015  relates  to  the  consolida- 
tion of  mining  comjianies. 

Nevada.  Stat.  1903,  cli.  88,  §  43: 
"Any  two  or  more  corporations  or- 
ganized imder  the  provisions  of  this 
act,  or  existing  under  the  laws  of  this 
State,  for  the  purpose  of  carrying  on 


any  kind  of  business,  may  consolidate 
into  a  single  corporation  wWch  may 
be  either  one  of  said  consolidating 
corporations,  or  a  new  corporation 
to  be  formed  by  means  of  such  con- 
solidation." 

New  Jersey.  Corp.  Act  of  1896,  § 
104-109,  provides  that  "anj'  two  or 
more  corporations  organized  or  to  be 
organized  under  any  law  or  laws  of 
this  State  for  the  purpose  of  carry- 
ing on  any  kind  of  business  of  the 
same  or  a  similar  nature  may  merge 
or  consolidate,"  but  the  provisions  of 
the  act  do  not  apply  to  railroad,  in- 
surance (except  title  insurance), 
banking,  turnpike,  or  canal  com- 
panies nor  to  savings  banks,  or  other 
corporations  intended  to  derive  prof- 
its from  the  loan  or  use  of  money." 

New  Mexico.  Laws  1905,  §  109  : 
"Any  two  or  more  corporations  or- 
ganized under  any  law  or  laws  of  this 
territory  for  the  purpose  of  carrying 
on  any  kind  of  business  of  the  same  or 
a  similar  nature  may  merge  or  con- 
solidate into  a  single  corporation, 
which  may  be  either  one  of  said  merg- 
ing or  consolidating  corporations,  or 
a  new  corporation  to  be  formed  by 
means  of  such  merger  and  consolida- 
tion." 

New  York.  Business  Corp.  Law 
(as  amended),  §  8:  "Any  two  or  more 
corporations  organized  under  the 
laws  of  this  State  for  the  purpose  of 
carrying  on  any  kind  of  business  of 
the  same  or  similar  nature,  which  a 
corporation  organized  under  this 
cliapter  might  carry  on,  may  con- 
solidate." 

Texas.  Rev.  Stat.  1895,  Art.  651, 
subdiv.  9,  authorizes  the  consolida- 
tion of  corporations  created  for  be- 
nevolent, charitable,  educational  and 
similar  purposes. 

Utah.  Rev.  Stat.  1898,  §  340: 
"Corporations  of  the  same  kind  en- 

43 


§24 


INTERCORPORATE    RELATIONS 


[part  I 


companies,  or  to  corporations  organized  for  the  purpose  of 
carrying  on  business  of  the  same  or  similar  nature,  and  a  few  of 
the  statutes  require  that  such  business  shall  be  carried  on  in  the 
same  locality. 

§  24.  Power  of  Legislature  to  withdraw  or  limit  Right  to  con- 
solidate —  (A)  In  Absence  of  Reserved  Power.  — -  It  has  been 
held  that  a  grant  of  power  to  consolidate  in  the  charter  of  a 
corporation  constitutes  a  contract  between  the  corporation 
and  the  State  and  that,  in  the  absence  of  a  reserved  right  to 
amend  or  repeal  the  charter,  such  power  cannot  be  withdrawn 
or  limited  by  subsequent  legislation.^  But  this  is  not  the  correct 
rule.  Provisions  of  this  character  in  charters  fall  wdthin  the 
class  of  grants  which,  as  obsei-ved  by  Mr.  Justice  Peckham 
in  Bank  of  Commerce  v.  Tennessee,^  "do  not  partake  of  the 
nature  of  a  contract,  which  cannot  for  that  reason  be  in  any 
respect  altered  or  the  power  recalled  by  subsequent  legisla- 
tion. When  no  act  is  done  under  the  provision  and  no  vested 
right  is  acquired  prior  to  the  time  when  it  was  repealed,  the 
provision  may  be  validly  recalled,  without  thereby  impairing 
the  obligation."  ^ 

The  power,  therefore,  granted  to  a  corporation  to  consohdate 
is  a  mere  license,  not  resting  in  contract,  which  may  be  rendered 


gaged  in  the  same  general  business  in 
the   same   vicinity"  may  consolidate. 

Virginia.  Code  1904,  §  1105e : 
"Except  as  any  merger  or  consolida- 
tion is  prohibited  by  .  .  .  this  act, 
any  corporation  ...  of  this  State 
may  merge  or  consolidate  into  a  single 
corporation  with  any  other  corpora- 
tion organized  for  the  purpose  of 
carrying  on  the  same  or  a  similar 
business  under  the  laws  of  this  or  any 
other  State  of  the  United  States,  or 
under  the  laws  of  the  United  States." 

1  Zimmer  v.  State,  30  Ark.  680 
(1875):  "The  power  here  given  the 
company  to  form  a  union  or  consoli- 
dation with  any  other  company  was 
a  right  secured  by  the  inviolability  of 
a  contract  between  the  State  and  com- 
pany, which  could  not  be  withdrawn 
or  to  any  extent  impaired  by  the 
State." 

44 


But  in  view  of  the  later  decision 
of  the  Supreme  Court  of  Arkansas 
in  St.  Louis,  etc.  R.  Co.  v.  Berry,  41 
Ark.  509  (1883),  this  language  mu.st 
be  regarded  as  mere  dicta  and  without 
authority  even  in  Arkansas.  It  was 
never  good  law  outside  that  State. 

-  Bank  of  Commerce  v.  Tennessee, 
163  U.  S.  425  (1896),  (16  Sup.  a.  Rep. 
1113). 

^  Galveston,  etc.  R.  Co.  v.  Texas, 
170  U.  S.  226  (1898),  (18  Sup.  Ct. 
Rep.  603) ;  Adams  v.  Yazoo,  etc.  R. 
Co.,  77  Miss.  194  (1899),  (24.  So 
Rep.  200,  60  L.  R.  A.  33  n.),  affirmed 
sub  nom.  Yazoo,  etc.  R.  Co.  v.  Adams, 
180  U.  S.  1  (1901),  (21  Sup.  Ct.  Rep. 
240).  See  also  Pearsall  v.  Great 
Northern  R.  Co.,  161  U.  S.  646  (1896), 
(16  Sup.  Ct.  Rep.  705). 


CHAP.    Il]         LEGISLATIVE   AUTHORITY    FOR    CONSOLIDATION  §   24 

inoperative  by  legislation  enacted  at  any  time  before  the  cor- 
poration avails  itself  of  the  privilege  granted;  and  such  power 
exists  in  the  legislature  independent  of  any  right  reserved  to 
amend  or  repeal  the  charter  or  of  its  police  power. 

If  power  to  consolidate,  while  unexecuted,  is  not  a  contract 
within  the  protection  of  the  decision  in  the  Dartmouth  Col- 
lege case,  a  fortiori  it  is  not,  in  itself,  a  vested  right  which  the 
legislature  may  not  take  away  or  impair.  Arrangements  for 
consohdation  made  and  carried  into  effect  create  vested 
rights,  but  the  bare  power  to  consolidate  is  not  of  that 
nature.^ 

General  power  to  consolidate  authorizes  the  consolidation 
of  competing  lines  of  railroad,  and  coastitutional  and  statutory 
provisions  against  consolidation  in  that  form  furnish  the  most 

'  In  Pearsall  v.  Great  Northern  R.  complete   enjoyment   of   the   original 

Co.,  161  U.  S.  G72  (1896),  (16  Sup.  Ct.  grant,  or  of  property  legally  acquired 

Rep.   705),    Mr.    .Justice    Brown    di.s-  subsequent    to    such    grant.     If,    for 

cusses  the  questions  suggested  in  the  example,    the   legislature   should   au- 

text,  although  in  that  case  the  statutes  thorize  the  construction  of  a  certain 

forbidding      consolidation      expressly  railroad,    and    by    a    subsequent    act 

protected    "vested    rights":      "It    is  .should  take  away  the  power  to  rai.se 

possible  that,  if  this  arrangement  had  funds  for  the  construction  of  the  road 

been  actually  made  and  carried  into  in  the  usual  manner  by  a  mortgage, 

effect,  before  the  acts  forbidding  the  or  the  power  to  purchase  rolling  stock 

consolidation  of  parallel  or  competing  or  equipment,   such  acts  might  per- 

lines  had  been  passed,  the  rights  of  the  haps  be  treated  as  so  far  destructive 

parties    thereto    would    have   become  of  the  original  grant  as  to  render  it 

vested,  and  could  not  be  impaired  by  valueless,    although    there    might    in 

any  subsequent  act  of  the  legislature.  neither  case  be  an  express  repeal  of 

But   the    real    question   before   us    is  any  of  its  provisions.     But  where  the 

whether  a  bare  unexecuted  power  to  charter    authorizes    the    company    in 

con.solidate  with  other  corporations,  a  sweeping  terms  to  do  certain  things 

power  which,  if  it  exists  as  claimed  by  which   are   unnecessary   to   the   main 

the  defendant,  would  authorize  it  to  object  of  the  grant,  and  not  directly 

absorb  by  successive  and  gradual  ac-  or  immediately  within  the  contempia- 

crctions  the  entire  railway  S3'stem  of  tion  of  the  parties  thereto,  the  power 

the  country,  is  not,  so  long  as  it  re-  ,so  conferred,  so  long  as  it  is  unexe- 

mains  unexecuted,  within  the  control  cuted,    is   within   the   control   of   the 

of  and  subject  to  revocation  by  the  legislature  and  may  be  treated  as  a 

legislature,  at  least,  .so  far  as  it  applies  license,  and  maj'  be  revokeil,  if  a  po.s- 

to    parallel   or   competing   lines.   .   .•  .  sible  exercise  of  such  power  is  found 

As  applied  to  railroad  corporations,  it  to  conflict  with  the  interests  of  the 

may  reasonably  be  contended  that  the  public." 

term    [vested    rights]    extends   to    all  See  also  Louisville,  etc.  R.  Co.  v. 

rights  of  property  acquired  by  exe-  Kentucky,  161   U.  S.  677  (1896),  (16 

cuted  contracts,  as  well  as  to  all  .such  Su]).  Ct.  Reji.  714). 
rights  as  are  necessary  to  the  full  ami 

45 


§   26  INTERCORPORATE    RELATIONS  [PART   1 

common  illustration  of  limitations  imposed  upon  existing 
rights  of  consolidation.* 

§  25.  Power  of  Legislature  to  withdraw  or  limit  Right  to  con- 
solidate —  (B)  In  Exercise  of  Reserved  Power.  —  Whatever 
doubt  may  exist  as  to  the  constitutional  authority  of  the  legis- 
lature to  withdraw  an  existing  unexecuted  right  to  consolidate 
in  the  absence  of  a  power  reserved  to  amend  or  repeal  the 
law  granting  the  right,  when  such  reservation  has  been  made 
legislative  authority  to  limit  or  take  away  the  right  is 
unquestionable.^ 

The  reservation  of  power  to  alter  or  amend  a  charter,  how- 
ever, gives  the  legislature  no  power  to  impair  vested  rights  of 
property  —  except,  of  course,  for  a  public  use  upon  just  com- 
pensation —  and  a  provision  in  an  act  forbidding  the  consoli- 
dation of  competing  railroads  that  it  shall  not  affect  vested 
rights  is  merely  declaratory.^  A  stipulation  in  an  act  repeal- 
ing the  power  to  consolidate  theretofore  granted  to  certain 
corporations,  that  such  repeal  shall  not  "affect  or  impair 
any  act  done  or  right  accruing,  accrued,  or  acquired"  before  a 
certain  date  does  not  affect  consolidation  proceedings  com- 
menced, but  not  concluded,  before  such  time,  and  they  may 
be  completed  entirely  unaffected  by  the  repealing  act.'* 

§  26.  Power  of  Legislature  to  withdraw  or  limit  Right  to  con- 
solidate —  (C)  In  Exercise  of  Police  Power.  —  There  is  another 
principle,  applicable  to  railroad  companies  and  other  corpora- 
tions assuming  the  performance  of  public  duties,  upon  which 
the  legislature  may  withdraw  the  power  of  consolidating,  if 
the  exercise  of  such  power  may  conflict  with  the  public  in- 
terests, and  that  is  the  principle  that  the  State  has  the 
right  to  guard  the  welfare  of  its  citizens  —  the  police  power. 
In  the  exercise  of  its  police  power  the  State  may  prohibit  the 


'See  post,    §    32:    •'Constitutional  161    U.   S.   672    (1896),    (16  Sup.   Ct. 

and  Statutory  Provisions  against  Con-  Rep.  705).     See  aritc,  §  24  :  "  Power  of 

solidation  of  Competing  Railroads."  Legislature  to  withdraw  or  limit  Right 

*  Pearsall  v.  Great  Northern  R.  Co.,  to    consolidate  —  In    Absence    of    Re- 
161  U.  S.  672  (1896),  (16  Sup.  Ct.  Rep.  served  Power." 

705) ;    Louisville,  etc.  R.  Co.  v.  Ken-  *  Cameron     v.     New     York,     etc. 

tucky,  161  U.  S.  695  (1896),  (16  Sup.  Water  Co.,  133  N.  Y.  336  (1892),  (31 

Ct.  Rep.  714).  N.  E.  Rep.  104). 

*  Pearsall  v.  Great  Northern  R.  Co., 

40 


CHAP.    Il]         LEGISLATIVE    AUTHORITY    FOR    CONSOLIDATION  §   27 

consolidation  of  competing  railroads,  although  their  charters 
authorize  consolidation,  provided  the  authority  has  not  been 
exercised  and  vested  rights  acquired.  It  is  also  immaterial 
whether  a  grant  of  power  to  consolidate  is  a  contract  or  a 
license  or  whether  a  right  to  amend  or  repeal  is  reserved,  for 
the  constitutional  prohibition  of  legislation  impairing  the 
obligation  of  contracts  does  not  exempt  a  corporation  from  the 
exercise  of  the  police  power  of  the  State. 

In  Louisville,  etc.  R.  Co.  v.  Kentucky  ^  Mr.  Justice  Brown 
said:  "Under  the  police  power  the  people,  in  their  sovereign 
capacity,  or  the  legislature,  as  their  representative,  may  deal 
with  the  charter  of  a  railway  cor|)oration,  so  far  as  is  neces- 
sary for  the  protection  of  the  lives,  health,  and  safety  of  its 
passengers  or  the  public,  or  for  the  security  of  property  or  the 
conservation  of  the  public  interests,  provided,  of  course,  that 
no  vested  rights  are  thereby  impaired.  In  other  words,  the 
legislature  may  not  destroy  vested  rights,  whether  they  are 
expressly  prohibited  from  doing  so  or  not,  but  otherwise  may 
legislate  with  respect  to  coiporations,  whether  expressly  per- 
mitted to  do  so  or  not.  While  the  police  power  has  been 
most  frequently  exercised  with  respect  to  matters  which  con- 
cern the  public  health,  safety,  or  morals,  we  have  frequently 
held  that  corporations  engaged  in  public  services  are  subject 
to  legislative  control,  so  far  as  it  becomes  necessary  for  the 
protection  of  the  public  interests." 

III.    Construction  of  Statutes  authorizing  Consolidation 

§  27.  General  Rules  of  Construction.  — The  Chancellor  of 
New  Jersey  once  intimated  ^  that  acts  authorizing  the  consoli- 
dation of  corporations  relate  rather  to  the  transfer  of  existing 

'  Louisville,    etc.    R.    Co.    v.    Ken-  (juiring  strict  construction  in  all  such 

tucky,  161  U.  S.  GO.')  (1896),  (16  Sup.  grants.      The  State  here  parts  witli  no 

Ct.   Rep.   714).     See  also   Pcarsall   r.  property  and  creates  no  new  privilege 

Great  Northern  R.  Co.,  161  U.  S.  672  or  franchise  that  can  affect  the  pub- 

(1896),  (16  Sup.  Ct.  Rep.  70.5);   Gibbs  lie.     It  simply  permits  a  new  arrange- 

V.  Con.solitlated  Gas  Co.,  130  U.  S.  407  ment    or    contract     as    to    privileges 

(1889),  (9  Sup.  Ct.  Rep.  55.3).  and    franchises   already   granted.      It 

^  Black  V.  Delaware,  etc.  Canal  Co.,  enlarges  none." 
22  N.   J.   Eq.  402  (1871):    "This  act  The   contract   under  consideration 

can  hardly  be  considered  a  grant  from  in    this    case    was    a    lea.se,    but    tiic 

the  State,  or  to  fall  within  the  rule  re-  statute  also  authorized  consolidation. 

47 


§   27  INTERCORPOKATE    RELATIONS  [PART    I 

rights  than  to  the  creation  of  new  ones  and  are  not  subject  to 
the  strict  rules  of  construction  applicable  to  original  grants 
of  corporate  powers.  But  the  Supreme  Court  in  reversing  the 
decree  of  the  Chancellor  ^  laid  down  the  rule  that  a  grant 
from  the  State  "  will  not  be  deduced  from  the  words  of  a 
statute,  except  when  it  contains  language  not  susceptible  of 
any  other  rational  construction."  The  correct  rule,  in  deter- 
mining the  existence  of  authority  to  consolidate,  is  that  a 
statute  should  receive  a  strict,  but  not  unreasonable,  con- 
struction. 

The  question  whether  authority  to  consolidate  must  be 
expressly  conferred  upon  each  consolidating  corporation  has 
occasioned  a  division  of  judicial  authority.  On  the  one  hand, 
it  has  been  held  that  where  power  is  given  by  statute  to  one 
corporation  to  unite  with  any  other,  whatever  other  corpora- 
tion it  selects  and  agrees  with  for  the  union  has,  by  implica- 
tion, power  to  unite  with  it,  although  such  other  corporation 
is  not  named  in  the  act  and  has  not,  otherwise,  power  to 
consolidate.^  The  reason  given  for  this  conclusion  is  that 
the  power  granted  to  one  corporation  to  consolidate  neces- 
sarily involves  the  same  power  in  the  other  company  and  so 
operates  impliedly  as  an  enlargement  of  its  charter.^  On  the 
other  hand,  it  has  been  held  that  all  the  constituent  corpora- 
tions must  have  the  power  to  consolidate  in  order  to  effect  a 
valid  consolidation  —  that  power  to  consolidate  with  any  other 
corporation  means,  reasonably,  any  other  corporation  having 
power  to  consolidate.*     The  latter  conclusion  is  more  in  ac- 

^  Black    V.    Delaware,    etc.    Canal  tlon    unless    it     finds     another    with 

Co.,    24   N.   J.   Eq.   455    (1873).  which  to  unite  and  which  is  capable 

2  Matter  of  Prospect  Park,  etc.  R.  of   union    with    it  ;    hence   whatever 

Co.,    67    N.    Y.    377    (1876)  :    "  The  other  company  it  selects  for  a  union, 

act   .    .   .   gave   power  to   one   of  the  and   finds    wilhng    to    join    it,    that 

corporations,  which  now  together  form  other    company,   though   not   named 

the  corporation  which  is  the  petitioner  in  the  statute,   gets  power  from  the 

in  this  case,   to  consolidate  with  any  statute  to  unite  with  that  company 

other  like  corporation.     The  point  of  which  the  statute  names." 
the  appellants,  that  no  power  to  con-  ^  New   York,   etc.   R.   Co.    v.   New 

solidate  is  given  to  the  other  of  those  York,  etc.  R.  Co.,  52  Conn.  274  (1884). 

corporations,  is  without  effect.     Power  See  also  Knox\-ille  v.  Knox\-ille,  etc. 

is  given  by  statute  to  one  corporation  R.  Co.,  22  Fed.  763  (1884). 
to    form    a    consolidation    with    any  <  In  Louis\-ille,  etc.  R.  Co.  v.  Ken- 

other.      It    cannot   form  a    consolida-  tucky,  161  U.  S.  691  (1896),  (16  Sup. 

48 


CHAP.    Il]  LEGISLATIVE    AUTHORITY   FOR    CONSOLIDATIOX 


§27 


cordance  with  the  rule  of  strict,  yet  reasonable,  construction. 
It  has  also  been  held,  upon  a  principle  which  is  at 
least  doubtful,  that  the  fact  that  the  right  of  one  company 
to  consoUdate  is  limited  under  its  charter  does  not  deprive 
it  of  the  right  to  consolidate  under  the  general  laws  of  the 
State.' 


Ct.  Rep.  714),  Mr.  .Justice  Brown 
said  :  "  Besides  this,  however,  in  order 
to  .support  the  proposed  consolidation 
of  these  two  .systems,  the  parties  are 
bound  to  show,  not  only  that  the  L.  & 
N.  Co.  was  competent  to  buy,  but  that 
the  Chesapeake  Co.  was  also  vested 
with  power  to  .sell.  To  make  a  valid 
contract  it  is  necessary  to  show  that 
both  parties  are  competent  to  enter 
into  the  proposed  stipulations.  It  is 
a  fundamental  principle  in  the  law  of 
contracts  that,  to  make  a  valid  agree- 
ment, there  must  be  a  meeting  of 
minds,  and,  obviously,  if  there  be  a 
disability  on  the  part  of  either  party 
to  enter  into  the  proposed  contract 
there  can  be  no  valid  agreement." 

See  also  St.  Louis,  etc.  R.  Co.  v. 
Terre  Haute  R.  Co.,  145  U.  S.  393 
(1S92),  (12  Sup.  Ct.  Rep.  953). 

In  Morrell  v.  Smith  County,  89 
Tex.  529  (1896),  (36  S.  W.  Rep.  56), 
it  was  held  that  authority  given  a 
railroad  company  by  its  charter,  to 
consolidate  with  any  other  company, 
does  not  confer  authority  upon  an- 
other company  to  consolidate  with  it  : 
and  the  power  is,  in  effect,  limitctl  to 
a  union  with  another  company  having 
like  power.  In  this  case  the  Court 
declined  to  follow  the  rule  laid  down 
in  Matter  of  Prospect  Park,  etc.  R. 
Co.,  67  N.  Y.  377  (1876).  See  also 
East  Line,  etc.  R.  Co.  v.  Rushing, 
69  Te.x.  306  (1887),  (6  S.  W. 
Rep.  834);  Ea.st  Line,  etc.  R. 
Co.  V.  State.  75  Tex.  434  (1889), 
(12  S.  W.  Rep.  690),  and  dissenting 
opinion  in  Boston,  etc.  R.  Co.  v.  New 
York,  etc.  R.  Co.,  13  R.  I.  275  (1881). 
That  the  same  principle  is  api)lirable 
in  the  case  of  interstate  consolitlations 


see  American  Loan,  etc.  Co.  v.  Min- 
nesota, etc.  R.  Co.,  157  111.  641  (1895), 
(42  N.  E.  Rep.  153);  Continental 
Trust  Co.  V.  Toledo,  etc.  R.  Co.,  82 
Fed.  642  (1897). 

In  England  it  has  been  said  that  an 
agreement  cannot  be  made  by  which 
one  railroad  company  shall  turn  over 
its  railway  to  be  worked  bj^  another 
company  unless  the  latter  possesses, 
under  its  charter,  power  to  receive  and 
work  it.  Winch  v.  Birkenhead,  etc. 
R.  Co.,  16  Jur.  10.35  (1835). 

'  Warrener  i'.  Kankakee  County, 
1  Monthly  West.  Jur.  556  (1875), 
(Fed.  Cas.  No.  17205)  (per  Blodgett 
J.)  :  "The  right  of  the  company  to 
con.solidate,  under  its  charter,  seemed 
limited,  but  that  did  not  take  away 
the  right  from  the  company  to  con- 
.solidate under  the  general  law  of  the 
State  b}^  comphing  with  all  the  pro- 
vdsions  of  the  law." 

A  statute  authorizing  the  filing  of 
amended  certificates  of  incorporation 
and  pro\nding  that  the  amended  cer- 
tificate shall  take  the  place  of  the 
original  has  a  retroactive  effect  in 
curing  errors  and  defects  in  the 
original,  but  the  filing  of  such 
amended  certificate  does  not  so  far 
relate  back  as  to  deprive  the  corpora- 
tion of  the  right  to  con.solidate  imder 
a  statute  pa.ssed  subsequent  to  its 
original  organization,  but  before  the 
filing  of  the  amendment. 

Colgate  V.  U.  S.  Leather  Co.,  67  Atl. 
Rep.  657,  (N.  J.  1907). 

In  tliis  case  it  was  also  held  that 
the  fact  that  the  statute  pro\nded 
that  nothing  should  be  inserted  in  the 
amended  certificate  not  in  conformity 
with  the  law  under  which  the  corpora- 

49 


§   28  INTERCORPORATE   RELATIONS  [PART    I 

§  28.    Construction  of  Particular  Statutory  Provisions.  —  An 

act  authorizing  the  consohdation  of  two  corporations  author- 
izes, by  reasonable  intendment,  the  consohdation  of  more  than 
two;  *  and  it  has  been  held  that  a  statute  providing  for  the 
consolidation  of  corporations,  but  upon  the  condition  "  that 
no  more  than  two  corporations  now  existing  shall  be  consoli- 
dated into  one  under  the  provisions  hereof,"  authorized  the 
consohdation  of  more  than  two  corporations  if  only  two  of 
them  were  in  existence  at  the  time  of  the  passage  of  the  act.^ 

A  consolidation  act  authorizing  the  consohdation  of  "rail- 
road companies"  has  been  held  to  include  street  railroad 
companies.^  When  the  words  "any  other  railroad"  or  similar 
words  are  used  in  a  charter  or  statute  authorizing  consohda- 
tion, without  restricting  them  to  domestic  corporations,  they 
include  foreign  railroad  companies  as  well.* 

A  statute  providing  that,  in  case  of  consolidation,  the 
consolidated  corporation  shall  be  liable  for  the  debts  of  the 
constitutent  companies  does  not,  in  itself,  authorize  con- 
solidation.'^ 

A  grant  of  power  to  connect  or  unite  with  another  road 
refers  merely  to  a  physical  connection  of  the  tracks  and  does 
not  authorize  any  union  of  the  franchises  of  the  two  corpora- 
tions or  their  consohdation.  Power  to  consolidate  cannot  be 
inferred  from  any  such  indefinite  language  as  "to  unite  and 
connect  with  such  road."  ^ 

tion  was  organized,  did  not  prevent  *  Pittsburg,  etc.  R.  Co.  v.  Keokuk, 

the   insertion   of   pro\-isions   for   con-  etc.  Bridge  Co.,  131  U.  S.  371  (1891), 

.solidation,  although  consolidation  was  (9  Sup.  Ct.  Rep.  770) ;   St.  Louis,  etc. 

authorized  after   the  organization   of  R.  Co.  r.  Terre  Haute  R.  Co.,  145  U.S. 

the  corporation.  403  (1892),   (12  Sup.  Ct.  Rep.  953); 

'  People   V.   Rice,   66  Hun  (N.  Y.)  Bo-ston,  etc.  R.  Co.  v.  Boston,  etc.  R. 

130    (1892),   (21     N.   Y.     Supp.   48),  Co.,  65  N.  H.  393  (1888),  (23  Atl.  Rep. 

affirmed    138    N.  Y.    614   (1893),  (33  529). 
N.  E.  Rep.  1083).  Contra,  Black  v.  Delaware,  etc.  R. 

2  Barrows   v.    People's   Gas    Light,  Co.,  24  N.  J.  Eq.  455  (1873). 

etc.  Co.,  75  Fed.  794  (1895).  »  Kavanaugh  v.  Omaha  Life  Ass'n., 

3  Matter  of  Washington  St.,  etc.  R.         84  Fed.  295  (1897). 

Co.,  115  N.  Y.  442  (1889),  (22  N.  E.  ^  Louis^-ille,  etc.  R.  Co.  v.  Ken- 
Rep.  356),  affirming  52  Hun  311  tucky,  161  U.  S.  684  (1896),  (16  Sup. 
(1889),  (5  N.  Y.  Supp.  355).  See,  Ct.  Rep.  714)  :  "By  the  act  ...  the 
however,  Philadelphia  v.  Thirteenth  company  was  gi^en  power  to  unite 
St.,  etc.  Co.  (Pa.),  1  Leg.  Gaz.  Rep.  their  road  with  any  other  road  con- 
165  (1871).  necting  therewith   upon   such   condi- 

50 


CHAP.    Il]         LEGISLATIVE    AUTHORITY    FOR    CONSOLIDATION 


§28 


While  the  authorities  are  not  uniform  upon  the  question 
whether  a  grant  of  power  to  consohdate  with  a  railroad  com- 
pany gives  power  to  sell  to  that  company/  the  converse  of 


tions  as  the  two  companies  might 
agree  upon.  As  we  have  frequently 
held  that  a  power  to  connect  or  unite 
with  another  road  refers  merely  to  a 
physical  connection  of  the  tracks  and 
does  not  authorize  the  purchase  or 
even  the  lease  of  such  road,  or  any 
union  of  their  franchises,  it  is  evident 
that  tliis  act  is  no  authority  for  the 
proposed  consolidation.  .  .  .  The 
important  power  to  purchase  or  con- 
solidate with  another  line  cannot  be 
inferred  from  any  such  indefinite  lan- 
guage as  'to  unite  or  connect  with 
such  road.'" 

See  also  Atchison,  etc.  R.  Co.  v. 
Denver,  etc.  R.  Co.,  110  U.  S.  667 
(1884),  (4  Sup.  Ct.  Rep.  185);  Penn- 
sylvania Co.  V.  St.  Louis,  etc.  R.  Co., 
118  U.  S.  290  (1886),  (6  Sup.  CH.  Rep. 
1094) ;  Oregon  R.,  etc.  Co.  v.  Oregonian 
R.  Co.,  130  U.  S.  1  (1889),  (9  Sup.  Ct. 
Rep.  409) ;  St.  Louis,  etc.  R.  Co.  v. 
Terre  Haute  R.  Co.,  145  U.  S.  393 
(1892),  (12  Sup.  Ct.  Rep.  953); 
Morrell  v.  Smith  County,  89  Te.x.  529 
(1896),  (36  S.  W.  Rep.  56). 

'  In  Branch  v.  Jesup,  106  U.  S.  478 
(1882),  (1  Sup.  Ct..  Rep.  495),  the 
Supreme  Court  of  the  L'nited  States 
said  :  "As  a  general  rule,  it  is  true,  a 
railroad  company,  with  only  the  ordi- 
nary powers  to  construct  and  operate 
its  road,  cannot  dispose  of  it  to  an- 
other company.  Legislative  aid  is 
necessary  to  that  end.  But  this  com- 
pany had,  by  its  charter,  express 
power  to  incorporate  its  stock  with 
the  stock  of  any  other  company. 
This  power  has  an  enlarging  effect 
upon  the  ordinary  power  to  sell  and 
tlispose  of  property  belonging  to  the 
company.  Generally  the  power  to 
sell  and  dispose  has  reference  only  to 
transactions  in  the  ordinary  course 
of  bu.siness  incident  to  a  railroad 
companj-,  and  does  not  extend  to  the 


sale  of  the  railroad  itself,  or  of  the 
franchise  connected  therewith.  Out- 
Ijnng  lands,  not  needed  for  railroad 
uses,  may  be  sold.  Machinerj'  and 
other  personal  property  may  be  sold. 
But  the  road  and  franchises  are 
generally  inalienable ;  and  they  are 
so  not  only  because  they  are  acquired 
by  legislative  grant,  or  in  the  exercise 
of  special  authority  given,  for  the 
specific  purposes  of  the  incorporating 
act,  but  because  they  are  essential  to 
tiie  fulfilment  of  tliose  purposes;  and 
it  would  be  a  dereliction  of  the  duty 
owed  by  the  corporation  to  the  State 
and  to  the  public  to  part  with  them. 
But  where,  as  in  this  case,  power  is 
given  to  incorporate  the  capital  stock 
with  the  stock  of  any  other  company, 
a  very  large  addition  is  made  to  the 
ordinary  powers  granted  to  a  com- 
pany. In  tills  country  the  creation 
and  exercise  of  such  a  jxjwer  is  well 
understood.  It  contemplates  not  only 
the  possible  transfer  of  the  railroad 
and  its  franchises  to  another  com- 
pany, but  even  the  extinguishment 
of  the  corporation  it.sclf,  and  its  ab- 
sorption into  a  different  organization. 
The  greater  poiver  of  alienating  or 
extingiiishing  all  its  frarjchises,  includ- 
ing its  onm  being  and  existejice,  con- 
tains the  lesser  potver  of  alienating  its 
road  and  the  franchises  irtcident  thereto 
and  necessary  to  its  operation," 

On  the  other  hand,  in  the  case  of 
Tippecanoe  County  v.  J^afayette,  etc. 
R.  Co.,  50  Ind.  110  (1875),  the  Su- 
preme Court  of  Indiana  said:  "That 
act  is  'to  authorize  railroad  com- 
panies to  consolitiate  their  stock  with 
the  .stock  of  other  railroad  companies 
in  this  or  in  an  adjoining  State,  and 
to  connect  their  roads  with  the  roads 
of  said  companies.'  The  title  no- 
where mentions  a  lease  or  a  sale. 
Indeed,   the   words   to   connect    their 

51 


§29 


INTERCORPORATE    RELATIONS 


[part  I 


the  proposition  was  adopted  in  reference  to  an  Illinois  statute, 
that  power  to  purchase,  in  the  form  there  granted,  gave  power 
to  consolidate.  "  While  the  statute  denominates  the  trans- 
action a  purchase,  the  thing  authorized  to  be  done,  and  what 
was  done  in  the  case,  was  in  fact  a  consoUdation."  * 

A  statute  providing  that  any  two  or  more  corporations 
organized  under  the  laws  of  the  State  may  consolidate  author- 
izes the  consolidation  of  a  college  and  a  university.  And  if  the 
method  of  consolidation  is  indicated  by  the  act  it  is  immaterial 
that  its  provisions  are  more  particularly  adapted  to  corpora- 
tions having  capital  stock.^ 

§  29.  Construction  of  Statutes  authorizing  Consolidation  of 
Railroads  —  Connecting  or  Continuous  Lines.  —  As  already 
shown  ^  the  consolidation  statutes  of  a  majority  of  the  States 
provide  that  railroad  companies  may  consolidate  with  other 
corporations   owning   railroads   which   form   a   continuous   or 


roads  with  the  roads  of  other  com- 
panies, would  seem  to  exclude  such  a 
concUi.sioQ.  To  connect  one  road 
■tNith  another  does  not  fairly  mean  to 
lease  or  sell  it  to  another."  See  also 
East  Line,  etc.  R.  Co.  v.  State  75 
Tex.  4.34  (1889),  (12  S.  W.  Rep.  690). 

•  Chicago,  etc.  R.  Co.  i\  Ashling, 
56  111.  App.  327  (1894)  ;  Continental 
Trust  Co.  V.  Toledo,  etc.  R.  Co.,  82 
Fed.  642  (1897). 

2  Central  University  i\  Walter 
(Ky.  1906),  90  S.  W.  Rep.  1066: 
"When  the  State,  by  the  general  law 
enacted  in  1903,  provided  for  the 
consolidation  of  corporations  in  this 
State,  the  statute  became,  as  it  were, 
a  part  of  the  charter  of  the  Central 
University,  as  if  written  therein 
originally.  We  do  not  mean  to  go 
further  here  than  to  decide  the  pre- 
cise ciuestion  presented,  which  is  the 
power  of  the  corporation  to  consoli- 
date with  another  corporation  having 
the  same  end  to  accomplish  and  using 
substantially  the  same  means  to 
accomplish  it.  So  long  as  the  con- 
solidated corporation  undertook  to 
do    the    thing    originally    undertaken 

52 


bj'  its  constituents,  we  hold  that  the 
purpose  of  the  original  incorporators 
and  of  those  whose  means  set  the 
thing  on  foot  was  not  being  diverted. 
The  only  matter  altered  was  the 
means  by  which  it  was  to  be  accom- 
plished. The  statute  pro  ^•ides  :  'Any 
two  or  more  corporations  organized 
under  tliis  chapter  or  under  the  law 
of  this  state,  may  consolidate  into  a 
single  corporation.'  This  power  of 
consolidation  is  conferred  in  amplest 
terms.  It  is  not  confined  to  any 
class  of  corporations.  .  .  .  While 
parts  of  the  section  may  be  inap- 
plicable, as  where  consent  of  a  certain 
per  cent  of  the  stockholders  is  to  be 
obtained  where  there  are  no  stock- 
holders, still  the  section  clearlj'  dis- 
closes that  the  course  to  be  pursued 
is,  after  the  assent  of  the  respective 
corporations  is  obtained,  that  the 
articles  of  consolidation  shall  be 
executed  bj'  the  directors  or  govern- 
ing bodies  of  the  corporations  re- 
spectivel}^" 

*  Ante,  §  22  :  "  What  Railroads  may 
consolidate  —  Statutory  Protisions." 


CHAP.    Il]         LEGISLATIVE    AUTHORITY    FOR    CONSOLIDATION 


§  29 


connecting  line  with  their  own,  and  the  effect  of  such  pro- 
visions is,  manifestly,  to  limit  the  right  of  consolidation  to 
that  class  of  railroads.  Accordingly,  to  bring  railroad  cor- 
porations within  the  provisions  of  such  statutes  it  must  be 
shown  that  there  is  such  a  physical  connection  between  their 
roads  as  to  permit  the  cars  of  one  road  to  pass  to  the  other, 
uninterruptedly,  without  the  transshipment  of  passengers  or 
freight.^ 

It  is  sufficient,  however,  that  the  connected  roads  form  a 
continuous  line,  and  it  is  not  necessary  that  the  road  of  one 
corporation  should  be  an  extension  from  either  terminus  of- 
the  other.- 

Whether  the  required  physical  connection  may  be  formed 
by  means  of  leased  lines  has  been  the  subject  of  extensive 
judicial  consideration.  The  weight  of  authority  supports  the- 
view  that  consolidation,  under  the  statutes  referred  to,  can 
take  place  only  when  the  railroads  owned  by  the  corporations 
proposing  to  consoUdate  form  continuous  lines.^     In  coiLstru- 


'  Central  R.  Co.  v.  Macon,  43  Ga. 
64G  (1871);  State  v.  Vanderbilt,  .37 
Ohio  St.  590  (1889);  State  v.  Atchi- 
son, etc.  R.  Co.,  24  Neb.  143  (1888), 
(38  N.  W.  Rep.  43,  8  Am.  St.  Rep. 
164)  (lease). 

Under  tlie  Ohio  statute  it  lias  been 
held  that  two  non-parallel  railroads 
may  be  deemed  to  "form  a  continu- 
ous line"  when  their  tracks  are  con- 
nected, not  directly  but  by  tho.se  of 
a  "union"  terminal  company.  Riirke 
V.  Cleveland,  etc.  R.  Co.,  22  Wkly. 
Law  Bull.  (Ohio)  11  (1889). 

Uniler  the  New  York  statute 
authorizing  the  consolidation  of  rail- 
roads forming  a  continuous  line  with 
each  other  or  "by  means  of  any  inter- 
vening railroad  bridge  or  ferry"  two 
railroads  connected  by  a  railroad 
bridge  owned  by  another  corporation 
may  be  consolidated.  "The  statute 
contained  no  requirement  that  sucli 
intervening  railroad  bridge  or  ferry 
should  be  owned  or  operated  by 
either  of  the  consolidating  companies 
and    none    such     can    be    implied." 


New  York  Central,  etc.  R.  Co.  v. 
City  of  Yonkers,  103  N.  Y.  Supp.  252, 
(1907,  N.  Y.  Supreme  Court). 

^  Hancock  v.  Louisville,  etc.  R.  Co., 
145  U.  S.  409  (1892),  (12  Sup.  Ct.  Rep. 
969).  See  also  Wallace  v.  Long 
Island  R.  Co.,  12  Hun  (N.  Y.)  46a 
(1S77). 

3  State  V.  Vanderbilt,  37  Ohio  St. 
590  (1882).  Sec  also  East  Line,  etc. 
R.  Co.  V.  State,  75  Tex..  4.34  (1889), 
(12  S.  W.  Rep.  690) ;  State  v.  Atchi- 
son, etc.  R.  Co.,  24  N<>)).  143  (1888), 
(.38  N.  W.  Rep.  43,  8  Am.  St.  Rep. 
164)  (lease) ;  Smith  i\  Reading  City 
Pa.«s.  R.  Co.,  13  Pa.  Co.  Ct.  Rep.  49 
(1893);  Hampe  v.  Mt.  Oliver  L  R. 
Co.,  24  Pitts.  Leg.  J.  (n.h)  330  (1894) 
(lease). 

Contra,  Black  v.  Dcl.aware,  etc.  R. 
Co.,  22  N.  J.  Eq.  130(1871),  where  the 
Chancellor  held  tliat  witere  an  act 
authorized  a  railro.id  <  ompany  to 
lease  to  or  consolitlate  with  any  other 
corjioration  whose  workst  shoulil  form 
continuous  or  connecting  lines  with 
its  own,  a  lea.se  was  avithoii/ed  to  a 

53 


§29 


INTERCORPORATE    RELATIONS 


[PART    I 


ing  a  statute  authorizing  coasolidation  "  when  the  lines  of 
road  of  any  raih'oad  companies  .  .  .  admit  the  passage  of 
burden  or  passenger  cars  over  any  two  or  more  of  such  roads 
continuously,  without  break  or  interruption,"  the  Supreme 
Court  of  Ohio  in  State  v.  Vanderhilt^  said:  "It  is  plain  that 
the  connection  is  formed  and  only  exists  by  the  Unes  of  the 
lessors,  and  that  as  to  the  lessee  companies  there  is  no  con- 
nection. .  .  .  Plainly,  as  it  seems  to  us,  there  is  no  coasolida- 
tion of  the  lessor  companies;  and  it  is  equally  clear  that  the 
right  to  consolidate,  based  on  the  consolidating  company's 
ownership  of  the  leased  roads,  is  wholly  untenable." 

Statutes  authorizing  the  consolidation  of  connecting  lines 
do  not  establish  exceptions  to  statutory  provisions  agaiast  the 
consolidation  of  parallel  and  competing  railroads.  The  lines 
of  two  railroad  companies  which  are,  in  their  general  features, 
parallel  and  competing  cannot  be  connected  for  the  carriage 


railroad  company  whose  lines  were 
connected  by  an  intervening  road. 
In  so  holding,  the  Chancellor  said 
that  the  works  of  the  United  Com- 
panies formed  both  connected  and 
continuous  lines  with  the  works  of 
the  Pennsylvania  Railroad  Company ; 
that  two  railroads  form  a  continuous 
line  when  their  tracks  and  rails  join, 
so  that  a  train  may  pass  from  the 
rails  and  tracks  of  one  directly  upon 
those  of  the  other  —  they  form  a 
connected  line  when  this  is  done  by 
means  of  an  intervening  or  connecting 
road.  This  doctrine  was,  however, 
doubted  by  the  Supreme  Court  of 
New  Jersey  when  the  case  came  to 
that  Court  (24  N.  J.  Eq.  455  (1873))  : 
"If  it  is  held  that  the  lease  may  be 
made  with  any  road  in  or  out  of  the 
State,  with .  which  the  united  com- 
panies are  connected  by  means  of  an 
intervening  road  or  canal,  they  may 
unite  with  almost  any  road  in  the 
whole  country,  and  it  may  be  wdth 
roads  abroad  if  they  were  connected 
by  means  of  steamships.  There 
should  be  a  very  clear  expression  of 
power  so  extensive  and  extraordinary 
as  this. "    .  < 

54 


See  also  Hervey  v.  Illinois  Midland 
Co.,  28  Fed.  172  (1884)  (case  of  sale), 
where  the  Court  said:  "It  is  quite 
true  that  the  Peoria,  Atlanta  &  Deca- 
tur Railroad  Company  was  not  au- 
thorized to  purchase  any  railroad  in 
the  State ;  but  I  incline  to  think  that 
its  charter  authorized  the  purchase  of 
any  road  which,  from  its  location, 
would  be  fairly  deemed  a  continua- 
tion of  the  main  line  of  the  purchas- 
ing company.  The  effect  of  the 
agreement  between  the  three  com- 
panies was  to  establish  a  continuous 
line  from  Peoria,  via  Decatur  to 
Terre  Haute.  That  small  parts  of 
that  line  were  and  are  owned  by  other 
companies,  does  not  affect  the  sub- 
stance of  the  transaction  wherebj^, 
with  the  knowledge  and  approval  of 
the  great  body  of  the  bondholders 
and  stockholders  of  the  three  roads, 
they  were  operated  as  one  line,  under 
a  common  management."  Also  Cleve- 
land, etc.  R.  Co.  V.  Erie,  27  Pa.  St. 
380  (1856). 

1  State  V.  Vanderbilt,  37  Ohio  St. 
590  (1882). 


CHAP.    Il]         LEGISLATIVE    AUTHORITY    FOR    CONSOLIDATION 


29 


of  freight  and  passengers  over  both  "  continuously  ";  and  hence 
such  companies  cannot  become  consoUdated  into  one  corpo- 
ration under  the  Ohio  statute  above  referred  to.' 

Under  another  Ohio  statute  authorizing  the  consoUdation  of 
domestic  railroad  corporations  owning  roads  running  to  the 
boundary  line  of  the  State,  with  similar  corporations  of  an 
adjoining  State,  owning  roads  forming  a  continuous  line 
therewith,  it  was  held  that  an  Ohio,  an  Indiana,  and  an  Illi- 
nois corporation  might  coasolidate  so  as  to  form  a  de  facto 
consoUdated  corporation  upon  the  principle  that  the  last  two 
companies  might  have  been  consolidated  and  have  become 
an  Indiana  corporation  —  a  corporation  of  an  adjoining  State 
to  that  of  the  Ohio  company  —  with  which  it  might  have  con- 
solidated.^ 


»  state  17.  Vanderbilt,  37  Ohio  St. 
590  (1882)  :  "The  Cleveland,  Cincin- 
nati and  Indianapolis  Ry.  and  the 
Cincinnati,  Hamilton  and  Dayton 
R.  R.,  with  their  leased  lines,  con- 
stitute two  great  arteries  of  trade, 
both  commencing  on  the  Ohio  River 
at  Cincinnati,  meeting  at  Dayton, 
and  extending  thence  to  Lake  Erie, 
one  terminating  at  Cleveland  and 
the  other  at  Toledo.  The  Attorney- 
General  says,  and  the  record  supports 
the  statement,  that  these  roads  are 
'for  sixty  miles  Ij'ing  parallel  and 
near  to  each  other.'  That  they  are, 
indeed,  in  the  largest  sense,  parallel 
and  competing  roads,  seems  to  be 
beyond  dispute,  and  it  ma}'  be  fairl}' 
inferred  from  the  record  that  a  lead- 
ing object  in  making  the  consolidation 
was  to  destroy  that  competition. 
That  being  true,  the  lines  of  these 
roads  are  not,  in  my  judgment,  'so 
constructed  as  to  admit  the  passage 
of  burden  or  passenger  cars  over  two 
or  more  of  such  roads  continuousl}-, ' 
within  the  proper  meaning  of  .section 
3379.  That  the  mere  phj'sical  abilitj' 
to  pass  cars  from  one  road  to  the 
other  satisfies  the  statute,  is  a  con- 
struction which  is  wholly  inadmissible, 
for  the  pro^^sion  requiring  such  con- 


nection would  be  without  meaning. 
In  imposing  that  restriction  upon  con- 
solidation, the  legislature  intended, 
not  merely  that  the  phj'.sical  fact 
should  exist,  but  that  such  consolida- 
tion should  only  be  made  for  the  very 
passing  of  freight  and  passengers  over 
both  lines,  or  some  material  parts 
thereof,  not  necessarily  in  a  direct  or 
straight  line,  but  continuously." 

See  also  Hafcr  v.  Cincinnati,  etc.  R. 
Co.,  29  Wkly.  Law  Bull.  (Ohio)  68 
1896),  4  S.  &  C.  P.  (Ohio)  487. 

2  Continental  Trust  Co.  v.  Toledo, 
etc.  R.  Co.,  82  Fed.  653  (1897).  The 
Court  said:  "It  cannot  be  denied, 
however,  that  under  the  Illinois 
statute,  the  Illinois  and  Indiana  cor- 
porations might  have  united,  and  that 
then  the  consolitlated  corporation, 
being  a  corporation  of  Indiana, 
could  be  consolidated  with  the  Ohio 
corporation  ;  and  we  should  have  had 
just  what  the  corporation  under  con- 
sideration purports  to  be,  to  wit  :  a 
legally  consolidated  corp)oration  of 
Ohio,  Indiana,  and  Illinois.  It  is 
obvious  (hat,  if  such  a  corporation 
could  have  been  legally  forme<l,  the 
mere  mistake  in  the  mode  by  which 
the  union  was  brought  about  (if  it 
was  a  mistake,  which  I  do  not  decide) 

55 


§   30  INTERCORPORATE    RELATIONS  [PART    I 

It  is  not  necessary  in  order  to  bring  railroad  companies 
within  the  provisions  of  statutes  authorizing  the  consolidation 
of  continuous  or  connecting  lines  that  their  lines  should  be 
entirely  constructed  if,  when  constructed,  they  will  form  con- 
tinuous or  connecting  lines.^ 

The  legal  principles  governing,  and  cases  illustrating,  the 
consolidation  of  connecting  lines  are  equally  applicable  to  the 
purchase  or  lease  of  such  lines. 

§  30.  Construction  of  Statutes  authorizing  Consolidation  of 
Corporations  other  than  Railroads.  —  Statutes  authorizing  the 
consolidation  of  mining,  manufacturing  and  business  corpora- 
tions, generally,  have  already  been  briefly  reviewed.^  These 
statutes,  as  a  rule,  are  limited  in  their  apphcation  to  corporations 
engaged  in  business  of  a  similar  nature  and,  sometimes,  to  those 
carrying  on  business  in  the  same  locaUty.  Under  such  a  statute 
authorizing  the  consolidation  of  corporations  of  the  same 
nature  covering  the  same  territory  it  was  held  that  two 
water  companies  organized  for  the  purpose  of  supplying 
water  to  the  same  village  might  lawfully  consolidate.^ 

It  has  been  said,  however,  that  a  consolidation  act  permit- 
ting the  amalgamation  of  "two  business  or  manufacturing 
companies"  whose  "objects  and  business  are  of  the  same 
nature"  does  not  apply  to  or  include  corporations  endowed 
with    peculiar    and    exclusive    franchises    and    privileges.*     It 

does    not    prevent    the    corporation  ^  Ante,   §  23:    "WJiat  Corporations 

from    being    a    de  facto    corporation,  other  than  Railroads  may  consolidate 

under  the  principles  stated  at  length  — Statutory  Provisions." 

above."  ^  Cameron  v.  New  York,  etc.  Water 

1  LiAdngston  County  v.  Portsmouth  Co.,  62   Hun  (N.  Y.)  269   (1891),  af- 

FirstNat.  Bank,  128  U.  S.  102  (1888),  firined  in    133  N.  Y.  336   (1892),    (31 

(9  Sup.  Ct.  Rep.  18)  :    "The  statute  N.  E.  Rep.  104). 

applied  to  the  consolidation,  although  For  construction  of  Pennsylvania 
no  road  had  yet  been  constructed."  act  of  1901   authorizing  the  merging 
See  also  Washburn  v.  Ca.ss  County,  3  of  certain  corporations,  and  corporate 
Dill.    (U.S.)   251   (1875).     Compare,  purchases  of  stock,  see  Motter  v.  Ken- 
however,   Clarke   v.   Omaha,    etc.    R.  nett  Tp.  Electric  Co.  212  Pa.  St.  613 
Co.,  4  Neb.  459(1876],  where  a  general  (1905),  (62  Atl.  Rep.  104). 
corporation   law   of   Nebraska   which  *  New    Orleans    Gas    Light    Co.    v. 
gave  no  power  to  consolidate  "until  Louisiana  Light,  etc.  Co.,  11  Fed.  277 
the  roads  shall  have  been  constructed "  (1882) . 
was    under    consideration.     See    also 
Venner  v.  Atchison,  etc.   R.  Co.,  28 
Fed.  585  (  !S86). 

56 


CHAP.    Il]         LEGISLATIVE   AUTHORITY    FOR    CONSOLIDATION 


30 


was  also  held  that  the  same  statute  did  not  permit  the  con- 
solidation of  two  companies  the  Ufe  of  one  of  which  was  to 
terminate  at  the  commencement  of  the  Ufe  of  the  other.^  The 
business  of  a  gas  company  and  that  of  an  electric  light  com- 
pany are  of  the  same  general  character  within  the  meaning  of 
a  statute  authorizing  the  consolidation  of  corporations  of  the 
same  or  a  similar  nature.^  An  electric  light  company  is  a 
"manufacturing  corporation"  within  the  meaning  of  an  act 
providing  that  "two  or  more  mining,  quarrying  or  manufac- 
turing corporations  may  unite  and  amalgamate."  ^ 

A  consolidation  effected  under  a  statute  authorizing  the 
amalgamation  of  "any  two  corporations  .  .  .  whose  objects 
and  business  are,  in  general,  of  the  same  nature,"  is  not  rendered 
invalid  by  the  fact  that  one  of  the  consolidating  corporations 
was  itself  the  result  of  a  previous  consolidation.' 


'  New  Orleans  Gas  laght  Co.  v. 
Louisiana  Light,  etc.  Co.,  11  Fed.  277 
(1882). 

2  People  V.  Rice,  138  N.  Y.  1.51 
(1893),  (33  N.  E.  Rep.  846). 

A  corporation  organized  under 
laws  for  the  incorporation  of  benevo- 
lent, charitable,  scientific  and  mis- 
sionary, but  not  religious,  societies  is 
not  a  corporation  of  the  same  nature 
as  a  religious  corporation,  nor  of  a 
similar  nature,  and  cannot  consolidate 
with  such  corporation  under  the  New 
York  statute  referred  to  in  the  text. 
Selkir  V.  Klein,  100  N.  Y.  Supp.  449 
(1906),  (50  Misc.  Rep.  194). 


'  Beggs  V.  Ed.  El.  Light,  etc.  Co., 
96  Ala.  295  (1891),  (11  So.  Rep.  381; 
38  Am.  St .  Rep.  94) .  An  electric  light 
company  has  also  been  held  to  be  a 
"manufacturing"  corporation  within 
the  meaning  of  a  taxation  statute. 
People  V.  Wemple,  129  N.  Y.  543 
(1892),  (29  N.  E.  Rep.  808;  14  L.  R. 
A.  708).  Precisely  the  opposite  was, 
however,  held  in  Commonwealth  v. 
Northern  El.  Light,  etc.  Co.,  145  Pa. 
St.  105  (1891),  (22  Atl.  Rep.  839). 

*  Jones  V.  Missouri  Edison  Electric 
Co.,  135  Fed.  153  (1905),  reversed  on 
other  points  144  Fed.  765  (1906). 


57 


§   31  INTERCORPORATE    RELATIONS  [PART    I 


CHAPTER   III 

CONSTITUTIONAL    AND    STATUTORY    RESTRAINTS    UPON    CONSOLI- 
DATION 

§  31.    Public  Policy  regarding  Consolidation  of  Competing  Railroads. 

§  32.  Constitutional  and  Statutory  Pro\'isions  against  Con.solidation  of  Com- 
peting Railroads. 

§  33.    Construction  of  Prohibitions  —  (A)  Meaning  of  Term  "Consolidation." 

§  34.  Construction  of  Prohibitions  —  (B)  Whether  a  Lease  amounts  to  Con- 
solidation. 

§  35.  Construction  of  Prohibitions  —  (C)  Arrangements  amounting  to  Con- 
solidation. 

§  36.  Construction  of  Prohibitions  —  (D)  Control  of  Competing  Railroads  by 
Holding  Corporation. 

§  37.  Construction  of  Prohibitions  —  (E)  What  are  Competing  or  Parallel 
Railroads. 

§  38.  Prohibition  of  Consolidation  of  Competing  Railroads  not  a  Regula- 
tion of  Interstate  Commerce. 

§  39.  Constitutional  Prohibitions  against  Consolidation  of  Competing  Car- 
rier Corporations  other  than  Railroads. 

§  40.    Enforcement  of  Provisions  against  Consolidation  of  Competing  Lines. 

§  31.  Public  Policy  regarding  Consolidation  of  Competing 
Railroads.  —  It  may  be  a  serious  economic  question  whether 
the  consoUdation  of  competing  railroad  companies  works,  in 
the  end,  injury  to  the  pubUc.  The  increased  capital  may 
result  in  bringing  the  roads  to  a  higher  standing  of  efficacy; 
the  resulting  economies  in  operation  may  permit  the  lowering 
of  rates;  the  possibility  of  disastrous  rate  wars  is  eliminated. 
On  the  other  hand,  consolidation  may  produce  an  increase  in 
rates,  public  faciUties  are  placed  in  the  hands  of  a  single 
corporation  relieved  from  the  obligations  imposed  by  compe- 
tition, and  rate  wars  do  not  always  result  disastrously  to  the 
public. 

Whatever  may  be  the  merits  of  the  question,  however,  it  is 
not  an  open  one  from  the  popular  point  of  view.*     Public 

'  Pearsall  v.  Great  Northern  R.  Co.,  ally  resulted  in  a  detriment  to  the  pub- 

161  U.S.  646,  676(1896),  (16  Sup.  Ct.  lie,  is  beside  the  question.     Whether 

Rep.  705)  :    "Whether  the  consolida-  it  has  that  effect  or  not,  it  certainly 

tion  of  competing  lines  will  necessa-  puts  it  in  the  power  of  the  consoli- 

ril}'  result  in  an  increase  of  rates,  or  dated    corporation    to    give    it    that 

whether  such  consolidation  has  gener-  effect ;    in  short,    puts  the   public   at 

58 


CHAP.    Ill] 


RESTRAINTS    UPON    CONSOLIDATION 


§31 


policy,  as  has  been  shown,  favors  the  eoasolidation  of  con- 
necting railroads  for  the  purpose  of  establishing  the  through 
line,  but  is  opposed  to  the  consolidation  of  railroads  which  are 
naturally  competitors  for  the  business  of  the  same  territory.^ 


the  mercy  of  the  corporation.  There 
is  and  ha.s  been,  for  the  past  three 
hundred  years,  both  in  England  and 
in  this  countrj^  a  popular  prejudice 
against  monopolies  in  general,  which 
has  found  expression  iu  innumerable 
acts  of  legislation.  We  cannot  say 
that  such  prejudice  is  not  well 
founded.  It  is  a  matter  upon  which 
the  legislature  is  entitled  to  pass 
judgment.  At  least  there  is  sufficient 
doubt  of  the  propriety  of  such  mo- 
nopolies to  authorize  the  legislature, 
which  may  be  presumed  to  represent 
the  views  of  the  public,  to  saj-  that 
it  will  not  tolerate  them  unless  the 
)iower  to  establish  them  be  conferred 
by  clear  and  explicit  language. 
While,  in  particular  ca.ses,  two  rail- 
ways, by  consolidating  their  interests 
imder  a  single  management,  maj'  have 
been  able  to  so  far  reduce  the  expenses 
of  administration  as  to  give  their  cus- 
tomers the  benefit  of  a  lower  tariff,  the 
logical  effect  of  all  monopolies  is  an 
increase  of  price  of  the  thing  produced, 
whether  it  be  merchandise  or  trans- 
portation. Owing  to  the  gieater 
speed  and  cheapness  of  the  ser\ace 
performeil  by  them,  railways  become 
neces.sarily  monopolists  of  all  traffic 
along  their  lines,  but  the  general  .senti- 
ment of  the  public  declares  that  such 
monopolies  must  be  limited  to  the 
necessities  of  the  ca-se,  and  rebels 
against  an  attempt  of  one  road  to 
control  all  traffic  between  terminal 
points,  also  connected  by  a  compet- 
ing line.  There  are,  moreover, 
thought  to  be  other  dangers  to  the 
moral  sense  of  the  community,  inci- 
dent to  such  great  aggregation  of 
wealth  which,  though  indirect,  arc 
even  more  in-sidious  in  their  influence, 
and  such  as  have  awakened  feelings 


of  hostility  which  have  not  failed  to 
find  expression  in  legislative  acts." 

1  State  V.  Vaiiderbilt,  37  Ohio  St. 
590  (1882)  :  "The  poUcy  of  the  coun- 
try in  general,  indicated  in  constitu- 
tional and  statutory  provisions,  has 
long  been  opposed  to  the  consolida- 
tion of  roads  bearing  such  relation  to 
each  other  [competing  and  parallel], 
and  this  strengthens  the  belief  that 
these  companies  are  not  within  the 
section  in  question.  Consolidation 
for  the  transportation  of  freight  and 
passengers  continuously  is  a  tiling 
wliich  the  legislature  might  well  desire 
to  encourage,  as  it  may  be  advan- 
tageous alike  to  the  public  and  the 
companies ;  but  corporations  have 
power  only  as  granted  b}-  the  general 
assembly,  and  where  companies  situ- 
ated as  the.se  are,  being  parallel  and 
competing,  claim  that  authority  to 
consolidate  has  been  granted  to  them, 
they  must  be  able  to  point  to  words 
in  the  statute  which  admit  of  no  other 
reasonable  construction,  for  it  will  not 
be  a.ssumed  that  the  lawmaking 
power  has  authorized  the  creation 
of  a  monopoly  so  detrimental  to  the 
public  interests."  See  also  Wood- 
ruff V.  Erie  R.  Co.,  93  N.  Y.  615 
(1883);  State  v.  Atchison,  etc.  R. 
Co.,  24  Neb.  143  (1888),  (38  N.  W 
Rep.  43,  8  Am.  St.  Rep.  164) ;  Central 
R.,  etc.  Co.  V.  Collins,  40  Ga.  582 
(1869). 

Another  view  as  to  the  propriety 
of  such  legislation  was,  however,  ex- 
pressed by  Lord  Hatherley,  then  Vice 
Chancellor  Wood,  in  Hare  v.  Railway 
Co.,  2  Johns.  &  H.  SO  (1861):  "I 
see  nothing  in  the  alleged  injury  to 
the  public  arising  from  the  prevention 
of  competition.  .  .  .  It  is  a  mistaken 
notion   that   the   public   is   benefited 

59 


§   32  INTERCORPORATE    RELATIONS  [PART   I 

In  many  States  statutes  have  been  enacted  prohibiting  the 
consohdation  of  competing  or  parallel  lines,  and  in  others 
the  people  have  inserted  such  provisions  in  their  fundamental 
laws.  Other  States  indicate  the  same  policy  by  failing  to 
authorize  consolidation  at  all. 

Public  sentiment,  as  so  ciystallized  in  statutes  and  consti- 
tutional provisions,  is  not  of  recent  inception.  As  said  by 
Mr.  Justice  Brown  in  Louisville,  etc.  R.  Co.  v.  Kentucky:  ^ 
"  This  restriction  upon  the  unlimited  power  to  consolidate 
with  other  roads  is  not,  as  the  plaintiff  in  error  suggests,  called 
for  by  any  new  view  of  commercial  policy,  but  by  virtue  of 
a  settled  policy  which  has  obtained  in  Kentucky  since  1858, 
in  Minnesota  since  1874,  in  Ohio  since  1851,  in  New  Hampshire 
since  1867,  and  by  more  recent  enactments  in  some  dozen 
other  States  —  a  policy  which  has  not  only  found  place  in 
the  statute  law  of  such  States  as  apprehended  evil  effects  from 
such  consolidations,  but  has  been  declared  by  the  courts  to 
be  necessary  to  protect  the  public  from  the  establishment  of 
monopoHes.  Indeed  the  unanimity  with  which  the  States 
have  legislated  against  the  consolidation  of  competing  lines 
shows  that  it  is  not  the  result  of  local  prejudice,  but  of  a  gen- 
eral sentiment,  that  such  monopolies  are  reprehensible." 

§  32.  Constitutional  and  Statutory  Provisions  against  Con- 
solidation of  Competing  Railroads.  —  Public  policy  as  directed 
against  the  consolidation  of  competing  railroad  companies 
has  manifested  itself  in  the  constitutional  provisions  and 
statutes  printed  or  referred  to  in  the  footnote.^  These  con- 
by  putting  two  railway  companies  purchase  the  works  or  franchises  of, 
against  each  other  till  one  is  ruined,  or  in  any  way  control,  any  other 
the  result  being  at  last  to  raise  the  railroad  or  canal  corporation  owning 
fares  to  the  highest  possible  stand-  or  ha\'ing  under  its  control  a  parallel 
ard."  or    competing    Une,    nor    shall    any 

'  Louisville,  etc.  R.  Co.  v.  Ken-  officer  of  such  railroad  or  canal  cor- 
tueky,  161  U.  S.  698  (1896),  (16  Sup.  poration  act  as  an  officer  of  any 
Ct.  Rep.  714).  other   railroad    or   canal    corporation 

2  Arkansas.  Const.  Art  XVII.  §  4  :  owning  or  ha^-ing  control  of  a  parallel 
"No  railroad,  canal,  or  other  corpora-  or  competing  line;  and  the  question 
tion,  or  the  lessees,  purchasers,  or  whether  railroads  or  canals  are  par- 
managers  of  any  railroad,  canal,  or  allel  or  competing  Unes  shall,  when 
other  corporation,  shall  consolidate  demanded  bj'  the  party  complainant, 
the  stock,  property,  or  franchises  of  be  decided  by  a  jury  as  in  other  civil 
such    corporation    with,    or    lease    or        issues." 

60 


CHAP.    Ill] 


RESTRAINTS    UPON    CONSOLIDATION 


§32 


stitutional  provisions,  as  will  be  observed,  generally  embrace 
other  carrier  corporations  as  well  as  railroad  companies. 


Colorado.  Const.  XV.  §  5:  "No 
railroad  corporation,  or  the  lessees 
or  managers  tliereof,  shall  consolidate 
its  stock,  property,  or  franchises  with 
any  other  railroad  corporation  own- 
ing or  having  under  its  control  a 
parallel  or  competing  line." 

Georgia.  Const.  Art.  IV.  §  2, 
par.  4:  "The  General  Assembly  of 
this  State  shall  have  no  power  to 
authorize  any  corporation  to  buy 
shares  or  stock  in  any  other  corpora- 
tion in  this  State  or  elsewhere,  or  to 
make  any  contract  or  agreement 
whatever  with  any  such  corporation 
which  may  have  the  effect  to  defeat 
or  lessen  competition  in  their  respec- 
tive businesses,  or  to  encourage  mo- 
nopoly ;  and  all  such  contracts  and 
agreements  shall  be  illegal  and  void." 

Illinois.  Const.  Art.  XI.  §  11  : 
"No  railroad  corporation  shall  con- 
solidate its  stock,  property,  or  fran- 
chises with  any  other  railroad  cor- 
poration owning  a  parallel  or  com- 
peting line ;  and  in  no  case  shall  any 
consolidation  take  place,  except  upon 
public  notice  given  of  at  least  sixty 
days,  to  all  stockholders,  in  such 
manner  as  may  be  provided  by  law. 
A  majority  of  the  directors  of  any 
railroad  corporation,  now  incorpo- 
rated or  hereafter  to  be  incorporated 
by  tiie  laws  of  this  State,  shall  be 
citizens  a!id  residents  of  this  State." 
Kentucky.  Const.  §  201  :  "  No  rail- 
road, telegraph,  teleijhone,  bridg<>,  or 
common  carrier  company  shall  con- 
solidate its  capital  stock,  franchises, 
or  property,  or  pool  its  earnings,  in 
whole  or  in  part,  with  any  other  rail- 
road, telegraph,  telephone,  bridge, 
or  common  carrier  comj)any  owning 
a  i)arallel  or  competing  line  or  struc- 
ture, or  acquire  by  purchase,  lease,  or 
otherwise,  any  jjarallel  or  competing 
line  or  structure,  or  operate  the  same. " 
Michigan.      Const.   Art.   XI.\.    A, 


§  2:  "No  railroad  corporation  shall 
con.solidate  its  stock,  property,  or 
franchises  with  any  other  railroad 
corporation  owning  a  parallel  or 
competing  line ;  and  in  no  case  shall 
any  consolidation  take  place  except 
upon  public  notice  of  at  least  si.xty 
days  given  to  all  stockholders,  in 
such  manner  as  shall  be  pro\'ided 
by  law." 

Missouri.  Const.  Art.  XII.  §  17 : 
"No  railroad  or  other  corporation, 
or  the  lessees,  purchasers,  or  man- 
agers of  any  railroad  corporation, 
shall  consolidate  the  stock,  property, 
or  franchises  of  such  corporation  with, 
or  lease  or  purchase  the  works  or 
franchises  of,  or  in  any  way  control, 
any  railroad  corporation  owning  or 
ha\'ing  under  its  control  a  parallel 
or  competing  line ;  nor  shall  anj^ 
officer  of  such  railroad  corporation 
act  as  an  officer  of  any  other  railroad 
corporation  owning  or  having  the 
control  of  a  parallel  or  competing  line. 
The  question  whether  railroads  are 
parallel  or  competing  lines  sliall, 
when  demanded,  be  decided  by  a 
jury,   as  in   other  civil  issues." 

Montana.  Const.  Art.  XV.  §  6: 
"No  railroad  corporation,  express 
or  other  transportation  company, 
or  the  lessees  or  managers  thereof, 
shall  consolidate  its  stock,  proj^erty, 
or  franchises  with  any  other  railroad 
corporation,  express  or  other  trans- 
portation company,  owning  or  ha\nng 
imder  its  control  a  parallel  or  com- 
peting line ;  neither  shall  it  in  any 
manner  unite  its  business  or  earnings 
with  the  busine.ss  or  earnings  of  any 
other  railroad  corporation  ;  nor  shall 
any  officer  of  such  railroad,  express 
or  other  transportation  company,  act 
as  an  officer  of  any  other  railroad, 
express  or  other  transportation  com- 
pany, owning  or  having  control  of  a 
parallel  or  comjjeting  line." 

61 


32 


INTERCORPORATE    RELATIONS 


[part  I 


In  Colorado,  Illinois,  Kentucky,  Michigan,  Missouri,  Mon- 
tana, Nebraska,  North  Dakota,  Pennsylvania,  South  Carolina, 


Nebraska.  Const.  Art.  XI.  §  3 : 
"No  railroad  corporation  or  tele- 
graph company  shall  consolidate  its 
stock,  property,  franchises,  or  earn- 
ings, in  whole  or  in  part,  with  any 
other  railroad  corporation  or  tele- 
graph company  owning  a  parallel 
or  competing  line ;  and  in  no  case 
shall  any  consolidation  take  place, 
except  upon  public  notice  of  at  least 
sixty  days  to  all  stockholders,  in  such 
manner  as  may  be  provided  by  law. " 

North  Dakota.  Const.  Art.  VII. 
§  141  :  "No  railroad  corporation  shall 
consolidate  its  stock,  property,  or 
franchises  with  any  other  railroad 
corporation  owning  a  parallel  or  com- 
peting line ;  and  in  no  case  shall  any 
consolidation  take  place  except  upon 
public  notice  given  at  least  sixty 
days  to  all  stockholders,  in  such  man- 
ner as  may  be  pro\'ided  by  law.  Any 
attempt  to  evade  the  provisions  of 
this  section  by  any  railroad  corpora- 
tion, by  lease  or  otherwise,  shall  work 
a  forfeiture  of  its  charter." 

Pennsylvania.  Const.  Art.  XVII. 
§  4:  "No  railroad,  canal,  or  other 
corporation,  or  the  lessees,  pur- 
chasers, or  managers  of  any  railroad 
or  canal  corporation,  shall  consoli- 
date the  stock,  propert}^  or  franchises 
of  such  corporation  with,  or  lease 
or  purchase  the  works  or  franchises 
of,  or  in  any  way  control  any  other 
railroad  or  canal  corporation  owning 
or  having  under  its  control  a  parallel 
or  competing  Une ;  nor  shall  any 
officer  of  such  railroad  or  canal  cor- 
poration act  as  an  officer  of  any  other 
railroad  or  canal  corporation  owning 
or  ha\'ing  the  control  of  a  parallel  or 
competing  Une ;  and  the  que.stion 
whether  railroads  or  canals  are  par- 
allel or  competing  lines  shall,  when 
demanded  by  the  partj^  complainant, 
be  decided  by  a  jury  as  in  other  ci^^l 
issues." 

62 


South  Carolina.  Const.  Art.  IX. 
§  7:  "No  railroad  or  other  transpor- 
tation company,  and  no  telegraph 
or  other  transmitting  company,  or  the 
lessees,  purchasers,  or  managers  of 
such  corporation,  shall  consolidate 
the  stock,  property,  or  franchises 
of  such  corporation  with,  or  lease  or 
purchase  the  works  or  franchises  of, 
or  in  any  way  control  any  other  rail- 
road or  other  transportation  com- 
pany owning  or  ha^^ng  under  its 
control  a  parallel  or  competing  line ; 
and  the  question  whether  railroads 
or  other  transportation,  telegraph, 
or  other  transmitting  companies  are 
parallel  or  competing  lines  shall, 
when  demanded  by  the  party  com- 
plainant, be  decided  by  a  jury  as 
in   other   civil   causes." 

South  Dakota.  Const.  Art.  XVII. 
§  14:  "No  railroad  corporation  shall 
consolidate  its  stock,  property,  or 
francliises  with  any  other  railroatl 
corporation  owning  a  parallel  or  com- 
peting line ;  and  in  no  case  shall  any 
consolidation  take  place  except  upon 
public  notice  given  out,  at  least  sixty 
days,  to  all  stockholders  in  such  man- 
ner as  may  be  provided  by  law.  Any 
attempt  to  evade  the  provisions  of 
this  section  by  any  railroad  corpora- 
tion, by  lease  or  otherwise,  shall  work 
a  forfeiture  of  its  charter." 

Texas.  Const.  Art.  X.  §  5  :  "No 
railroad  or  other  corporation,  or 
the  lessees,  purchasers,  or  managers 
of  any  railroad  corporation,  shall 
consolidate  the  stock,  property,  or 
franchises  of  such  corporation  wth, 
or  lease  or  purchase  the  works  or 
francliises  of,  or  in  any  way  control 
any  railroad  corporation  owning  or 
having  under  its  control  a  parallel 
or  competing  line ;  nor  shall  any 
officer  of  such  railroad  corporation  act 
as  an  officer  of  any  other  railroad 
corporation    owning    or    having    the 


CHAP.    Ill] 


RESTRAINTS    UPON    CONSOLIDATION 


§    32 


South  Dakota,  Texas,  and  West  Virginia,  the  constitutional 
inhibition  is  against  the  consohdation  of  "  competing  or  paral- 
lel Hnes."  In  Utah  and  Washington  "  competing  "  lines  only 
are  referred  to. 

Consolidation  with  a  corporation  "  owning "  a  competing 
line  is  prohibited  in  Illinois,  Kentucky,  Michigan,  Nebraska, 
North  Dakota,  South  Dakota,  Utah,  Washington,  and  West 
Virginia,  while  in  the  constitutions  of  Missouri,  Montana, 
Pennsylvania,  South  Carolina,  and  Texas  the  similar  provision 
reads,  "  owning  or  having  under  its  control  "  such  line. 

In  Georgia  and  Wyoming  all  contracts  to  prevent  competi- 
tion are  prohibited  and  Texas  does  not  permit  consolidation 
with  foreign  railroad  corporations  at  all. 


control    of   a    parallel    or    competing 
line./' 

Art.  X.  §  6.  "No  railroad  com- 
pany organized  under  tlie  laws  of  this 
State  shall  consolidate  by  private 
or  judicial  sale  or  otherwise  with  any 
railroad  company  organized  under 
the  laws  of  any  otlier  State  or  of  the 
United  States." 

Utah.    Const.  Art.  XII.  §  1.3:  "No 
railroad  corporation  shall  consolidate 
its  stock,  property,  or  franchises  with 
any  other  railroad  corporation  own- « 
ing  a  competing  line." 

Washington.  Const.  Art.  XII.  §  16  : 
"No  railroad  corporation  shall  con- 
solidate its  stock,  property,  or  fran- 
chises with  any  other  railroad  cor- 
poration  owning  a   competing  line." 

West  Virginia.  Const.  Art.  XI. 
§  11  :  "No  railroad  corporation  shall 
consolidate  its  stock,  property,  or 
franchises  with  any  otlicr  railroad 
owning  a  parallel  or  competing  line, 
or  obtain  the  po.ssession  or  control 
of  such  parallel  or  comjX'ting  line,  by 
lease  or  other  contract,  without  the 
permission  of  the  legi.slature." 

Wyoming.  Const.  Art.  X.  §  8: 
"There  sliall  be  no  con.solidation  or 
combination  of  corporations  of  any 
kind  -whatever  to  prevent  competi- 
tion, to  control  or  influence  produc- 


tions or  prices  thereof,  or  in  any 
manner  to  interfere  with  the  public 
good  or  general  welfare." 

In  contrailistinction  to  the  phrase 
"continuous  or  connecting  lines" 
con.solitlation  statutes,  generally,  em- 
ploy the  phrase  "parallel  or  com- 
peting lines"  —  authorizing  the  con- 
solidation of  the  one  and  prohibit- 
ing the  consohdation  of  the  other. 
ProNasions  prohibiting  the  con.solida- 
tion  of  parallel  or  competing  rail- 
roads appear  in  the  statutes  of  the 
following  States,  some  of  which  also, 
as  will  be  ob.served,  have  similar  con- 
stitutional pro\nsions :  Arkansas, 
Arizona,  Connecticut,  Florida,  Idaho, 
Maryland,  Minnesota,  Mississippi, 
Missouri,  Montana,  New  York,  South 
Carolina,  Tennessee,  Utah,  Wash- 
ington, West  Virginia,  Wisconsin. 
For  references  to  con.solidation  stat- 
iites  .see  note,  ante,  §  22:  "What 
Railroads  may  consolidate  —  Statu- 
tory Provisions. " 

In  Florida  (Acts  1887,  p.  117), 
and  New  York  (R.  R.  Laws,  §  80, 
.see  ante,  §  22,  note),  the  railroad  com- 
missioners may  authorize  the  con- 
solidation of  competing  lines.  For 
Minnesota  statutes  see  post,  §  35, 
note. 

63 


§    33  INTERCORPORATE     RELATIONS  [pART    t 

The  constitutions  of  Arkansas,  Missouri,  Montana,  and 
Pennsylvania  prohibit  the  officers  of  railroad  companies  from 
becoming  officers  in  competing  corporations.  In  Arkansas, 
Missouri,  and  Pennsylvania  the  question  whether  railroads 
are  parallel  or  competing  lines,  is  to  be  determined  ])y  the 
jury  as  in  other  civil  issues. 

The  constitutions  of  North  Dakota  and  South  Dakota  pro- 
vide that  any  attempt  by  any  railroad  corporation  to  evade 
their  provisions  against  consolidation  shall  work  a  forfeiture 
of  its  charter. 

The  West  Virginia  constitution  prohibits  the  consolidation 
of  competing  or  parallel  lines  "  without  the  permission  of  the 
legislature."  As  no  consolidation  is  possible  without  legisla- 
tive sanction  this  provision  is,  and  was  doubtless  intended 
to  be,  wholly  ineffective. 

Statutory  provisions  against  the  consolidation  of  competing 
railroads  have  no  ex  post  facto  application.^ 

§  33.  Construction  of  Prohibitions  —  (A)  Meaning  of  Term 
*'  Consolidation."  —  Constitutional  and  statutory  provisions 
against  the  consolidation  of  competing  lines  of  railroad  are 
not  penal  in  their  nature,  but  are  declaratory  of  the  policy  of 
the  State  in  favor  of  the  preservation  of  competition  and  are 
entitled  to  a  liberal  construction.  The  purpose  of  constitu- 
tional conventions  in  adopting^  such  provisions  and  of  legis- 
latures in  enacting  such  laws  was  to  place  an  effective  bar 
against  any  union  of  railroad  companies  whereby  competition 
might  be  removed.^ 

While,  therefore,  the  term  "  consolidation "  is  generally 
used  to  describe  a  union  of  corporate  properties  and  stock- 

'■  Manchester,   etc.   R.  Co.   v.  Con-  or    arrangements    between    them    by 

cord    R.   Co.,   66    N.   H.    131    (1889),  means    of   which    competition    is    re- 

(20  Atl.  Rep.  383,  49  Am.  St.  Rep.  moved."     See  also  State  v.  Atchison, 

582,  9  L.  R.  A.  689).  etc.  R.  Co.,  24  Neb.   143  (1888),  (38 

2  Manchester,   etc.   R.  Co.   v.  Con-  N.  W.  Rep.  43,  8  Am.  St.  Rep.  164)  ; 

cord    R.   Co.,    66   N.    H.    131    (1889),  East  St.  Louis,  etc.  R.  Co.  v.  Jar\'is, 

(20  Atl.  Rep.  383,  49  Am.  St.  Rep.  92  Fed.  743  (1899) ;    MorriU  v.  Rail- 

582,  9  L.  R.  A.  689)  :  "The  purpose  road  Co.,  55  N.  H.  531  (1875) ;  Gulf, 

of  the   legislature   was   to   make   the  etc.    R.    Co.    v.    State,    72    Tex.    404 

act   in    question   an   effective   instru-  (1888),   (10  S.  W.   Rep.   81,    13  Am. 

mentaUty    against    the    consolidation  St.  Rep.  815,  1  L.  R.  A.  849). 
of  competing  roads  through  contracts 

64 


CHAP.    Ill]  RESTRAINTS    UPON    CONSOLIDATION  §    33 

holders  by  the  process  of  absorption  or  fusion,  it  has  a  broader 
meaning  as  used  in  constitutional  and  statutoiy  provisioas 
against  the  consolidation  of  competing  railroads,  and  is  here 
used  in  the  sense  of  "  join  "  or  "  unite."  ^ 

In  East  St.  Louis,  etc.  R.  Co.  v.  Jarvis,^  Judge  Jenkins  said : 
"  It  is  contended  that  the  term  '  consolidation '  means  a  per- 
manent union  of  the  interests,  management,  and  control  of 
two  roads,  either  in  the  formation  of  a  new  company  out  of  the 
consolidated  one,  or  else  by  consolidated  management  of  the 
old  ones  unitedly  while  their  distinct  corporate  entities  still  re- 
mained. This  distinction  is  true  in  the  general  sense  in  which 
one  speaks  of  the  '  consolidation '  of  railroads.  The  term  may 
also  mean  the  act  of  forming  into  a  more  firm  or  compact  mass, 
body,  or  system.  The  constitutional  convention,  representing 
the  people  of  the  State,  sought  to  provide  against  monopolies, 
and  to  preserve  to  the  public  the  benefit  that  would  accrue 
from  competition  between  parallel  or  competing  lines  of  rail- 
way. It  sought  for  practical  results.  It  intended  to  provide 
that  parallel  or  competing  lines  should  continue  to  be  compet- 
ing, and  this  it  aimed  to  accomplish  by  prohibiting  the  con- 
solidation of  the  stock  or  the  franchises  or  the  property  of 
any  such  competing  lines  of  railway.  The  union  of  such  lines 
was  prohibited,  in  view  of  the  objects  sought  to  be  accom- 
plished. The  term  'consolidate'  we  think  must  be  construed 
to  have  been  used  in  the  sense  of  'join'  or  'unite.'  To  permit 
two  such  competing  lines  of  railway  under  a  single  management 
and  a  single  control  would  accomplish  the  very  purpose  which 
the  constitution  sought  to  prevent.  We  must  have  regard  to 
the  spirit  and  the  oljject  of  that  constitutional  provision,  and 
not  juggle  with  the  technical  meaning  of  the  word.     The  pro- 

*  In  State  v.  Atchison,  etc.  R.  Co.,  is  here  used  in  the  sense  of  join  or 

24  Neb.  164  (1888),  (38  N.  W.  Rep.  unite.     The     constitutional     conven- 

43,  8  Am.  St.  Rep.  164),  the  Supreme  tion  aimed  at  practical  results." 
Court  of  Nebraska  said  :    "This  [the  Power  to   join   or   unite,    however, 

constitutional  provision]  is  an  abso-  does     not     authorize     consolidation, 

lute    prohibition    against    a    railroad  Louis\alle,   etc.   R.  Co.  v.   Kentucky, 

corporation    «>nsolidating    its    stock,  161    U.  S.   684  (1896),    (16    Sup.    Ct. 

property,   franchises,   or  earnings,   in  Rep.  714). 

whole  or  in  part,  with  any  other  cor-  ^  East    St.    Louis,    etc.    R.    Co.    v. 

poration   owning   a   parallel   or  com-  Jar\ds,  92  Fed.  743  (1899). 
peting  line.     The  word  'consoUdate' 

65 


§34 


INTERCORPORATE     RELATIONS 


[part  I 


hibition  goes  to  the  consolidation  or  uniting  of  the  stock  of 
two  competing  roads,  or  of  the  franchises  of  two  competing 
roads,  or  of  the  property  of  two  competing  roads.  The  doing 
of  either  would  create  the  prohibited  monopoly,  and  either  is 
within  the  intendment  and  meaning  of  the  constitutional 
provision." 

§  34.  Construction  of  Prohibitions  —  (B)  Whether  a  Lease 
amounts  to  Consolidation.  —  It  has  been  held  that  a  lease  of 
a  competing  railroad  falls  within  a  constitutional  provision 
against  the  consolidation  of  competing  lines. ^  The  courts  in 
so  holding  have  based  their  conclusion  upon  the  premise  — 
indicated  in  the  last  section — that  the  term  "consolidate" 
is  broadly  used  in  such  inhibitions  in  the  sense  of  "join" 
or  "unite." 

It  may  be  doubted,  however,  whether  the  conclusion  follows 
from  the  premise.  In  order  to  make  the  constitutional  pro- 
visions effective  instruments  for  the  accomplishment  of  the 
purposes  for  which  they  were  designed,  a  liberal  construction 
is  necessary  and  proper,  and  the  word  "consoHdate"  may  well 


'  State  V.  Atchison,  etc.  R.  Co.,  24 
Neb.  164  (1888),  (8  Am.  St.  Rep.  164, 
38  N.  W.  Rep.  43)  :  "The  constitu- 
tional convention  aimed  at  practical 
results.  The  character  of  the  title 
of  the  parties  operating  a  railway  is 
of  but  little  moment  to  the  general 
public,  while  the  requirement  that 
different  roads  shall  continue  to  be 
competing  lines,  as  when  they  were 
constructed,  is  of  the  utmost  impor- 
tance to  all.  The  law  cannot  be 
evaded,  therefore,  by  substituting 
a  lease  for  a  deed  of  conveyance." 

This  decision  was  rendered  upon 
demurrer.  Compare  decision  upon 
the  merits,  38  Neb.  437  (1893),  (57 
N.  W.  Rep.  20). 

East  St.  Louis,  etc.  R.  Co.  v.  Jarvis, 
92  Fed.  743  (1899):  "Nor  do  we 
think  that  there  is  force  in  the  con- 
tention that  this  union  or  consolida- 
tion was  by  means  of  a  temporary 
arrangement,  if  thereby  that  is  ac- 
complished which  is  prohibited  by 
the    constitution.     If    it    be    lawful, 

66 


by  means  of  a  lease  for  ten  years, 
to  consolidate  and  unite  the  prop>- 
erties  of  competing  lines  of  railway, 
we  perceive  no  reason  why  a  lease 
for  ninety-nine  years  would  not  be 
equally  valid.  We  cannot  draw  the 
line  in  that  respect  between  what  is 
permanent  and  what  is  temporary. 
Whatever  produces  the  prohibited 
result  is  obnoxious  to  the  spirit  and 
the  letter  of  the  constitutional  pro- 
\'ision,  and  is  illegal.  We  must  deal 
with  the  result  accomplished,  with- 
out regard  to  the  means  employed. 
It  cannot  be  permitted  that  one  may 
effect  a  prohibited  result  by  indirec- 
tion which  he  may  not  lawfully 
accompUsh  by  direct  means.  We 
must  therefore  hold  that  the  leases 
in  question  practically  effected  a  con- 
soUdation  of  the  projjprties  of  two 
competing  lines,  and  are  witliin  the 
inhibition  of  the  constitution." 

Compare  Missouri  Pacific  R.  Co. 
1'.  Owens,  1  Tex.  App.  Qv.  Cas.  §  384 
(1883). 


CHAP.    Ill]  RESTRAINTS    UPON   CONSOLIDATION  §   35 

be  described  as  an  equivalent  for  "join"  or  "unite."  But 
these  terms  when  applied  to  corporations  would  seem  to  imply 
some  legal  union  or  joinder  —  something  more  than  the  mere 
phA'sical  conjunction  of  corporate  properties  effected  under 
a  lease. 

CorLstitutional  provisions  often  expressly  prohibit  the  leasing 
of  competing  roads,  but,  in  the  absence  of  such  a  prohibition, 
a  construction  which  reads  it  into  a  constitutional  provision 
by  virtue  of  the  use  of  the  word  "consolidate"  is — to  say 
the  least  —  .strained.^ 

§  35.  Construction  of  Prohibitions  —  (C)  Arrangements 
amounting  to  Consolidation.  —  An  arrangement  whereby  one 
railroad  company,  in  return  for  a  guaranty  of  its  bonds  by  a 
company  owning  a  parallel  and  competing  road,  was  to  turn 
over  one-half  of  its  stock  to  the  stockholders  of  the  latter  com- 
pany, or  to  a  trustee  for  their  benefit,  was  held  by  the  Supreme 
Court  of  the  United  States  in  Pear  sail  v.  Great  Northern  R. 
Co.^  to  constitute  a  clear  violation  of  statutes  prohibiting 
railroad  companies  from  consolidating  with,  or  in  any  way 
owning  or  controlling,  other  corporations  having  parallel  or 
competing  Hnes.^     Mr.  Justice  Brown  said:    "The  fact  that 

'  In    Gere    v.    New    York    Central  tana   R.    Co.,    21    Mont.    221    (1S98), 

R.    Co.,  19    Abb.    N.  C.    210  (1885),  (53  Pac.  Rep.  623  ;  45  L.  R.  A.  271n). 

the    New    York    Supreme    Court,    in  See    also    ante,     §    14:     "Distinction 

con.sidering    whether    a    lease    came  between  Consolidation  and  Lease." 
within  tlie  New  York  statute  against  ^  Pearsall  v.  Great  Northern.  R  Co., 

the  consolidation  of  competing  lines,  161   U.   S.  671    (1896),   (16   Sup.    Ct. 

said  :    "The   leasing   of   one   railroad  Rep.  705). 

by  another,  whether  for  a  longer  or  For    consideration     of    the     later 

shorter  period,  is  not  a  merger  or  con-  attempted    combination    or   practical 

solidation.     The  term  'lease'  implies  consolidation  of  the  Great  Northern 

the  continued   existence   of  the   cor-  and    Northern     Pacific    railways    by 

poration,  the  lessor,  with  all  its  powers  means  of  a  holding  corjxjration   see 

and    functions,    and    all    the    rights  ^  397 a,  post :  "The  Northern  Securities 

incident  to  its  creation,  and  it  would  Case." 

be  a  gross  misapplication  of  terms  '  Minnesota.  Laws  1874,  ch.  29 
to  hold  that  a  lca.sing  or  contract  for  (.\ct  of  March  9,  1874)  :  "No  railroail 
use  by  one  railroad  to  another  is  a  corporation,  or  the  les.sees,  purcha.«ers, 
merger  or  consolidation  of  the  two  or  managers  of  any  railroad  corpora- 
roads."  Also  Wallace  v.  Long  I.sland  tion,  shall  consolidate  the  .stock, 
R.  Co.,  12  Hun  (N.  Y.),  460  (1877).  property,  or  franchises  of  such  cor- 
A  lease  is  not  a  con.solidation  within  poration  with,  or  lea-se  or  purchase 
the  meaning  of  the  Montana  con-  the  works  or  franchises  of,  or  in  any 
stitutional  iiro\nsion.     State  v.  Mon-  way  control   any  other  railroad  cor- 

07 


§   35  INTERCORPORATE    RELATIONS  [I'ART    I 

one-half  of  the  capital  stock  of  the  reorganized  company  is 
to  be  turned  over  to  the  shareholders  of  the  Great  Northern, 
which  is,  in  turn,  to  guarantee  the  payment  of  the  reorganized 
bonds,  is  evidence  of  the  most  cogent  character  to  show  that 
nothing  less  than  a  purchase  of  a  controlling  interest,  and 
practically  the  absolute  control,  of  the  Northern  Pacific  is 
contemplated  by  the  arrangement.  .  .  .  There  is,  however, 
in  addition  to  that,  an  alternative  provision  that  the  transfer 
may  be  made  to  a  trustee  for  the  use  of  the  stockholders,  who 
would,  of  course,  act  as  their  agent  and  represent  them  as  a 
body,  and,  in  fact,  stand  as  the  company  under  another  name. 
Doubtless  these  stockholders  could  lawfully  acquire  by  indi- 
vidual purchases  a  majority,  or  even  the  whole  of  the  stock  of 
the  reorganized  company,  and  thus  possibly  obtain  its  ultimate 
control;  but  the  companies  would  still  remain  separate  cor- 
porations with  no  interests,  as  such,  in  common.  This,  though 
possible,  would  not  be  altogether  feasible  and  would  require 
considerable  time  for  its  accomplishment.  In  a  few  years  the 
two  companies  might,  by  sales  of  the  stock  so  acquired,  become 
completely  dissevered,  and  the  interests  of  the  stockholders 
of  each  company  thus  become  antagonistic.  Under  the  pro- 
posed arrangement,  however,  the  Northern  Pacific  as  a  com- 
pany, in  return  for  a  guaranty,  which  the  individual  stock- 
holders could  not  give,  turns  over  to  a  trustee  for  the  entire 
body  of  stockholders  of  the  Great  Northern  one-half  of  its 
stock,  with  the  almost  certainty  of  the  latter  securing  the  com- 
plete control,  and  probably  the  ultimate  amalgamation,  of 
the  two  companies."  ^ 

poration  owning  or  ha\-ing  under  his  chase,    or    in    any    way    become    the 

control  a  parallel  or  competing  line ;  owner  of  or  control   any  other  rail- 

nor  shall  any  officer  of  such  railroad  road  corporation,  or  any  stock,  fran- 

corporation  act  as  the  officer  of  any  chise,    or   rights   of   property   thereof 

other  railroad  corporation  owning  or  which  owns  or  controls  a  parallel  or 

having   the   control   of  a    parallel   or  competing  line." 

competing    line;     and    the    question  '  In  Pennsylvania  R.  Co.  v.  Com- 

whether  railroads  are  parallel  or  com-  monwealth    (Pa.    1886),   7   Atl.   Rep. 

peting  lines  shall,  when  demanded  by  368,  it  was  held  that  the  purchase  by 

the  party  complainant,  be  decided  by  one  corporation  of  a  sufficient  amount 

a  jurj'  as  in  other  ci\'il  issues."  of  the  stock  of  another  corporation, 

Laws  of  1881,  ch.  94  (Act  of  March  owning  a  parallel  and  competing  road, 

3,    18S1)  :    "No  railroad   corporation  to  give  control  of  the  latter,  was  in 

shall  consolidate  with,  lease  or  pur-  contravention    of    the    Pennsylvania 

6S 


CHAP.    Ill] 


RESTRAINTS    UPON    CONSOLIDATION 


36 


Where  persons  in  charge  of  an  insolvent  construction  com- 
pany which  had  contracted  to  build  a  railroad  for  a  corpora- 
tion, and  had  received  all  its  stock  and  other  assets  as  security, 
without  beginning  the  work,  transferred  the  stock  of  the  con- 
struction company  to  the  managers  of  an  operating  railroad 
which  would  compete  with  the  projected  road  if  completed 
(the  funds  of  the  latter  railroad  being  used  for  the  purchase), 
it  was  held  that  the  evident  purpose  of  the  transaction  was 
to  violate  by  indirection  the  provisions  of  the  constitution  of 
Georgia  declaring  the  purchase  of  the  stock  of  one  corporation 
by  another,  and  any  contract  between  them  tending  to  lessen 
competition,  illegal  and  void.* 

A  prohibition  against  the  consolidation  of  parallel  or  com- 
peting railroads  cannot  be  evaded  by  a  judicial  sale.  "If 
from  reasons  of  public  policy,  the  legislature  declares  that 
a  railway  shall  not  become  the  purchaser  of  a  parallel  or  com- 
peting line,  the  purchase  is  not  the  less  unlawful  because  the 
parties  choose  to  let  it  take  the  form  of  a  judicial  sale."  ^ 

§  36.    Construction  of    Prohibitions  —  (D)   Control  of    Com- 


constitutional  pro\'isioii  agaiu.st  the 
consolidation  of  corporations  owning 
parallel  or  competing  lines.  See  also 
Pennsylvania  R.  Co.  v.  Connnonwealth 
(Pa.  1886),  7  Atl.  Rep.  374. 

Pooling  contracts  have  been  held 
invalid  under  a  statute  prohibiting 
consolidation.  Currier  v.  Concord  R. 
Co.,  48  N.  H.  321  (1809);  Morrell  v. 
Railroad  Co.,  55  N.  H.  537  (1875); 
Manchester,  etc.  R.  Co.  v.  Concord  R. 
Co.,  66  N.  H.  100  (1889),  (20  Atl.  Rep. 
383,  9  L.  R.  A.  G89,  49  Am.  St.  Rep. 
582). 

A  traffic  arrangement  between 
parallel  lines  was  held  to  be  illegal  in 
Gulf,  etc.  R.  Co.  V.  State,  72  Tex. 
404  (1888),  (10  S.  W.  Rep.  8,  13  Am. 
St.  Rep.  815,  1  L.  R.  A.  849).  Com- 
pare, however.  People  v.  O'Brien,  111 
N.  Y.  64  (1889),  (18  N.  E.  Rep.  692). 

'  Langdon  v.  liranch,  37  Fed.  449 
(1888),  (2  L.  R.  A.  120).  See  also 
Hamilton  r.  Savannah,  etc.  R.  Co., 
49  Fed.  415  (1892). 

In   Dady  v.  Georgia,  etc.   R.  Co., 


112  Fed.  838  (1900),  it  was  held,  in 
construing  the  Georgia  constitutional 
provision,  that  where  separate  lines 
of  railway  transport  freight  anil  pas- 
sengers for  widely  separated  sections 
of  two  States,  and  no  point  on  either 
road  can  be  reached  in  any  reason- 
able time  by  a  passenger  starting  out 
on  the  other,  con.solidation  does  not 
tend  to  defeat  competition  and  cre- 
ate a  monopoly  merely  because  two 
shallow  rivers,  on  wliich  steamboat.s 
carr\dng  freight  and  pa.s.sengers  occa- 
sionally jjly,  are  crossed  by  both  lines. 
2  Louis\Tlle,  etc.  R.  Co.  v.  Ken- 
tucky. 161  U.  S.  693  (1896),  (16  Sup. 
Ct.  Rep.  714).  In  this  case  it  was 
held  also  that  accjuiesccnce  by  the 
State  in  several  purchases  by  a  rail- 
road of  local  lines  which  ran  parallel 
to  some  of  its  own  branches  could 
not  be  treated  as  a  contemporaneous 
construction  of  its  charter  authorizing, 
generally,  consolidation  with  jjarallel 
and  competing  roads. 

69 


§36 


INTERCORPORATE   RELATIONS 


[part  I 


peting  Railroads  by  Holding  Corporation.  —  The  question 
whether  the  acquisition  of  control  of  competing  railroad  com- 
panies by  a  holding  corporation,  formed  for  the  purpose,  is  in 
contravention  of  constitutional  or  statutory  provisions  against 
the  consolidation  of  competing  lines,  has  never  been  directly 
decided  by  the  court  of  highest  authority.^ 

The  following  preliminary  propositions  have,  however,  been 
established : 

(1)  Prohibitions    against    the    consolidation    of     competing 
railroads  are  declaratory  of  public  policy.^ 

(2)  Practical  as  well  as  technical  consolidation  contravenes 
such  provisions.^ 

(3)  Between  the  State  and  the  corporation,  acts  of  the  stock- 
holders may  be  regarded  as  acts  of  the  corporation.* 


'  The  application  of  the  State  of 
Minnesota  to  the  Supreme  Court  of 
the  United  States  for  leave  to  file 
an  original  bill  for  an  injunction  to 
restrain  the  alleged  consolidation  of 
two  competing  railroad  companies  by 
means  of  a  holding  corporation  was 
denied  because  of  the  want  of  indis- 
pensable parties  —  only  the  holding 
corporation  being  named  as  defendant 
—  which  could  not  be  brought  in 
without  defeating  the  constitutional 
jurisdiction  of  the  court.  Minnesota 
V.  Northern  Securities  Co.,  184  U.  S. 
199  (1902),  (22  Sup.  Ct.  Rep.  308). 

The  State  of  Washington  then  filed 
a  similar  application  making  the  rail- 
road corporations  and  the  holding 
corporation  defendants,  and,  after  a 
hearing,  the  Supreme  Court  granted 
leave  to  file  the  bill.  Washington  v. 
Northern  Securities  Co.  185  U.  S. 
2.54  (1902),  (22  Sup.  Ct.  Rep.  623). 
This  case  was  subsequently  dismissed 
per  stipulation. 

The  State  of  Minnesota  also  filed 
a  similar  bill  in  a  State  court,  which 
was  removed  to  the  Circuit  Court 
of  the  United  States,  where  Judge 
Lochren  held  that  control  by  a  hold- 
ing corporation  did  not  amount  to  a 
consolidation     in     ■violation     of     the 

70 


Minnesota  statute  against  the  con- 
solidation of  competing  railroads 
(Minnesota  v.  Northern  Securities 
Co.,  123  Fed.  692  (1903)).  This  de- 
cision was  reversed  by  the  Supreme 
Court  upon  the  ground  that  the  case 
had  been  improperly  removed  from 
the  State  Court.  (194  U.  S.  48  (1903), 
(24  Sup.  Ct.  Rep.  598)). 

The  decision  under  the  federal 
statute  is  examined  in  another  section 
of  this  treatise.  See  post,  §  397a, 
"The  Northern  Securities  Case."  In 
this  connection  it  should  be  noted 
that  the  decision  of  Judge  Lochren 
was  rendered  before  that  of  the  Su- 
preme Court  in  this  case. 

2  Ante,  §§  33,  34,  35. 

3  Ante,  §§  33,  34,  35. 

*  In  People  v.  North  River  Sugar 
Ref'g  Co.,  121  N.  Y.  582  (1890),  (24 
N.  E.  Rep.  834,  18  Am.  St.  Rep.  843, 
9  U.  R.  A.  33  n.),  the  Court  of  Ap- 
peals of  New  Yol-k  said :  "The 
abstract  idea  of  a  corporation,  the 
legal  entity,  the  impalpable  and  in- 
tangible creation  of  human  thought, 
is  itself  a  fiction,  and  has  been  ap- 
propriateh'  described  as  a  figure  of 
speech.  It  serves  very  well  to  desig- 
nate in  our  minds  the  collective  action 
and   agency   of  many  indi\'iduals   as 


CHAP.    Ill] 


RESTRAINTS    UPON   CONSOLIDATION 


36 


(4)  Unity  of  ownership  is  distinguishable  from  community 
of  interest.^ 

(5)  Assuming  that  an  individual  stockholder  has  the  right 
to  sell  his  stock,  it  does  not  necessarily  follow  that  a  majority' 
of  stockholders  may  combine  to  sell  their  stock.^ 

Further,  it  has  been  held  by  the  Supreme  Court  of  the  United 
States  that  an  arrangement  of  this  character  is  a  combination 
in  restraint  of  interstate  commerce  in  violation  of  the  federal 
anti-trust  statute.^ 

The  conclusion  seems  necessarily  to  follow  that  the  control 


permitted  by  the  law ;  and  the  sub- 
stantial inquiry  always  is  what,  in  a 
given  case,  has  been  that  collective 
action  and  agency.  As  between  the 
corporation  and  those  with  whom  it 
deals,  the  manner  of  its  exercise  is 
usually  material ;  but  as  between  it 
and  the  State,  the  substantial  inquiry 
is  only  what  that  collective  action 
and  agency  has  done,  what  it  has  in 
fact  accomplished,  what  is  seen  to 
be  its  effective  work,  what  has  been 
its  conduct."  See  also  State  v. 
Standard  Oil  Co.,  49  Ohio  St.  137 
(1892),  (30  N.  E.  Rep.  279,  34  Am. 
St.  Rep.  541,  15  L.  R.  A.  145). 

'  The  distinction  between  the 
ownership  of  controlUng  interests  in 
competing  railroad  companies  by 
individuals  acting  together  in  tem- 
porary harmony  and  the  ownership 
of  such  interests  by  a  single  corpora- 
tion is  apparent,  and  is  illustrated  by 
the  following  language  of  Mr.  Justice 
Brown  in  Pearsall  v.  Great  Northern 
R.  Co.,  161  U.  S.  G71  (189G),  (16  Sup. 
Ct.  Rep.  705):  "Doubtless  these 
stockholders  could  lawfully  acquire 
by  individual  purchases  a  majority, 
or  even  the  whole,  of  the  stock  of 
the  reorganized  company,  and  thus 
possibly  obtain  its  ultimate  control; 
but  the  companies  would  still  remain 
separate  corporations  with  no  in- 
terests, as  such,  in  common.  This, 
though  possible,  would  not  be  alto- 
gether feasil)ie,  and  woultl  refjuire 
considerable  time  for  its  accomplish- 


ment. In  a  few  years  the  two  com- 
panies might,  bj'  sales  of  the  stock, 
so  acquired,  become  completely  dis- 
severed and  the  interests  of  the  stock- 
holders of  each  company  thus  become 
antagonistic." 

2  Pennsylvania  R.  Co.  v.  Common- 
wealth (Pa.  1886),  7  Atl.  Rep.  373,  29 
Am.  &  Eng.  R.  Cas.  145  :  "  During  the 
argument  counsel  invoked  the  aid  of 
the  undoubted  general  principle  that 
the  ownership  of  .shares  of  .stock 
carries  with  it  the  legal  right  to  sell, 
and  contended  that  the  owners  of 
the  shares  of  the  South  Pennsj'lvania 
Railroad  Company  could  not  legally 
be  restrained  from  .so  doing  and  that 
an  injunction  against  the  purchase 
would  have  this  effect,  ^^'e  do  not 
think  the  principle  applies  to  this 
case.  We  are  not  called  upon  to 
express  any  opinion  as  to  the  right 
of  individual  shareholders  to  sell  their 
several  shares  bo7ia  fide  in  the  open 
market.  This,  so  far  as  they  are 
concerned,  is  an  intended  sale  in 
combination,  for  the  express  purpose 
of  enabling  them  to  abandon  the 
rights  and  duties  conferred  and  im- 
posed upon  them  by  the  act  incor- 
porating the  company  and  of  putting 
the  control  of  their  company  in  the 
hands  of  its  rival.  This  is  an  act 
contrary  to  the  public  policy  of  the 
State,  which  they  have  no  right  to  do. " 

3  See  post,  §  397a,  "  The  Northern 
Securities  Case." 

71 


§37 


INTERCORPORATE    RELATIONS 


[part  I 


of  competing  railroads  by  a  holding  corporation  would  amount 
to  a  practical  consolidation,  and  would  contravene  the  State 
statutory  and  constitutional  prohil^itions. 

§  37.  Construction  of  Prohibitions  —  (E)  What  are  Com- 
peting or  Parallel  Railroads,  — To  render  railroads  competing 
lines  they  must  be  substantial  competitors  for  business.  "  The 
competition  must  be  of  some  practical  importance,  such  as  is 
hable  to  have  an  appreciable  effect  on  rates."  ^  Thus  two 
railroads  which  did  not  touch  at  any  two  common  points  and 
between  which  for  a  distance  of  forty  miles  another  railroad 
ran,  and  the  traffic  of  one  of  which  except  an  unimportant 
amount  would  in  no  event  pass  over  the  other,  were  held  not 
to  be  competing  lines.^ 

"Parallel  lines  are  not  necessarily  competing  lines,  as  they 
not  infrequently  connect  entirely  different  termini  and  com- 
mand the  traffic  of  distinct  territories."  ^  Passenger  travel 
over  parallel  streets  of  cities  is  not  necessarily  competing 
travel.* 


1  Kimball  v.  Atchison,  etc.  R.  Co., 
46  Fed.  888  (1891). 

2  Kimball  v.  Atchison,  etc.  R.  Co., 
46  Fed.  888  (1891). 

^  Louisville,  etc.  R.  Co.  v.  Ken- 
tucky, 161  U.  S.  698  (1896),  (16  Sup. 
Ct.  Rep.  714),  where  the  Supreme 
Court  of  the  United  States  said  :  "  For 
instance,  a  line  from  Toledo  to  Cin- 
cinnati is  substantially  parallel  with 
another  from  Chicago  to  Cairo ;  but 
they  could  scarcely  be  caUed  com- 
peting, since  one  is  dependent  upon 
the  traffic  of  the  Northwest,  while 
Cincinnati  is  a  southern  outlet  of  the 
traffic  of  the  Northeastern  States  and 
the  lower  lakes.  Another  familiar 
instance  is  that  of  the  three  north 
and  south  railwaj's  through  the  State 
of  Connecticut,  one  from  Bridgeport 
to  Pittsfield,  in  Massachusetts,  an- 
other from  New  Haven  to  Spring- 
field, and  another  from  Norwich  to 
Worcester.  These  are  strictly  parallel 
lines,  but  in  only  a  limited  sense  com- 
peting, since  they  are  between  dif- 
ferent  termini    and   each   is  required 

72 


for  the   trade  of  its  own   section   of 
the  State." 

*  In  Gyger  v.  Philadelphia,  etc.  R. 
Co.,  136  Pa.  St.  96  (1890),  (20  Atl. 
Rep.  399),  the  Supreme  Court  of 
Pennsylvania  said:  "We  think,  also, 
that  it  is  quite  clear  that  the  sense  of 
'competing,'  which  is  the  essential 
sense  of  the  prohibition,  is  not  ap- 
plicable to  the  travel  upon  the  streets 
of  cities  and  towns  over  passenger 
railways.  The  competition  of  traffic 
between  distant  points,  by  rival  roads 
and  canals,  tends  to  promote  cheap 
transportation  and  thereby  tends  to 
the  public  good.  But  if  this  is  pre- 
vented by  the  absorption  of  one  of 
the  competing  Unes  bj'  the  other,  the 
wholesome  competition  ceases  and 
higher  rates  soon  result.  This  is  the 
evil  which  was  sought  to  be  prevented 
by  the  fourth  section  of  the  seven- 
teenth article.  It  will  be  seen  at 
once  that  it  is  inapplicable  to  the 
travel  upon  the  streets  of  cities  and 
towns  on  passenger  railways.  The 
travel    over    parallel    streets    is    not 


CHAP.    Ill]  RESTRAINTS    UPON    CONSOLIDATION  §   37 

Conversely,  "  competition  between  railroads  may  exist  and 
yet  their  lines  not  run  parallel,  but  cross  each  other  at  some 
point  in  their  route."  '  Railroads  having  the  same  termini 
are  competing  lines  although  their  roads  are  far  apart  and 
there  is  no  pretension  that  the}'  are  parallel.^  Two  lines  having 
but  one  common  terminus  may  also  be  competing  when  one 
company  has  a  traffic  contract  giving  it  the  right  to  use  a 
road  running  to  the  other  terminus  of  the  other  road.^  Com- 
petition in  fact  is  what  the  constitutional  and  statutory  pro- 
visions are  designed  to  encourage,  and  for  this  reason  it  has 
been  held  that  a  railroad  by  its  relations  to  other  roads  may 
be  a  competing  line  with  a  road  with  which  it  is  not  parallel 
and  does  not  connect.'* 

The  phrase  "a  parallel  or  competing  line"  includes  a  pro- 
jected but  not  wholly  constructed  road  if  such  road  when 
completed  and  in  operation  would  actually  compete  with  the 
road  seeking  control.  "Before  completion  it  is  'parallel/ 
when  completed  it  will  become  'competing.'"^ 

The  court  may  take  judicial  notice  of  the  geographj^  of  the 
State,  and  the  general  direction  of  two  railroads  as  fixed  by 
their  charters  and  can  then  determine  whether  they  are  par- 

necessarily  a  competing  travel.    Each  etc.    R.   Co.    v.    Jar\-is,   92    Fed.    743 

State  has  a  travel  of  its  own   which  (1899). 

is  conducted  upon  its  own  railway.  ^  Texas,  etc.  R.  Co.  v.  Southern 
That  travel  may  be  almost  entirely  Pacific  Co.,  41  La.  Ann.  970  (1889), 
conducted  without  competition  with  (6  So.  Rep.  888,  17  Am.  St.  Rep.  445). 
the  travel  upon  another,  though  ^  Pennsylvania  R.  Co.  v.  Common- 
parallel,  street,  nor  do  railways  upon  wealth  (Pa.  1886),  7  Atl.  Rep.  368,  29 
parallel  streets  have  the  same  ter-  Am.  &  Eng.  R.  Cas.  145.  See  also 
mini."  State  v.  Vanderbilt,  37  Ohio  St.  590 

The  Texas  con.stitutional  provision  (1882). 
against    the    actiuisition    of    railroads  ■•  East  Line,  etc.  R.  Co.  v.  State  75 

by  parallel  and  competing  lines  does  Tex.  446  (1889),  (12  S.  W.  Rep.  690)  : 

not  applj'^  to  street   railways.      Scott  "We   further  concur  with   the  court 

I'.    Farmers'    etc.    Bank    (Tex.    1903)  below    in    holding    that    railways    by 

75  S.  W.  Rep.  7.  reasons  of  their  relations  with,  con- 

'  East  Line,  etc.  R.  Co.  v.  Rushing,  trol,  or  management  of  other  lines 
69  Tex.  306  (1887),  (6  S.  W.  Rep.  than  their  own,  may  become,  within 
834) ;  East  Line,  etc.  R.  Co.  v.  the  meaning  of  the  law,  competing 
State,  75  Tex.  434  (1889),  (12  S.  lines,  though  the- railroads  owned  by 
W.  Rep.  690);  Texas,  etc.  R.  them  may  not  in  fact  connect." 
Co.  V.  Southern  Pacific  Co.,  41  La.  *  Pennsylvania  R.  Co.  v.  Common- 
Ann.  970  (1889),  (6  So.  Rep.  888,  17  wealth  (Pa.  1886),  7  Atl.  Rep.  368,  29 
Am.  St.  Rep.  445)  ;   East  St.  Louis,  Am.  &  Eng.  R.  Cas.  145. 

73 


§38 


INTERCORPORATE    RELATIONS 


[part  1 


allel,  but  the  existence  of  competition  must  be  established  by 
evidence  as  any  other  fact.' 

§  38.  Prohibition  of  Consolidation  of  Competing  Railroads 
not  Regulation  of  Interstate  Commerce.  —  As  already  shown, 
State  statutes  authorizing  the  consolidation  of  railroad  cor- 
porations engaged  in  interstate  commerce  are  not  regulations 
of  such  commerce  in  violation  of  the  federal  constitution.^ 
And  the  same  conclusion  follows  with  respect  to  legislation 
prohibiting  the  consolidation  of  competing  railroads.  Cor- 
porations created  by  the  State  derive  the  power  to  consolidate 
from  the  State  alone.  The  State  may  withhold  such  power 
entirely,  may  accompany  the  grant  of  it  with  such  limitations 
as  it  may  choose  to  impose,  and,  under  the  police  power,  may 
take  it  away  when  granted  if  its  operation  may  be  prejudicial 


'  In  East  Line,  etc.  R.  Co.  v.  Rush- 
ing, 69  Tex.  313  (1887),  (6  S.  W.  Rep. 
834),  the  Supreme  Court  of  Texas 
said:  "It  may  be  that  this  court, 
judicially  knowing  the  geography  of 
the  State,  might  take  notice  from  the 
general  direction  of  these  two  roads 
as  fixed  by  the  statutes  vmder  con- 
sideration, that  tlieir  lines  must  neces- 
sarily cross  each  other,  and  could 
therefore  treat  them  as  connecting 
lines,  and  not  parallel  to  each  other. 
But  as  to  whether  they  were  compet- 
ing lines  we  could  have  no  judicial 
notice  whatever.  Competition  be- 
tween railroads  may  exist  and  yet 
their  Hnes  not  run  parallel,  but  cross 
each  other  at  some  point  in  their 
route.  Hence  when  a  question  as  to 
such  competition  is  raised,  the  court 
or  jury  must  have  proof  upon  the 
subject,  as  in  the  case  of  any  other 
fact  submitted  for  its  consideration." 

Compare,  however,  Gulf,  etc.  R. 
Co.  t'.  State,  72  Tex.  410  (1888),  (10 
S.  W.  Rep.  81,  13  Am.  St.  Rep. 
815),  where  the  same  Court  said : 
"Whether  two  roads  which  intersect 
each  other  at  a  certain  point  are  com- 
petitors for  freight  or  not,  must  de- 
pend upon  a  variety  of  circumstances 
not    known    to    the    court.     But   the 

74 


authorities  cited  show  that  we  must 
take  judicial  notice  of  the  geography 
of  the  State  and  at  least  of  its  navi- 
gable streams.  It  is  a  matter  of  his- 
tory that  important  lines  of  railroad 
once  established  have  remained  as 
fixed  and  permanent  in  their  course 
as  the  rivers  themselves.  They  super- 
sede in  the  maia  all  other  modes  of 
travel  between  the  points  which  they 
touch  and  become  as  well,  if  not 
better,  known  than  any  other  geo- 
graphical feature  of  the  country. 
Their  locality  becomes  'notorious 
and  indisputable.'  .  .  .  We  think 
we  must  take  judicial  notice  that 
these  roads  are  parallel  and  comp)et- 
ing  lines.  .  .  .  We  cannot  shut  our 
eyes  to  the  'notorious  and  indis- 
putable' facts  that  these  parts  of  the 
respective  hnes  touch  at  the  same 
points,  and  that  they  are  natural 
competitors  for  the  traffic  of  a  large 
scope  of  countrj'." 

See  also  Georgia  Pac.  R.  Co.  v. 
Gaines,  88  Ala.  381  (1889),  (7  So. 
Rep.   382). 

^  See  ante  §  19a:  "Authorization 
of  Consolidation  of  Interstate  Rail- 
roads not  Regulation  of  Interstate  Com- 
merce." 


CHAP.    Ill] 


RESTRAINTS    UPON    CONSOLIDATION 


38 


to  the  public  welfare.  The  exercise  of  the  authority  of  the 
State,  in  any  of  these  forms,  involves  no  interference  with 
interstate  commerce,  for  it  relates  entirely  to  a  State  grant  to 
a  State  corporation.^ 

The  power  of  the  State,  however,  to  prohibit  the  consolida- 
tion of  c'ompeting  railroads  is  not  exclusive.  Congress  may 
also  prohibit  such  consolidations  when  in  restraint  of  inter- 
state commerce.  And  the  power  of  Congress  is  dominant. 
A  State  consolidation  act  could  never  justify  a  consolidation 
of  interstate  railroads  in  violation  of  a  federal  statute.^ 


*  In  the  leading  case  of  Louisville, 
etc.  R.  Co.  V.  Kentucky,  161  U.  S. 
701  (1896),  (16  Sup.  Ct.  Rep.  714), 
Mr.  Justice  Brown  said:  "While  the 
constitutional  power  of  the  State  in 
this  particular  has  never  been  formally 
passed  upon  by  this  Court,  the  power 
of  the  State  to  impose  this  restriction 
upon  the  general  authority  to  con- 
soUdate  has  been  recognized  in  a 
number  of  cases.  ...  In  the  last 
case  (Ashley  v.  Ryan,  153  U.  S.  346 
(1894)),  (14  Sup.  Ct.  865),  it  was 
broadly  held  that  a  State,  in  per- 
mitting railway  companies  to  con- 
solidate, might  impose  such  condi- 
tions as  it  might  deem  proper,  and 
that  the  acceptance  of  the  franchise 
implied  a  submission  to  the  conditions 
without  which  it  could  not  have  been 
obtained.  The  power  to  forbid  such 
purchase  or  consolidation  with  com- 
peting lines  has  been  directly  upheld 
in  a  large  number  of  ca.ses  in  the 
State  courts,  in  some  of  which  cases 
a  violation  of  the  commerce  clause 
was  suggested  and  in  others  it  was 
not.  ...  In  conclusion  we  are  of 
the  opinion  :  that  .  .  .  section  201  of 
the  Constitution  of  1S91  was  a  legiti- 
mate exerci.se  of  the  police  power  of 
the  State  and  forbade  such  consoli- 
dation." 

See  also  Northern  Securities  Co.  v. 
United  States  193  U.  S.  348  (1904). 

2  Development  of  Commerce  Clause 
of  Constitution. 


A  clear  appreciation  of  the  dis- 
tinction between  the  exclusive  and 
the  dominant  powers  of  Congress 
under  the  commerce  clause  of  the 
Constitution  requires  a  brief  examina- 
tion of  its  development  in  this  respect. 

President  IStonroe  in  a  message  to 
Congress  .said  that  nothing  more  was 
intended  by  the  commerce  clause 
than  to  prevent  the  imposition  of 
duties  by  States  upon  goods  brought 
in  from  other  States.  Moreover,  the 
circumstances  surrounding  the  atlop- 
tion  of  the  commerce  clause  support 
the  view  that  the  power  was  intended 
to  be  Umited  and,  to  a  certain  extent, 
concurrent  with  the  powers  of  the 
States.  The  motive  to  give  Congress 
the  "sole  and  exclusive"  power  over 
commerce  was  lost  in  the  Constitu- 
tional Convention.  That  the  power 
of  Congress  was  merely  concurrent 
with  that  of  the  States  and  involved 
no  prohibition  of  State  action  not 
inconsistent  with  Federal  laws  was, 
moreover,  the  opinion  of  the  attornej'- 
general  immediately  after  the  adop- 
tion of  the  Constitution  (Opinion  of 
Edmund  Randolph,  attorney-general, 
Feb.  12,  1791),  and  of  different  State 
courts. 

It  was  acknowledged  from  the 
beginning  that  the  power  of  Congress, 
when  exercised,  was  paramount. 
The  essential  question  was  whether  it 
was  exclusive  or  concurrent.  This 
<luestion  was  first  answered  in  Gibbons 

75 


§39 


INTERCORPORATE    RELATIONS 


[part  I 


§  30.  Constitutional  Prohibitions  against  Consolidation  of 
Competing  Carrier  Corporations  other  than  Railroads.  —  Con- 
stitutional provisions  against  the  consolidation  of  competing 
corporations  do  not  apply  to  railroad  companies  alone.  In 
proportion  to  their  use  l^y  the  public  it  is  as  essential  that 
competition  should  be  preserved  in  the  case  of  other  corpora- 
tions of  a  quasi-public  nature  as  in  the  case  of  railroad  cor- 
porations. 

Accordingly,  constitutional  provisions  against  the  consoli- 
dation of  competing  lines,  while  nearly  always  applying  to 
railroad  companies,  apply  also  —  as  the  case  may  be  —  to 
telegraph,^  telephone,^  and  "other  transmitting  companies,"^ 
and  to  canal,*  bridge,^  express,"  other  "  common  carrier,"  ^ 
and  "other  transportation  companies,"*  owning  competing 
lines  or  structures.     Other  constitutional  provisions  prohibit 


V.  Ogden,  9  Wheat.  (U.  S.)  189  (1824), 
in  which  Chief  Justice  Marshall  said 
that  the  federal  commercial  power 
was  indivisible  and,  therefore,  exclu- 
sive of  a  like  power  in  a  coordinate 
sovereignty.  The  underlying  princi- 
ple is,  that  the  power  to  regulate 
being  the  power  to  restrain,  the  grant 
of  power  to  regulate  necessarily  im- 
plies power  to  determine  what  .shall 
remain  unrestrained.  Inaction  by 
Congress  is  equivalent  to  an  affirma- 
tive declaration  that  no  action  is 
desired.  Accordingly,  while  the  deci- 
sion of  Gibbons  v.  Ogden  has  not 
always  been  followed,  it  is  now  well 
settled  by  the  Supreme  Court  of  the 
United  States  that,  with  respect  to 
all  subjects  national  in  character  and 
admitting  uniformity  of  regulation, 
the  federal  commercial  power  is  not 
only  paramount  but  exclusive. 

The  sale,  exchange  and  transpor- 
tation of  commodities  and  the  trans- 
portation of  persons  manifestly  admit 
of  uniform  regulation,  and  are  subject 
solely  to  the  control  of  Congress. 
The  States  are  without  power  to 
impose  any  burdens  upon  such  com- 
merce, or  to  interfere  with  it  in  any 
way.     It  is  only  in  the  case  of  local 

76 


matters  —  in  matters  which  are  rather 
auxiliary  to  commerce  than  a  part  of 
it  —  that  the  States  have  power  to 
act  in  the  absence  of  action  by 
Congress.  If  the  prohibition  of  the 
consolidation  of  competing  railroads 
could  be  said  to  affect  interstate 
commerce  at  all,  it  would  only  do 
so  with  respect  to  such  a  matter  of 
a  local  nature.  In  this  connection 
see  opinion  of  Mr.  Justice  Harlan  in 
the  Northern  Securities  Case,  193  U. 
S.  342  (1904). 

1  Alabama,  Const.  Art.  XIV.  §  11  ; 
Colorado,  Const.  Art.  XV.  §  13 ;  A'en- 
tucky,  Const.  §  201 ;  Nebraska,  Const. 
Art.  XI.  §  3;  Pennsylvania,  Const. 
Art.  XVI.  §  12 ;  South  Carolina,  Const. 
Art.  IX.  §  7;  South  Dakota,  Const. 
Art.  XVI.  §  11. 

^Kentucky,  Const.  §  201. 

^  South  Carolina,  Const.  Art.  IX. 
§7. 

^  Pennsylvania,  Const.  Art.  X\^II. 
§4. 

^Kentucky,  Const.  §  201. 

*  Montana,  Const.  Art.  XV.  §  6. 

^  Kentucky,  Const.  §  201. 

»Monta?m,  Const.  Art.  XV.  §  6; 
South  Carolina,  Const.  Art.  IX.  §  7. 


CHAP.    Ill] 


RESTRAINTS    UPON    CONSOLIDATION 


40 


the  consolidation  of  "corporations  of  any  kind  whatever" 
for  the  purpose  of  preventing  competition.' 

The  States  generally  have  also  enacted  so-called  "  anti- 
trust" statutes  directed  against  combinations  tending  to 
create  monopolies  which  are  fully  considered  in  another  part 
of  this  treatise." 

§  40.  Enforcement  of  Provisions  against  Consolidation  of 
Competing  Lines.  —  The  consolidation  of  competing  or  parallel 
railroad  companies  in  the  face  of  a  constitutional  or  statutory 
prohibition  is  unlawful,  and,  therefore,  7iltra  vires,  and  may 
be  restrained  at  the  suit  of  any  stockholder.^ 

Such  a  consolidation  is  also  a  cause  of  forfeiture  of  the  char- 
ters of  the  consolidating  companies  which  may  be  enforced 
by  the  State  in  quo  warranto  proceedings.*  The  State  may 
also  enjoin  such  a  consolidation  and  have  the  proceedings 
declared  void,  upon  the  ground  that  they  are  unlawful  and 
contrary  to  the  declared  policy  of  the  State. ^ 


'  Wyoming,  Const.  Art.  X.  §  8. 
See  also  Georgia,  Const.  Art.  IV.  §  2. 

2  See  subdiv.  II.  Art.  III.  Part  V., 
"State  Anti-trust  Statutes." 

'  Pearsall  v.  Great  Northern  R. 
Co.,  161  U.  S.  647  (1896),  (16  Sup.  Ct. 
Rep.  705) ;  Hafer  v.  Cincinnati,  etc. 
R.  Co.,  29  Week.  Law.  Bui.  68  (Cin. 
1893).  See  also  Clark  v.  Central  R. 
Co.,  50  Fed.  338  (1892);  Hamilton 
V.  Savannah,  etc.  R.  Co.,  49  Fed.  412 
(1892);  Kimball  v.  .\tchison,  etc. 
R.  Co.,  46  Fed.  888  (1891).  Compare 
Langdon  v.  Branch,  37  Fed.  449 
(1888). 

In  Currier  v.  Concord  R.  Corp.,  48 
N.  H.  321  (1869),  it  was  held  under 
the  peculiar  provisions  of  the  New 
Hamp.shire  act  of  1867  (since  repealed) 
that  any  citizen  might  sue  to  restrain 
the  consolidation  of  competing  rail- 
roads. 

*  State  V.  Vanderbilt,  37  Ohio  St. 
590  (1882);  East  Line,  etc.  R.  Co.  v. 
State,  75  Tex.  434  (1889),  (12  S.  W. 
Rep.  690) ;  State  v.  Atchison,  etc.  R. 
Co.,  24  Neb.  143  (1888),  (38  N.  W. 
Rep.  43.)     In  the  last  case,  however, 


the  court  did  not  adjudge  a  forfeit- 
ure but  declared  the  offending  con- 
tract void. 

*  Louisville,  etc.  R.  Co.,  v.  Ken- 
tucky, 161  U.  S.  677  (1896),  (16  Sup. 
Ct.  Rep.  714) ;  Pennsylvania  R.  Co. 
V.  Commonwealth  (Pa.  1886),  7  Atl. 
Rep.  368,  29  Am.  &  Eng.  R.  Cas.  145; 
Penn.sylvania  R.  Co.  v.  Commonwealth 
(Pa.  1886),  7  Atl.  Rep.  374;  Gulf,  etc. 
R.  Co.  V.  State,  72  Tex.  404  (1868). 
(10  S.  W.  Rep.  81,  13  Am.  St.  Rep. 
815,  1  L.  R.  A.  849  n.)  In  People  r. 
Bo.ston,  etc.  R.  Co.,  12  Abb.  N.  C.  230 
(1883)  it  was  held  that  a  proposed 
consolidation  of  four  New  York  rail- 
road companies  was  invalid  because 
they  were  parallel  within  the  meaning 
of  the  statute  and  because  they  did 
not  form  a  continuous  line;  that  an 
action  by  the  attorney-general  to 
annul  the  contract  of  consolidation 
was  the  proper  remedy. 

Where  two  street  railway  com- 
panies which  operated  roads  that  were 
to  a  certain  extent  parallel  ami  com- 
peting con.soliflatcd,  another  railway 
com[)any  which  did  not  contend  that 

77 


§  41  INTERCORPORATE  RELATIONS  [PART   I 


CHAPTER    IV 

ASSENT    OF    STOCKHOLDERS 

§41.  Requisite  Number  of  Stockholders  —  (A)  Under  Laws  in  Force  at 
Organization  of  Consolidating  Corporations. 

§  42.  Requisite  Number  of  Stockholders  —  (B)  When  Unanimous  Consent  is 
necessary. 

§  43.  Requisite  Number  of  Stockholders  —  (C)  Under  Enactments  in  Exer- 
cise of  Reserved  Power. 

§  44.    Power  of  Legislature  to  compel  Consolidation  under  its  Reserved  Power. 

§  45.  Assent  of  Stockholders  —  How  manifested.  Acquiescence.  Estop- 
pel. 

§  46.    Rights  and  Remedies  of  Dissenting  Stockholders. 

§  47.    Rights  and  Remedies  of  Dissenting  Subscribers. 

§  48.    Procedure  in  Stockholders'  Actions. 

§  49.    Laches  of  Stockholders. 

§  50.  Can  a  Majority  effect  Consolidation  upon  giving  Sectirity  to  Dissenting 
Stockholders  ? 

§  51.    The  Right  to  condemn  Stock. 

§  41.  Requisite  Number  of  Stockholders  —  (A)  Under  Laws 
in  Force  at  Organization  of  Consolidating  Corporations.  —  Con- 
solidation directly  affects  the  interests  of  each  stockholder. 
He  exchanges  a  larger  interest  in  a  smaller  corporation  for  a 
smaller  interest  in  a  larger  corporation.  The  corporate  funds 
are  embarked  upon  a  new  enterprise  of  wider  scope.  As  will 
be  shown,  it  is  only  when  the  rights  of  minority  stockholders 
are  constitutionally  limited  by  legislation  that  consolidation 
can  be  effected  without  the  unanimous  consent  of  stockholders.^ 

A  statement,  however,  that  unanimous  consent,  as  a  general 
rule,  is  essential  to  consolidation  would  be  misleading  in  a 
modern  treatise.  General  consohdation  statutes  almost  in- 
variably prescribe  a  proportion  of  shareholders  whose  consent 
is  necessaiy  to  effect  consolidation.^  These  statutes  will, 
usually,  be  found  to  antedate  the  organization  of  corporations 

the    line    of    the    consolidated    com-  .sas  City,  etc.  R.  Co.  (La.  1907),  44  So. 

pany    was    parallel    to    or    competed  Rep.  457. 
with  its  own  or  that  its  business  was  '  See  next  section, 

injuriously  affected  by  the  consolida-  '^  See  post,  §  52,  "Formal  Statutory 

tion  was  without  interest  to  contest  Reqnisites,"   for   abstract   of   statutes 

the  validity  of  the  consolidation.  showingnumber  of  assenting  shares  re- 

Shreveport  Traction   Co.    v.    Kan-  quired  in  different  consolidation  acts. 

78 


CHAP.    IV] 


ASSENT    OF    STOCKHOLDERS 


sWl 


proposing  to  consolidate  at  the  present  time.  The  American 
railway  corporation  has  not  been  distinguished  for  longevity. 
Where,  therefore,  a  general  statute  in  force  at  the  time 
when  the  stock  of  the  consolidating  corporations  was  subscribed 
for  provides  that  the  consolidation  agreement  may  be  ratified 
by  the  holders  of  a  majority  or  greater  proportion  of  the  shares 
of  each  corporation,  the  consent  of  the  prescribed  majority 
is  sufficient.^     Subscribers  to  the  capital  stock  of  the  corpora- 


'  Nugent  V.  Supervisors,  19  Wall. 
(U.  S.)  249  (1873):  "The  general 
statute  of  the  State  authorized  all 
railroad  companies  then  organized,  or 
thereafter  to  be  organized,  to  consoli- 
date their  property  and  stock  with 
each  other,  and  with  companies  out 
of  the  State,  whenever  their  lines 
connect  with  the  lines  of  such  com- 
panies out  of  the  State.  .  .  .  Nor  is 
this  all.  The  special  charter  of  the 
Kankakee  and  Illinois  River  Railroad 
Company  contained  in  its  eleventh 
section  an  express  grant  to  the  com- 
pany of  authority  to  unite  or  consoli- 
date its  railroad  with  any  other  rail- 
road or  railroads  then  constructed  or 
that  might  thereafter  be  constructed 
within  the  State,  or  any  other  State, 
which  might  cross  or  intersect  the 
same,  or  be  built  along  the  line  thereof, 
upon  such  terms  as  might  be  mutually 
agreed  upon  between  said  company 
and  any  other  company.  It  was 
therefore  contemplated  by  the  legis- 
lature, as  it  must  have  been  by  all 
the  subcribers  to  the  stock  of  the 
company,  that  precisely  what  has 
occurred  might  occur.  Sub.scribers 
must  be  presumed  to  have  known  the 
law  of  the  State  and  to  have  con- 
tracted in  view  of  it.  When  the 
voters  of  the  county  of  Putnam 
sanctioned  a  county  subscription  by 
their  vote,  and  when  the  board  of 
supervisors  in  pursuance  of  that  sec- 
tion resolved  to  make  the  subscrip- 
tion, they  were  informed  by  the  law 
of  the  State  that  a  consolidation  with 
another  company  might  be  made; 
that  the  stock  thej'  projioscd  to  sub- 


scribe might  be  converted  into  stock 
of  the  consolidated  company,  and 
that  the  liability  they  assumed  might 
become  owing  to  that  companj-. 
With  this  knowledge  and  in  view  of 
such  contingencies  they  made  the 
contract." 

In  Mayfield  v.  Alton  Ry.  Gas  it 
Elec.  Co.,  198  III.  53.3  (1902),  (65  N.  K. 
Rep.  100),  the  Supreme  Court  of  Illi- 
nois said:  "Of  course,  statutes  au- 
thorizing consolidation  after  sub- 
scriptions have  been  made  cannot  be 
held  to  compel  a  dissenting  stock- 
holder to  transfer  his  subscription  to 
the  consolidated  company,  because 
to  do  so  would  impair  the  obligation 
of  his  contract.  But  if  a  statute 
already  in  existence  to  that  effect 
enters  into  and  becomes  a  part  of 
his  contract,  then  manifestly  there  is 
no  impairment  of  his  contract  by 
requiring  him  to  submit  to  the  re- 
((uired  majority  vote  for  the  con.soli- 
dation." 

See  also  Wilson  7^  Salamanca,  90 
U.  S.  499  (1878);  Mansfield,  etc.  R. 
Co.,  V.  Brown,  20  Ohio  St.  224  (1875) ; 
Sparrow  v.  Evansville,  etc.  R.  Co., 
7  Ind.  369  (1856) ;  Bish  v.  Johnson,  21 
Ind.  299  (1863). 

A  pledgee  of  stock  which  is  assigned 
in  blank  but  is  not  transferreiL  to  his 
name  upon  the  books  of  the  cor- 
l)oration  is  not  a  stockholder,  and  is 
not  entitled  to  participate  in  consoli- 
dation jjroceedings. 

Cleveland  City  R.  Co.  v.  First 
National  Bank,  68  Ohio  St.  582  (1903), 
(67  N.  E.  Rep.  1075). 

79 


§42 


INTERCORPORATE    RELATIONS 


[part  I 


tions  are  presumed  to  know  the  laws  of  the  State  regarding 
consoUdation,  and  to  contract  in  view  of  them.  The  law  enters 
into  and  forms  a  part  of  the  contract. 

A  fortiori  is  this  conclusion  true  where  the  charters  of  the 
corporations  themselves  contain  provisions  authorizing  con- 
soUdation by  a  majority  vote.  Such  provisions  become  a  part 
of  the  contract  between  the  stockholders  and  the  corporation, 
and  their  unanimous  consent  is  not  essential  to  consoUdation.' 

Power  to  consolidate  conferred  in  the  laws  under  which  a 
corporation  is  organized,  without  any  provision  as  to  the 
necessary  number  of  assenting  shares,  may  be  exercised  by 
"proper  corporate  action,"  viz.  a  majority  vote  of  the  stock- 
holders.^ 

§  42.  Requisite  Number  of  Stockholders  —  (B)  When  Unani- 
mous Consent  is  necessary.  —  The  principle  upon  which  unani- 


'■  Fisher  v.  Evansville,  etc.  R  Co., 
7  Ind.  407  (1856);  Hanna  v.  Cincin- 
nati, etc.  R.  Co.,  20  Ind.  30  (1863); 
Bish  V.  Johnson,  21  Ind.  299  (1863); 
Sparrow  v.  Evansville,  etc.  R.  Co.,  7 
Ind.  369  (1856);  Atchison,  etc.  R. 
Co.  V.  Phillips  County,  25  Kan.  261 
(1881). 

Where  the  articles  of  association  of 
a  comijany  prohibited  consolidation 
without  the  consent  of  a  majority  of 
the  stockholders  it  was  held  that 
another  provision  allowing  the  ar- 
ticles to  be  amended  by  a  vote  of  two- 
thirds  of  the  executive  committee 
and  a  majority  of  the  trustees  did  not 
authorize  an  amendment  changing 
the  provision  concerning  the  stock- 
holders' consent  to  consolidation ; 
that  it  only  allowed  amendments 
pertinent  to  the  business  and  objects 
for  which  the  association  was  or- 
ganized. Blatchford  v.  Ross,  54 
Barb.  (N.  Y.)  42  (1869),  (5  Abb.  Pr. 
434). 

2  In  Dady  v.  Georgia,  etc.  R.  Co., 
112  Fed.  842  (1900),  Judge  Speer 
said:  "There  are  several  grounds 
upon  wliich  complainants  insist  that 
they  are  entitled  to  relief.  The  first 
is  that  it  requires  the  unanimous  con- 

80 


sent  of  the  stockholders  of  the  Georgia 
&  Alabama  Railway,  before  the  com- 
plainants can  be  permitted  to  consoli- 
date or  merge  that  company  with  the 
Seaboard  Air  Line  or  the  Florida 
Central  &  Peninsular."  The  judge 
then  distinguished  the  case  of  Alex- 
ander V.  Railway  Co.,  108  Ga.  866 
(1889),  (33  S.  E.  Rep.  866),  and  con- 
tinued :  "In  other  words,  the  Supreme 
Court  of  the  State  seems  carefully  to 
distinguish  a  case  like  that  before 
them  and  a  case  like  that  before  this 
court ;  for  here  the  Georgia  &  Ala- 
bama Railway  is  chartered  under  this 
general  law,  and  the  court  adds  that 
the  provisions  of  the  general  railroad 
law  are  operative  when  that  law  con- 
stitutes the  whole  or  a  portion  of  the 
railroad  charter.  What,  then,  is 
'proper  corporate  action,'  for  the  pur- 
pose of  merger  and  consolidation, 
when  this  is  made  the  policy  of  the 
State  by  its  statutory  law?  Cor- 
porate action,  then,  is  the  majority 
vote  of  the  corporation." 

For  Georgia  statute  under  con- 
sideration in  this  case,  see  ante,  §  22 : 
"What  Railroads  may  consolidate — ■ 
Statutory  Provisions." 


CHAP.    IV] 


ASSENT    OF   STOCKHOLDERS 


42 


mous  consent  may  be  essential  to  coasolidation  is  the  principle 
of  the  Dartmouth  College  case/  enlarged  in  its  application 
by  the  long  line  of  authorities  since  that  famous  decision,  that 
the  charter  of  a  private  corporation  and  the  association  of  the 
corporators  thereunder  constitute  executed  contracts,  between 
the  corporation  and  the  State  and  between  the  stockholders 
and  the  corporation,  within  the  protection  of  the  constitutional 
provision  against  laws  impairing  the  obligations  of  contracts. - 
The  legislature  has  no  right,  except  by  express  reservation,  to 
pass  any  amendment  to  the  charter  of  a  private  corporation 
which  makes  any  material  or  fundamental  change  therein, 
without  the  consent  of  all  the  stockholders.  Where,  therefore, 
a  corporation,  when  created,  is  without  authority  to  consolidate, 
either  under  its  charter  or  general  laws,  a  grant  of  authority 
to  consolidate,  except  in  the  form  of  an  enabling  act,  makes 
a  change  of  a  material  and  fundamental  character  in  its  charter. 
The  exercise  of  the  powder  conferred  under  such  conditions 
requires  the  unanimous  consent  of  the  stockholders.^ 


'  Dartmouth  College  v.  Woodward, 
4  Wheat.  (U.  S.)  700  (1819). 

-  Pennsylvania  College  Cases,  13 
Wall.  (U.  S.)  212  (1871) ;  Wilmington 
R.  Co.  V.  Reid,  13  Wall.  (U.  S.)  2G4 
(1871) ;  Delaware  R.  R.  Tax,  18  Wall. 
(U.  S.)  206  (1873).  In  Pearsall  v. 
Great  Northern  R.  Co.,  161  U.  S.  660 
(1896),  (16  Sup.  Ct.  Rep.  705),  the 
principle  is  discussed  and  earlier 
cases  reviewed. 

^  United  States :  Clearwater  v. 
Meredith,  1  Wall.  39  (1863);  Pearce 
V.  Madison,  etc.  R.  Co.,  21  How.  441 
(1858) ;  Earl  v.  Seattle,  etc.  R.  Co.,  56 
Fed.  911  (1893);  Knoxville  v.  Knox- 
ville,  etc.  R.  Co.,  22  Fed.  758  (1884). 

To  effect  a  consolitlation  of  rail- 
road companies  subsisting  under 
special  charters  not  providing  there- 
for, the  consent  of  everj'  stockhohlcr 
must  be  given ;  and  any  one  di.ssent- 
ing  stockholder  is  entitled  to  an  in- 
junction against  such  consolidation. 
Mowrcy  x\  Indianapolis  etc.  R.  Co., 
4  Diss.  78  (1866). 

Illinois:     Illinois,    etc.    R.    Co.    v. 


Cook,  29  111.  237  (1862).  In  Sprague 
V.  Illinois  River  R.  Co.,  19  III.  174 
(1857),  it  was  held  that  an  amend- 
ment to  a  railroad  charter  which 
authorized  the  consolidation  of  the 
road  to  be  built  under  it  with  any 
other  intersecting  road  was  not  an 
alteration  in  the  charter  of  a  funda- 
mental nature. 

hidiana :  Fi.sher  v.  Evansville, 
etc.  R.  Co.,  7  Ind.  407  (1856). 

The  relation  between  a  railroad 
company  and  a  stockholder  is  one 
of  contract;  and  any  legislative 
enactment  authorizing  a  material 
change  in  the  powers  or  purposes  of 
the  corporation,  if  acted  upon  by  the 
corporation,  is  not  binding  upon  the 
stockholder,  without  his  consent. 
McCray  v.  Jvmction  R.  Co.,  9  Ind.  358 
(1857). 

Kentucky:  Botts  v.  Simpsonville, 
etc.  Tunipiko  Road  Co.,  88  Ky. 
54  (1888),  (10  S.  W.  Rep.  134, 
2  L.  R.  A.  594);  Louisville, 
etc.  R.  Co.  V.  Howard,  15  Ky.  L. 
Rep.  25. 

81 


§42 


INTERCORPORATE  RELATIONS 


[part  I 


In  Clearwater  v.  Meredith,^  Mr.  Justice  Davis  said:  "  When 
any  person  takes  stock  in  a  railroad  corporation,  he  has  entered 
into  a  contract  with  the  company  that  his  interests  shall  be 
subject  to  the  direction  and  control  of  the  proper  authorities 
of  the  corporation,  to  accomplish  the  object  for  which  the 
company  was  organized.  He  does  not  agree  that  the  improve- 
ment to  which  he  subscribed  should  be  changed  in  purpose 
and  character,  at  the  will  and  pleasure  of  a  majority  of  the 
stockholders,  so  that  new  responsibilities,  and,  it  may  be,  new 
hazards,  are  added  to  the  original  undertaking.  He  may  be 
willing  to  embark  in  one  enterprise,  and  unwilling  to  engage  in 
another;  to  assist  in  building  a  short  line  of  railway  and  averse 
to  risking  his  money  in  one  having  a  longer  line  of  transit." 

A  statute  declaring  that  "  it  shall  be  lawful  "  for  corpora- 
tions to  consoHdate  is  with  reference  to  corporations  formed 
before  its  passage  merely  an  enabling  act.  It  gives  the  consent 
of  the  State  to  consolidation  when  all  the  stockholders  ap- 
prove, but  does  not  limit  the  rights  of  dissenting  stockholders.^ 


Michigan:  Tuttle  v.  Michigan  Air 
Line  Co.,  35  Mich.  247  (1877). 

Mississippi:  New  Orleans,  etc. 
R.  Co.  V.  Harris,  27  Miss.  517  (1854). 

New  Jersey :  Kean  v.  Johnson, 
9  N.  J.  Eq.  401  (1853) ;  Black  v.  Dela- 
ware, etc.  Canal  Co.,  24  N.  J.  Eq.  455 
(1873). 

Ohio :  Mansfield,  etc.  R.  Co.  v. 
Brown,  26  Ohio  St.  223  (1875)  ;  Chap- 
man V.  Mad  River,  etc.  R.  Co.,  6 
Ohio  St.  119  (1856). 

Texas:  Gulf,  etc.  R.  Co.  v.  New- 
ell, 73  Tex.  334  (1889),  (11  S.  W. 
Rep.  342,  15  Am.  St.  Rep.  788). 

Vermont:  Stevens  v.  Rutland,  etc. 
R.  Co.,  29  Vt.  545  (1857). 

Contra :  Lauman  v.  Lebanon  Val- 
ley R.  Co.,  30  Pa.  St.  42  (1858),  (72 
Am.  Dec.  685),  where  it  was  held  that 
consolidation  might  be  effected  with- 
out the  unanimous  consent  of  stock- 
holders if  security  were  given  to  mi- 
nority dissenting  stockholders.  See 
post,  §  50. 

'  Clearwater  v.  Meredith,  1  Wall. 
(U.  S.)  40  (1863). 

82 


2  Mills  V.  Central  R.  Co.,  41  N.  J. 
Eq.  4  (1886) :  "The  provision  in  that 
act  that  it  should  be  lawful  to  lease 
or  consolidate  is  merely  a  legislative 
authorization  —  a  concession  on  the 
part  of  the  legislature  of  the  power  to 
do  that  wliich  could  not  lawfully  be 
done  without  such  authority.  It  is 
not  an  enactment  that  the  directors 
may,  without  the  consent  of  the 
stockholders  of  the  company,  lease, 
consolidate,  or  merge.  Nor  is  it,  in 
effect,  an  enactment  that  they  may, 
with  the  consent  of  the  majority  of 
the  stockholders,  do  so.  But  the 
statute  is  merely  an  enabling  act  — - 
a  law  intended  to  give,  once  for  all, 
a  general  legislative  authority  to 
lease,  consolidate,  or  merge." 

In  Clearwater  i\  Meredith,  1  Wall. 
(U.  S.)  39  (1863),  the  Supreme  Court 
of  the  United  States  also  said:  "The 
act  of  the  legislature  of  Indiana  al- 
lowing railroad  corporations  to  merge 
and  consolidate  their  stock,  was  an 
enabling  act  —  was  permissive,  not 
mandatory.     It  simply  gave  the  con- 


CHAP.    IV] 


ASSENT   OF   STOCKHOLDERS 


§42 


The  passage  of  an  amendment  conferring  power  to  consolidate 
upon  a  corporation,  which  it  has  not  attempted  and  may  never 
attempt  to  exercise,  does  not  per  se  affect  the  rights  of  stock- 
holders.' 

It  has  been  held  that  a  purchaser  of  stock  after  a  statute 
has  been  enacted  authorizing  consolidation  is  bound  by  it  not- 
withstanding consolidation  was  not  authorized  at  the  time  such 
stock  was  subscribed  for.  This  decision  was  placed  upon  the 
ground  that  the  right  of  a  subscriber  to  object  to  an  authorized 
consolidation  is  a  mere  personal  privilege  which  does  not  pass 
upon  the  sale  of  his  stock. ^  Upon  principle,  however,  it  would 
seem  that  such  a  right  is  a  right  of  property  and  transferable. 
But  —  as  will  be  shown  —  the  purchaser  might  be  bound 
if  the  statute  were  passed  in  the  exercise  of  the  reseiTed  power. 


sent  of  the  legislature  to  wliatever 
could  lawfully  be  done,  and  which, 
without  that  consent,  could  not  be 
done  at  all." 

See  also  Hamilton  Mut.  Ins.  Co. 
V.  Hobart,  2  Gray  (Mass.)  543  (1854)  ; 
Alexander  v.  Railway  Co.,  108  Ga. 
806  (1899),  (33  S.  E.  Rep.  866). 

'  Fry  1'.  Lexington,  etc.  R.  Co., 
2  Mete.  (Ky.)  314  (1859). 

*  Colgate  1'.  United  States  Leather 
Co.  (N.  J.  Ch.  1907),  67  Atl.  Rep. 
661:  "  The  preci.se  point,  vi2. :  whether 
there  is  any  difference  in  status  be- 
tween a  purchaser  of  shares  before  or 
after  the  grant  of  the  power  of  con- 
solidation to  the  company  has  not 
been  authoritatively  decided  in  this 
State.  .  .  .  The  basis  for  the  proper 
ilecision  of  the  question  will  be 
reached  when  once  we  have  pre- 
cisely and  correctly  settled  the 
legal  origin  and  scope  of  the  stock- 
holders' right  of  objection.  It  origi- 
nates, in  my  judgment,  solely  from 
the  contract  between  the  company, 
considered  as  a  corporate  entity,  and 
the  in<lividual  stockholder,  and  tliis 
being  the  sole  contract  affected  by  the 
powers  to  consolidate,  these  two 
parties  —  the  company  and  the  in- 
dividual  stockholder  —  are   the   onlv 


parties  directly  interested,  and  each 
stockholder  for  himself  alone  deals 
with  the  company,  and  not  with  any 
or  all  of  the  other  stockholders,  in 
relation  to  his  assent  or  dissent. 
Each  is  bound  by  his  own  action  or 
failure  to  act  and  so  far  as  relates  to 
the  mere  exercise  or  existence  of  the 
right  to  object  is  not  governed  or 
controlled  by  the  action  of  any  other 
stockholder  or  of  all  the  others 
together,  even  if  that  action  be 
taken  at  a  meeting  of  the  corpo- 
rate body.  .  .  .  The  question  now 
considered  is,  whether  any  consoli- 
dation at  all  on  terms  legally  author- 
ized can  be  made  against  tiie 
objection  of  a  stockholder  who  pur- 
chased his  shares,  not  before,  but  after 
the  act  authorizing  consolidation.  In 
my  judgment,  the  right  to  consoli- 
dation is  an  equity  or  right  of  a  purely 
personal  character,  belonging  only  to 
the  persons  who  were  members  or 
shareholders  before  the  power  to 
consolidate  was  given.  The  argu- 
ment that  vniless  the  shareholder  can 
transfer  this  right  of  objection  witli 
his  shares  he  is  deprived  of  property 
begs  the  question  at  issue  whether  it 
is  a  projierty  right." 

83 


§  43  INTEUCOUI'ORATE    UELATI0N8  •  [PART    I 

In  England,  as  there  are  no  constitutional  restraints  upon 
Parliament,  the  consolidation  of  existing  corporations  may  be 
authorized  without  the  unanimous  consent  of  their  stock- 
holders. 

§  43.  Requisite  Number  of  Stockholders  —  (C)  Under  En- 
actments in  Exercise  of  Reserved  Power.  —  After  the  decision 
in  the  Dartmouth  College  case,  the  States  generally  passed 
laws  providing  that  all  charters  thereafter  granted  should  be 
subject  to  amendment  or  repeal  at  the  pleasure  of  the  legisla- 
ture and  special  provisions  to  the  same  effect  have  often  been 
inserted  in  charters. 

Under  this  reserv^ed  power  the  decisions  are  uniform  that 
the  legislature  has  the  power  to  alter  or  repeal  charters  when 
necessary  to  protect  the  interests  of  the  State  or  of  the  public, 
but  there  has  been  a  conflict  of  judicial  opinion  as  to  the  power 
of  the  legislature  to  alter  charters  for  the  mere  purpose  of 
changing  the  rights  of  the  shareholders  among  themselves,  as 
in  the  case  of  a  grant  of  power  to  consolidate.  On  the  one 
hand,  it  has  been  held  that  the  legislature,  under  such  a  reser- 
vation, has  the  right  to  authorize  a  consolidation  of  corpora- 
tions, which  can  be  carried  into  effect  notwithstanding  the 
objection  of  a  minority  of  the  stockholders;^    on  the  other 


1  Market    Street    R.    Co.    v.    Hell-  cussed   at  length  the  nature  of  cor- 

man,    109  Cal.   571    (1895),    (42   Pac.  porate  charters  and  the  constitutional 

Rep.    225):      "Corporations    cannot,  rights  of  the  legislature  in  connection 

without  the  consent  of  all  their  stock-  therewith.     Regarding    the    exercise 

holders,      consolidate      with      others,  of    reserved    powers  the  Court  said: 

except  when  the   power  so   to  do  is  "Cases   often   arise   where   the   legis- 

given  by  their  charters  or  by  a  gen-  lature,   in  granting  an  act  of  incor- 

eral   .statute   existing   at   the   date  of  poration  for  a  private  purpose,  either 

incorporation,      or     in     these     cases  makes  the   duration  of    the    charter 

where  the  right  is  reserved  bj'  con-  conditional  or  reserves  to  the  State 

stitutional  or  statutory  provision  to  the  power  to  alter,  modify,  or  repeal 

the  legislature  to  alter  or  amend  the  the   same   at   pleasure.     Where  such 

charter."  a    provision    is    incorporated    in    the 

See  also  Hale  v.  Cheshire  R.  Co.,  charter  it  is  clear  that  it  qualifies  the 

161  Mass.  44.3  (1894),  (37  N.  E.  Rep.  grant,   and   that  the  subsequent   ex- 

307) ;   Durfee  ?'.  Old  Colony  R.  Co.,  87  ercise  of  that   reserve  power  cannot 

Mass.  230  (1862) ;   Buffalo,  etc.  R.  Co.  b<!  regarded  as  an  act  within  the  pro- 

V.  Dudley,  14    N.  Y.  348  (1856).  hibition    of    the    Constitution.     Such 

In  the  Pennsylvania  College  Cases,  a  power  also,  that  is,  the  power  to  alter, 

13  Wall.  (U.  S.)  213   (1871),  the  Su-  modify,  or  repeal  an  act  of  incorpora- 

preme  Court  of  the  United  States  dis-  tion,    is    frequently    reserved    to    the 

84 


CHAP.    IV] 


ASSENT   OF   STOCKHOLDERS 


§43 


hand,  it  has  been  held  that  the  legislature,  under  its  reserved 
power  to  amend  the  charter  of  a  corporation,  cannot  author- 
ize a  consolidation  without  the  unanimous  consent  of  the  stock- 
holders when  the  effect  of  the  consolidation  is  to  increase 
the  liabilities  of  the  stockholders  or  diminish  the  value  of  their 
stock  ;^  and  in  New  Jersey  it  has  been  broadly  held  that  such 
a  resei*vation  is  made  by  the  State  for  its  own  benefit,  is  not 
intended  to  effect  or  change  the  rights  of  corporators  as  be- 
tween themselves,  and  does  not  authorize  the  State  to  empower 
one  part  of  the  stockholders,  for  their  own  benefit,  at  their 
option,  to  change  their  contract  with  the  other  part;  that 
the  power  to  alter  or  modify  a  charter  is  exercisable  only  with 
respect  to  the  powers  and  franchises  conferred  in  it.- 


State  by  a  general  law  applicable  to 
all  acts  of  incorporation,  or  to  certain 
classes  of  the  same,  as  the  case  may 
be,  in  which  case  it  is  equally  clear 
that  the  power  may  be  exercised 
whenever  it  appears  that  the  act  of 
incorporation  is  one  which  falls  within 
the  reservation  and  that  the  charter 
was  granted  subsequent  to  the  pas- 
sage of  the  general  law,  even  though 
the  charter  contains  no  such  condi- 
tion nor  any  allusion  to  such  a  reser- 
vation. Reservation  in  such  a  char- 
ter, it  is  admitted,  may  be  made,  antl 
it  is  also  conceded  that  where  they 
exist  the  exercise  of  the  power  re- 
served by  a  subsequent  legislature 
does  not  impair  the  obligation  of  the 
contract  created  by  the  original  act 
of  incor])oration.  Subsecjuent  leg- 
islation altering  or  modifj'ing  the 
jjrovisions  of  such  a  charter,  where 
there  is  no  such  reservation,  is  cer- 
tainly unauthorized  if  it  is  prejudicial 
to  the  rights  of  the  corporators,  and 
was  passed  without  their  assent,  but 
the  converse  of  the  proposition  is 
also  true,  that  if  the  new  provisions 
altering  and  modifying  the  charter 
were  jjassed  with  the  assent  of  the 
corporation  and  they  were  duly  ac- 
cepted by  a  corporate  vote  as  amend- 
ments to   the   original   charter   they 


cannot  be  regarded  as  impairing  the 
obligation  of  the  contract  created  by 
the  original  charter." 

'  Botts  V.  Simpsonville,  etc.  Turn- 
pike Road  Co.,  88  Ky.  54  (1888), 
(10  S.  W.  Rep.  134,  2  L.  R.  A. 
594). 

In  Keno-sha,  etc.  R.  Co.  v.  Marsh, 

17  Wis.  13  (1863),  it  was  held  that  the 
legislature,  under  its  reserved  power, 
had  no  right  to  authorize  a  radical 
fundamental  change  in  the  character 
of  an  enterprise;  but  whether  con- 
solidation worked  such  change  quaere. 
See  also  Mowrey  r.  In«lianapolis  R. 
Co.,  4  Biss.  (U.  S.)  78  (1866). 

-  Zabriskie  v.   Hackensack  R.  Co., 

18  N.  J.  Eq.  178  (1867),  (90  Am.  Dec. 
617);  Black  r.  Delaware,  etc.  Canal 
Co.,  24  N.  J.  Eq.  468  (1873). 

In  Colgate  v.  U.  S.  Leather  Co. 
(N.  J.  Ch.  1907),  67  .\tl.  Rep.  6.57,  it 
was  held  that  a  purchaser  of  stock  in 
a  corporation  who  ac»iuire<l  his  stock 
after  power  to  consoliilate  had  been 
conferred  upon  the  corporation  could 
not  object  to  its  consolidation  witli 
another  corporation  ujion  the  ground 
that  the  corporation  did  not  pos- 
.sess  the  power  to  consolidate  when 
organized  —  that  the  only  per.'^ons 
who  could  object  upon  that  groun<l 
were    those    who    were    stockholders 

85 


§  44  INTERCORPORATE   RELATIONS  [sWRT   I 

The  weight  of  authority  is,  however,  opposed  to  the  latter 
conclusion  and  is  in  favor  of  the  proposition  that  the  legisla- 
ture, under  its  resen-ed  power,  has  the  right  to  authorize  con- 
solidation without  the  unanimous  consent  of  stockholders; 
that  the  legislature  and  the  majority  are  not  both  subordi- 
nate to  the  will  of  a  dissenting  minority.  The  stockholders 
in  joining  the  corporation  are  deemed  to  take  their  shares 
subject  to  the  possibility  of  alteration  by  the  legislature.' 

§  44.  Power  of  Legislature  to  compel  Consolidation  under 
its  Reserved  Power.  —  While  the  weight  of  authority  supports 
the  view  that  the  legislature,  in  the  exercise  of  its  reserved 
power,  may  authorize  the  consolidation  of  corporations  by  the 
action  of  a  majority  of  their  stockholders,  its  right  to  compel 
their  consolidation  against  the  will  of  a  majority  presents  a 
very  different  question. 

"Each  and  every  shareholder  contracts  that  the  will  of  the 
majority  shall  govern  in  all  matters  coming  within  the  limits 
of  the  act  of  incorporation."  ^  This  is  a  fundamental  principle, 
and  the  legislature,  while  it  may  waive  the  public  rights,  has 
no  more  authority  to  divest  the  stockholders  of  a  private  cor- 
poration of  their  vested  rights,  based  upon  this  principle,  and 
compel  them  to  become  adventurers  in  a  new  enterprise  than 
it  has  to  force  individuals  to  form  a  corporation.^     For  these 

when   the   power   to   consolidate   was  was  upon  the  faith  of  the  stipulations 

conferred.  contained    in    said    charter   that    the 

'  Hale  V.  Cheshire  R.  Co.,  161  Mass.  shareholders  subscribed  to  the  capi- 

443    (1894),    (37    N.    E.    Rep.    307);  tal   stock,    and   thereby  made   them- 

Market   St.    R.   Co.   v.   Hellman,    109  selves   members   of   the    corporation. 

Cal.  571  (1895),  (42  Pac.  Rep.  225).  These  stipulations,  as  we  have  alreadj- 

2  Dudley  v.  Kentuckj-  High  School,  seen,  contemplated  and  pro\'ided  for 

9  Bush,  578  (1873).     Also  Durfee  v.  the  construction  of  a  railroad  between 

Old    Colonj',    etc.    R.    Co.,    5    Allen  the   termini   named,    to   be   governed 

(Mass.),  242  (1862).  by  the  shareholders,   in  the  manner 

^  In  City  of  Knoxville  v.  Knox-  and  upon  the  terms  prescribed.  Each 
ville,  etc.  R.  Co.,  22  Fed.  Rep.  763  corporator  is  entitled  to  have  the 
(1884),  Judge  Baxter  said:  "But  it  contract  fairly  interpreted  and  hon- 
was  not  competent  for  the  legisla-  estly  enforced.  The  charter  invests 
ture  to  do  more  in  this  respect  than  the  owners  of  a  majority  of  the 
to  waive  the  public  rights.  It  could  capital  stock  with  the  right  to  con- 
not  divest  or  impair  the  rights  of  the  trol  the  corporate  business  within 
shareholders,  as  between  themselves,  the  scope  of  its  pro\'isions.  Within 
as  guaranteed  bj'  the  company's  this  limit  the  power  of  a  majority, 
pharter,    without    their    consent.     It  when  acting  in  good  faith,  is  supreme." 

86 


CHAP.    IV] 


ASSENT   OF   STOCKHOLDERS 


§44 


reasons  it  is  clear  that  the  legislature  cannot  compel  the  con- 
solidation of  corporations  owning  no  public  duties.^ 

On  the  other  hand,  the  legislature  may  compel  the  consoli- 
dation of  municipal  and  other  essentially  public  corporations, 
including,  as  held  by  the  Supreme  Court  of  the  United  States, 
educational   institutions.^ 

It  has  not,  however,  been  directly  decided  that  the  compul- 


>  Mason  v.  Finch,  28  Mich.  282 
(1873). 

2  Pennsylvania  College  Cases,  13 
Wall.  (U.  S.)  214  (1871):  "Apply 
those  principles  to  the  case  under 
consideration,  and  it  is  quite  clear 
that  the  decision  of  the  State  court 
was  correct,  as  the  fifth  section  of  the 
charter,  by  necessary  implication, 
reserves  to  the  State  the  power  to 
alter,  modify,  or  amend  the  charter 
without  any  prescribed  limitation. 
Provision  is  there  made  that  the  con- 
stitution of  the  college  shall  not  be 
altered  or  alterable  by  any  ordinance 
or  law  of  the  trustees,  'nor  in  any 
other  manner  than  by  an  act  of  the 
legislature  of  the  Commonwealth,' 
which  is  in  all  respects  equivalent  to 
an  express  reservation  to  the  State 
to  make  any  alteration  in  the  charter 
wliich  the  legislature  in  its  wisdom 
maj'  deem  fit,  just,  and  expedient 
to  enact,  and  the  donors  of  the  insti-. 
tution  are  as  much  bound  by  that 
provision  as  tlie  trustees." 

McKee  v.  Chautauqua  Assembly, 
130  Fed.  539  (1904):  "The  reserved 
power  authorizes  the  legislature  to 
make  any  alteration  or  amendment 
qf  a  charter  which  will  not  defeat 
or  substantially  impair  the  object 
of  the  grant,  or  any  rights  vested 
under  it,  and  which  the  legislature 
may  deem  necessary  to  promote  the 
original  purpose  contemplated  by  its 
charter  or  articles  of  association,  or 
to  protect  the  rights  of  the  public. 
The  changes  of  more  doubtful  va- 
lidity are  those  made  by  section  3. 
The  provisions  of  this  section  not  only 
merge  the  corporation  with  two  others, 


and  thus  embark  it  in  new  enter- 
prises, but  they  compel  it  to  assume 
the  debts  and  liabilities  of  the  cor- 
porations. Thus  apparently  these 
provisions  appropriate  the  funds  of 
the  corporation,  and  divert  them 
from  its  own  treasury,  to  the  extent 
necessary  to  pay  the  outstanding 
liabilities  and  carry  on  the  opera- 
tions of  the  other  two  corporations. 
If  it  were  really  the  effect  of  the.se 
provisions  to  compel  the  corporation 
to  embark  its  money  improperly  in 
one  or  more  unrelated  and  indepen- 
dent concerns,  the  legislation  would 
seem  to  be  an  unwarranted  exercise 
of  the  power  of  alteration  or  amend- 
ment. ...  It  appears,  however, 
that  for  several  years  previous  to  the 
passage  of  the  act  that  the  three 
corporations  had  been  practically 
one,  and  the  power  of  management 
had  been  submitted  to  the  Chautauqua 
Assembly.  .  .  .  Presumably  the  mem- 
bership of  the  three  corporations 
was  composed  of  the  same  persons; 
but,  however  the  fact  may  have  been, 
it  is  not  material ;  it  suffices  that  no 
person  had  a  voice  in  the  control  of 
the  two  corporations  except  the  mem- 
bers of  the  Chautauqua  Assembly. 
In  view  of  this  relation  between  the 
three  corporations,  the  validity  of 
the  legislation  is  not  fairly  open  to 
question.  The  provisions  of  section  3 
were  merely  a  legislative  recognition 
and  approval  of  the  existing  relations 
between  them." 

See  also  Central  University  r. 
Walter  (Ky.  1906),  90  S.  W.  Rep. 
1066. 

87 


§  45  INTERCORPORATE    RELATIONS  [PART   I 

scry  consolidation  of  railroad  companies  and  other  quasi- 
public  corporations  is  legal,  nor  does  it  appear  that  such  legis- 
lation has  ever  been  attempted.*  Upon  principle  it  seems 
that  the  reasoning  applicable  to  distinctly  private  corpora- 
tions applies  to  them.  They  are  private  corporations  owing 
public  duties.  The  State  may  hold  them  strictly  to  the  per- 
formance of  those  duties  and,  for  public  reasons,  may  take 
away  existing  rights  to  consohdatQ.^  It  would  seem  that  the 
converse  of  the  proposition  must  necessarily  follow,  that  the 
State  cannot,  itself,  change  the  nature  of  the  duties  and 
the  abiUty  of  the  corporation  to  perform  them  by  compelling 
consolidation. 

§  45.  Assent  of  Stockholders  —  How  manifested.  Acquies- 
cence. Estoppel.  —  While  the  assent  of  a  stockholder  to  a 
proposed  consolidation  should  regularly  be  expressed  by  his 
vote  at  a  stockholders'  meeting  or  by  his  approval  in  writing 
—  as  the  consolidation  act  may  provide  —  he  cannot,  after 
acquiescing  in  a  consolidation  and  after  the  new  corporation 
has  taken  charge  of  the  property  of  the  constituent  corpora- 
tions, attack  the  validity  of  the  consolidation  on  the  ground 
that  he  did  not  assent  thereto.  A  stockholder  who. takes  an 
active  part  in  a  consolidation  estops  himself  from  alleging  his 
want  of  consent  and,  in  the  absence  of  fraud,  from  raising 
future   objections.^     A   stockholder   who    consents   to   a   con- 

'  The  question  is  raised  in  Mowrey  .essential    to    consolidation    than    as 

V.  Indianapolis,   etc.   R.   Co.,   4   Biss.  holding  that  the  legislature,  even  in 

(U.  S.)   78  (1866).  the    exercise    of    its    reserved    power, 

In  an    early    case   in    Connecticut  can   compel   corporations   to   consoli- 

(Bishop  V.   Brainard,    28  Conn.  289)  date   against   the   will   of   a  majority 

(1859),  it  was  said  that  the  legislature,  of  their  stockholders, 

under  its  reserved  power  of  amending  ^  Gjbbs    v.    Consolidated  Gas   Co., 

a  charter,   might  effect   a  consolida-  130  U.  S.  407  (1889),  (9  Sup.  Ct.  Rep. 

tion    of    corporations    by    its    direct  553),  where  it  was  held  that  the  legis- 

action  without  any  action  upon  the  lature  by  a  compulsory  amendment 

part  of  the  stockholders  or  directors  to  the  charter  of  a  gas  company  might 

of     the     corporation.     It     appeared,  prohibit   the   exercise  of   an   existing 

however,    that    the    directors    and    a  right  to   consolidate  with   any  other 

majority     of     the     stockholders     had  gas  company.     See  also  ante,   §§  24, 

voted  to  ratify  the   consolidation  so  25,  26. 

that   the  remarks  of    the  court  were  ^  GljTnont  Imp.,  etc.  Co.  v.  Toler, 

dicta  and  the  decision  should  rather  80  Md.  278  (1894),  (30  Atl.  Rep.  651) ; 

be  considered   as   holding   that   ante-  Branch    v.    Atlantic,    etc.    R.    Co.,    3 

cedent  action  by  stockholders  is  not  Wood    (U.  S.),  481    (1879);    Boston, 

88 


riiAP.  iv] 


ASSENT   OF   STOCKHOLDERS 


§4: 


solidation  is  also  estopped  from  questioning  the  regularity 
of  the  steps  leading  up  to  it.  Thus,  where  an  unauthorized 
amendment  was  accepted  and  adopted  by  the  directory  of  a 
corporation,  on  the  faith  of  which  a  consolidation  was  made, 
under  legislative  sanction,  with  another  corporation,  stock- 
holders consenting  to  the  consolidation  were  held  to  be  es- 
topped to  dispute  the  validity  of  the  amendment.*  Where, 
however,  an  amendment  tlid  not,  on  its  face,  give  the  power 
to  consolidate,  a  stockholder  was  held  not  to  be  estopped  by 
his  failure  to  object  to  it  in  season.^  The  merely  preliminary 
vote  of  a  director  in  favor  of  consolidation  will  not  preclude 
him  from  subsequently  objecting  as  a  stockholder.^ 


etc.  R.  Co.  V.  New  York,  etc.  R.  Co., 
13  R.  I.  265  (1881)  (sale);  Phinizy 
V.  Augusta,  etc.  R.  Co.,  62  Fed.  684 
(1894).  See  also  Drake  v.  New  York 
Sub.  Water  Co.,  50  N.  Y.  Supp.  82(5 
(1898). 

A  person  subscribing  for  the  stock 
of  a  consolidated  corporation  thereby 
consents  to  the  consolidation.  Fisher 
V.  Evansville,  etc.  R.  Co.,  7  Ind.  470 
(1856),  (65  Am.  Dec.  745). 

Where  a  stockholder  in  a  consoli- 
dating corporation  participated  in  all 
the  proceedings  incident  to  consolida- 
tion and  permitted  the  corporation  so 
formed  to  control  the  corporate  busi- 
ness and  property,  and  third  persons 
to  purchase  the  mortgage  bonds  of 
the  new  company,  and  to  acquire 
other  rights  and  interests  based  on  its 
lawful  existence,  the  fact  that  at  a 
foreclosure  sale  under  the  mortgage 
bonds  issued  by  the  de  facia  com- 
pany, he  notified  purcha.sers  that 
he  would  contest  the  consolida- 
tion, does  not  prevent  him  from 
being  estopped  to  attack  such 
consolidation.  Bradford  v.  Frank- 
fort, etc.  R.  Co.,  142  Ind.  38.3 
(1895),  (40  N.  E.  Rep.  741),  (41  N. 
E.  Rep.  819). 

'  Deaderick  v.  Wilson,  8  Baxt. 
(Tenn.)    108    (1874). 

-  International,  etc.  R.  Co.  v.  Brc- 
mond,  53  Tex.  90  (1880):    "Nor  had 


he,  by  failing  to  object  to  a  subse- 
(lucnt  enlargement  of  the  charter, 
which,  whether  it  actually  gave  such 
power  or  not,  did  not  on  its  face 
purport  to  give  any  power  to  consoli- 
date, precluded  himself  from  object- 
ing to  a  consolidation  making  so 
fundamental  a  change  in  the  objects 
of  the  corporation.  ...  A  stock- 
holder may  be  estopped  by  his  con- 
duct from  objecting  to  a  consolida- 
tion which  was  attempted  without 
authority ;  but  in  its  present  case 
the  conduct  and  action  of  Bremond 
have  not  .  .  .  been  such  as  to  pre- 
clude him  from  still  refusing  to  go 
into  the  new  enterprise,  or  for  de- 
manding full  compensation  for  his 
interest  in  the  old." 

^  If  a  member  of  the  board  of 
directors  of  a  corporation  is  present 
at  the  adoption  of  a  resolution,  and 
is  aware  of  what  is  going  on  and 
makes  no  objection  to  its  adoption, 
he  must  be  presumed  to  have  assented 
to  it.  But  if  such  proceeding  is 
merely  preliminary  to  a  subsecjuent 
vote  of  the  stockholders  on  the  con- 
solidation of  the  corporation  with 
another,  which  can  ultimately  be 
decided  by  the  stockholders  only, 
he  will  not  be  estopped  from  after- 
wards objecting  as  a  stockholder. 
Mowrey  r.  Indianapolis,  etc.  R.  Co., 
4   Biss."  (U.   S.)   78  (1806). 

89 


46 


INTERCORPORATE   RELATIONS 


[part  I 


As  the  stockholders  act  in  their  individual  capacities  in 
adopting  the  consolidation  agreement,  it  is  immaterial  that 
the  directors  of  the  consolidating  corporations  may  have  been 
directors  of  both  corporations.* 

§  46.  Rights  and  Remedies  of  Dissenting  Stockholders.  — 
When  the  unanimous  consent  of  the  stockholders  is  essential 
to  consolidation,  a  dissenting  stockholder  is  entitled  to  an  in- 
junction restraining  a  proposed  consolidation  on  the  ground 
that  the  funds  of  the  corporation  are  being  diverted  to  objects 
not  authorized  by  its  charter.^  On  the  other  hand,  where  a 
statute  authorizes  consolidation  through  the  action  of  a  pre- 
scribed majority  of  the  stockholders  and  a  consolidation  is 
duly  and  in  good  faith  effected  in  accordance  with  its  pro- 
visions, a  dissenting  stockholder  has  no  ground  of  complaint.^ 

"The  right  to  recover  .  .  .  [the  value  of  his  stock]  .  .  . 
upon  the  consummation  of  a  consolidation  may  exist  where 
the  consolidation  is  effected  without  authority,  or  wrongfully, 
and  without  the  consent  of  the  suing  stockholder,  or  where 


Where  the  directors  of  two  con- 
soUdating  corporations  provided  in 
the  consolidation  agreement  that  un- 
adjusted matters  should  be  arranged 
according  to  a  preliminary  memoran- 
dum of  agreement  signed  by  a  major- 
ity of  the  stockholders  of  the  cor- 
porations, —  the  memorandum  being 
thereby  made  a  part  of  the  consolida- 
tion agreement,  —  it  was  held  that 
directors  signing  the  agreement  as- 
sented as  stockholders  to  the  mem- 
orandum and  were  bound  by  its 
provisions.  Cleveland  City  R.  Co. 
V.  First  Nat.  Bank,  68  Ohio  St.  582 
(1903),  (67  N.  E.  Rep.  1075). 

'  Colgate  V.  U.  S.  Leather  Co. 
(N.  J.  1907),  67  Atl.  Rep.  657.  And 
see  Hill  v.  Nisbet,  100  Ind.  341  (1884). 
Compare,  however,  Munson  v.  Syra- 
cuse, etc.  R.  Co.,  103  N.  Y.  73  (1886), 
(8  N.  E.  Rep.  355). 

2  Clearwater  v.  Meredith,  1  Wall. 
(U.  S.)  40  (1863):  " Clearwater  could 
have  prevented  this  consolidation 
had  he  chose  to  do  so;,  instead  of 
that  he  gave    his    assent    to    it    and 

90 


merged  his  own  stock  in  the  new 
adventure.  If  a  majority  of  the 
stockholders  of  the  corporation  of 
which  he  was  a  member  had  under- 
taken to  transfer  his  interest  against 
his  wish,  they  would  have  been  en- 
joined. There  was  no  power  to 
force  him  to  join  the  new  corpora- 
tion, and  to  receive  stock  in  it  on 
surrender  of  his  stock  in  the  old 
company." 

See  also  Blatchford  v.  Ross,  54 
Barb.  (N.  Y.)  42  (1869);  Botts  v. 
Simpsonville,  etc.  Turnpike  Road  Co., 
88  Ky.  54  (1888),  (10  S.  W.  Rep. 
134,  2  L.  R.  A.  594)  ;  Mowrey  v. 
Indianapolis,  etc.  R.  Co.,  4  Biss. 
(U.  S.)  78  (1866);  Zabriskie  v.  Hack- 
ensack,  etc.  R.  Co.,  18  N.  J.  Eq.  178 
(1867),  (90  Am.  Dec.  617);  Stevens 
V.  Rutland,  etc.  R.  Co.,  29  Vt.  545 
(1857) ;  Young  v.  Rondout,  etc.  Gas 
Light  Co.,  129  N.  Y.  57  (1891),  (29 
N.  E.  Rep.  83). 

^  Jones  V.  Missouri  Edison  Elec. 
Co.,  144  Fed.  765  (1906). 


CHAP.    IV] 


ASSENT   OF   STOCKHOLDERS 


46 


the  right  to  consolidate  is  granted  after  such  stockholder  has 
subscribed  for  his  stock."  * 

A  dissenting  stockholder  has  a  right  of  action  in  equity 
against  the  consolidated  corporation,  in  the  ca.se  of  an  unau- 
thorized consolidation,  upon  the  theory  of  a  wrongful  appro- 
priation by  it  of  his  equitable  interest  in  the  original  corpora- 
tion.^ 

Where  an  unla^^^ul  consolidation  has  been  brought  about 
by  the  action  of  the  stockholdei's,  a  dissenting  stockholder 
cannot  maintain  an  action  for  damages  against  the  directors.^ 

While  a  dissenting  stockholder  may  enjoin  an  unauthorized 


'  Mayfield  v.  Alton  Ry.  Gas  & 
El.  Co.,  100  111.  App.  614  (1901), 
affirmed,  198  111.  528  (1902),  (65  ^.  E. 
Rep.  100). 

In  this  case  a  going  corporation 
was  absorbed  by  a  new  companj' 
with  double  the  amount  of  capital 
stock  but  with  nothing  paid  in  except 
the  assets  of  the  company  absorbed. 
The  stockholders  of  the  old  corpora- 
tion received  share  for  share  in  the 
stock  of  the  new  corporation.  It 
was  held  that  this  transaction  did 
not  amount  to  a  confiscation  of  one- 
half  the  value  of  the  stock  in  the  old 
corporation  in  the  absence  of  proof 
tiiat  the  unissued  stock  of  the  new 
corporation  had  not  been  in  good 
faith  subscribed  for. 

In  Pennsylvania  where  the  pe- 
culiar doctrine  prevails  (see  post, 
§  50)  that  even  in  the  absence  of  a 
statute  authorizing  such  procedure 
a  majority  may  effect  consolidation 
upon  giving  security  to  minority  in- 
terests, it  is  held  that  a  stockhoUler 
in  a  corporation  who  has  voted  against 
its  consolidation  with  another  com- 
pany may  bring  a  bill  in  equity  to 
enforce  payment  of  the  value  of  his 
stock  and  is  not  obliged  to  resort  to 
a  statute  providing  for  the  apprai.sal 
of  stock  in  aid  of  consolidation. 
Harnett  v.  Philadelphia  Market  Co., 
218  Pa.  649  (1907),  (67  Atl.  Rep. 
912). 


^  A  stockholder  in  a  railwaj'  com- 
pany, which,  against  his  protest,  has 
been  consolidated  with  another  com- 
pany, by  the  action  of  other  stock- 
holders, and  whose  equitable  interest 
has  been  wrongfully  appropriated  by 
the  consolidated  company,  cannot 
maintain  an  action  for  the  injury 
against  the  directors  of  the  company 
as  such ;  nor  are  directors  responsible 
for  a  consolidation  effected  by  stock- 
holders. He,  however,  has  an  equit- 
able action  against  the  consolidated 
company  for  the  wrongful  appropria- 
tion of  his  interest.  International, 
etc.  R.  Co.  V.  Bremond,  53  Tex.  96 
(1880). 

A  stockholder  in  a  constituent 
corporation  who  has  not  converted 
his  stoc*k  into  the  stock  of  the  con- 
solidated company  has  no  standing 
to  maintain  a  stockholder's  bill 
against  that  company.  Philadelphia, 
etc.  R.  Co.  V.  Catawissa  R.  Co.,  53 
Pa.  St.  20  (1866). 

A  stockholder  in  a  building  asso- 
ciation which  has  illegally  absorbed 
another  similar  as.sociation  cannot 
obtain  relief  which  would  be  granted 
only  to  stockholders  of  the  latter 
association.  Continental  Building, 
etc.  Ass'n.  v.  Miller,  44  Fla.  757 
(1902),  (33  So.  Rep.  404). 

^  International,  etc.  R.  Co.  v. 
Bremond,  53  Tex.  96  (1880). 

91 


§  47  INTERCORPORATE   RELATIONS  [PART  I 

consolidation,  one  of  the  constituent  corporations  itself  can- 
not, after  agreeing  to  a  consolidation,  object  to  its  validity 
upon  the  ground  that  all  its  stockholders  did  not  assent 
thereto.^ 

Where  a  statute  provides  that  a  consolidation  shall  not  be 
effected  without  the  payment  of  the  value  of  the  interests  of 
stockholders  who  dissent,  and  a  consolidation  agreement  is 
proposed  which  deprives  a  stockholder  of  this  right,  he  is  not 
bound  to  be  present  at  the  stockholders'  meeting  where  such 
agreement  is  proposed  to  oppose  it.  He  can  stand  upon  his 
statutory  rights  and  recover  the  value  of  his  stock.^ 

It  has  been  held  that  a  purchaser  of  stock  after  a  statute 
has  been  enacted  authorizing  consolidation  cannot  object  to 
a  consolidation  upon  the  ground  that  it  was  not  authorized 
at  the  time  when  such  stock  was  Subscribed  for.^ 

§  47.  Rights  and  Remedies  of  Dissenting  Subscribers.  — 
Where  authority  to  consolidate  does  not  exist  at  the  time 
when  a  corporation  is  chartered  and  where  power  to  amend 
or  repeal  is  not  reserved,  a  grant  of  authority  to  consolidate 
works  a  change  of  a  fundamental  nature  in  the  charter  of  a 
corporation  and,  it  is  held,  exonerates  dissenting  subscribers 
for  the  stock  of  the  corporation  from  further  liability  upon 
their  subscriptions.*     Mr.  Justice  Strong,  in  Nugent  v.  Super- 

'  St.    Louis,   etc.   R.    Co.    v.  Terre  '  Colgate  v.  United  States  Leather 

Haute  R.  Co.,  33  Fed.  440  (1888).  Co.   (N.  J.    1907),   67   Atl.    Rep.   661. 

^  Douglass  V.  Concord,  etc.  R.  Co.,  For  consideration  of  this  case  see 
72N.H.  26(1903),  (54  Atl.  Rep.  883):  ante,  §  42:  "Requisite  Number  of 
"As  it  is  the  law  of  this  State  that  Stockholders  —  (B)  When  Unanimous 
the  union  of  two  railroad  corpora-  Consent  is  Necessary." 
tions  cannot  be  effected  without  the  *  United  States :  Nugent  v.  Super- 
payment  of  the  value  of  their  inter-  visors,  19  Wall.  248  (1873);  Clear- 
ests  to  those  who  do  not  assent,  and  water  v.  Meredith,  1  Wall.  25  (1863). 
as  the  legislative  authorization  for  the  Indiana :  Shelby ville,  etc.  Turn- 
action  proposed  to  be  taken  expressly  pike  Co.  v.  Barnes,  42  Ind.  498  (1873) ; 
provided  for  such  payment  as  an  Booe  v.  Junction  R.  Co.,  10  Ind.  93 
essential  to  the  validity  of  such  con-  (1857);  McCray  v.  Junction  R.  Co., 
tract,  she  was  not  legally  bound  to  at-  9  Ind.  358  (1857);  State  v.  Bailey, 
tend  the  meeting  to  oppose  a  contract  16  Ind.  46  (1861),  (79  Am.  Dec.  405). 
illegally  depriving  her  of  her  stock."  Mississippi :   New  Orleans,  etc.  R. 

In   this   case   the   stockholder   was  Co.  v.  Harris,  27  Miss.  517  (1854). 

permitted  to  recover  her  proportionate  North     Carolina :   Charlotte    First 

share  of  the  stock  of  the  consolidated  Nat.  Bank  v.  Charlotte,  85  N.  C.  433 

corporation.  (1881),  (39  Am.  Rep.  708). 

92 


CHAP.  IV]  ASSENT    OF    STOCKHOLDERS  §  47 

visors}  thus  stated  the  reason  for  the  rule:  "  It  must  be  con- 
ceded, as  u  general  rule,  that  a  subscriber  to  the  stock  of  a 
railroad  company  is  released  from  obligation  to  pay  his  sub- 
scription by  a  fundamental  alteration  of  the  charter.  The 
reason  of  the  rule  is  evident.  A  subscription  is  always  pre- 
sumed to  have  been  made  in  view  of  the  main  design  of  the 
corporation,  and  of  the  arrangements  made  for  its  accomplish- 
ment. A  radical  change  in  the  organization  or  purposes  of 
the  company  may,  therefore,  take  away  the  motive  which 
induced  the  subscription,  as  well  as  affect  injuriously  the  con- 
sideration of  the  contract.  For  this  reason  it  is  held  that 
such  a  change  exonerates  a  subscriber  from  liability  for  his 
subscription;  or,  if  the  contract  has  been  executed,  justifies  a 
stockholder  in  resorting  to  a  court  of  equity  to  restrain  the 
company  from  applying  the  funds  of  the  original  organization 
to  any  project  not  contemplated  by  it." 

A  subscriber  is,  however,  entitled  to  the  benefit  of  his  con- 
tract as  made  and  is  neither  obliged  to  withdraw  from  it  nor 
to  eml)ark  in  a  new  venture.^ 

This  rule  that  the  unconstitutional  grant  of  authority  to 
consolidate  operates  as  a  dissolution  of  the  subscription  con- 
tract and  as  a  release  of  dissenting  subscribers,  is  supported 
by  the  highest  authorities.  It  is  difficult,  however,  to  justify  it 
upon  legal  principles.  An  act  unconstitutional  as  to  a  dissent- 
ing subscriber  would  seem  to  be  void  as  to  him.  To  say  that 
it  dissolves  the  subscription  contract  is  to  give  effect  to  a  void 
act.  The  distinction  drawn  between  the  position  of  a  stock- 
holder and  that  of  a  subscriber  —  treating  the  latter  as  a  party 
to  an  executory  contract  only  —  is  inaccurate.  The  effect 
of  an  ordinary  subscription  is,  immediately,  to  constitute  the 

England:  Dougan's  Case,  28  L.  T.  statute   existing    at    the    time   of   his 

Rep.  GO  (1873).  subscription,    providing   for   the  con- 

'  Nugent  V.  Supervisors,    10  Wall.  solidation  upon  a  vote  less  than  the 

248  (1S73).  wliole,    or    for    the    purchase    of    the 

^  "The  stockholders  in  the  old  cor-  interests    of    dissenting    stockholders 

poration,  who  do  not  enter  into  tiie  in  the  event  of  a  consolitlation,  it  is 

new    corporation,    are,    therefore,    in  conceived    that    he    will    neither    be 

the  absence  of  such  statutes,  entitled  bound  to  consent  to  the  consolidation 

to   withdraw   from    the    venture   and  nor   to   surrender   his   interest   in   his 

cease  to  be  liable  on  their  stock  sub-  original  corporation."      1   Thomj).  on 

scriptions.      But  in  the  absence  of  a  Corp.  §  343. 

93 


§   48  INTERCORPORATE   RELATIONS  [PART  I 

subscriber  a  stockholder,  subject  to  the  liability  to  pay  his 
suljscription  when  called.  Only  a  contract  to  subscribe  for 
stock  at  a  future  time  can  properly  be  called  an  executory 
contract. 

The  general  rule  stated  is  inapplicable  in  a  case  where  it  is 
apparent  from  the  articles  of  association  that  consolidation 
was  one  of  the  purposes  for  which  the  corporation  was  organ- 
ized and  that  the  consolidation  in  cjuestion  is  only  carrying 
out  that  purpose.  Consolidation,  under  such  conditions,  does 
not  discharge  a  subscriber  from  the  payment  of  his  subscrip- 
tion, although  authority  to  consolidate  was  granted  after  the 
subscription.* 

§  48.  Procedure  in  Stockholders'  Actions.  —  When  a  major- 
ity has  taken  steps  towards  an  unauthorized  consolidation  or 
when  unanimous  consent  is  necessary,  a  dissenting  stock- 
holder may  file  a  bill  for  an  injunction  and  it  is  not  necessary 
that  he  should  first  seek  relief  through  the  corporation.  In 
Nathan  v.  Tompkins"^  the  Supreme  Court  of  Alabama  said: 
"  When  the  injuiy  is  to  the  shareholder  individually,  or  there 
is  a  real  contest  between  him  and  the  corporation  growing 
out  of  the  acts  of  a  majority  of  the  stockholders  in  conven- 
tion, and  in  excess  of  their  powers,  express  or  implied,  he  may 
maintain  a  suit  to  prevent  the  wrong  without  the  vain  and 
useless  ceremony  of  attempting  to  induce  the  same  majority 
to  sue  themselves.  A  dissenting  stockholder  may,  under 
such   circumstances,    enjoin   an   unauthorized    consolidation."' 

The  stockholder  is  protecting  his  own  rights,  and  it  is  imma- 
terial whether  he  is  acting  in  good  faith  for  the  interests  of 
the  corporation.^  The  injunction  is  granted  to  restrain  the 
officers  and  managers  of  the  corporation  from  diverting  its 
funds,  but  it  is  necessary  to  make  the  corporation  a  party 
defendant.^  An  injunction  once  issued  restraining  an  at- 
tempted consolidation  will  not  be  dissolved  unless  it  is  estab- 
lished by  proof   that  the  consolidation  agreement   has  been 

'  Hanna  v.  Cincinnati,  etc.  R.  Co.,  ^  Central  R.  Co.  v.  Collin?,  40  Ga. 

20  Ind.  30  (1863).  617  (1861). 

2  Nathan  v.  Tompkins,  82  Ala.  437  *  Ridgway  Township  v.  Griswold, 

(1891),    (2    So.    Rep.    747).      Contra,  1  McCrary  (U.  S.),  151  (1878). 
however,    Mozley    v.    Alston,    1    Phil. 
Ch.  790  (1847). 

94 


CHAP.    IV] 


ASSENT   OF   STOCKHOLDERS 


§49 


cancelled.  Allegations  that  the  scheme  has  been  abandoned 
are  not  sufficient.' 

An  injunction  against  an  attempted  consolidation  will  not 
be  dissolved  upon  an  answer  which  fails  to  allege  the  consent 
of  the  plaintiff,  where  the  unanimous  consent  of  the  stock- 
holders is  essential  to  consolidation.^ 

§  49.  Laches  of  Stockholders.  —  Laches  in  bringing  suit 
will  preclude  a  dissenting  stockholder  from  enjoining  a  con- 
solidation. He  cannot  look  to  equity,  but  must  content  him- 
self with  some  other  form  of  remedy.^     Reasonable  haste  is, 


»  Nathan  v.  Tompkins,  82  Ala.  446 
(1886),  (2  So.  Rep.  747):  "The 
answers  do  not  aver  that  the  resolu- 
tions have  been  rescinded,  or  any 
attempt  made  to  rescind  them,  or 
any  official  declaration  of  the  aban- 
donment. The  resolutions  remain  in 
force  on  the  minutes,  so  far  as  the 
majority  could  impart  vitality.  In 
view  of  the  character  of  the  resolu- 
tions,—  that  the  consolidation  'do 
now  take  place,'  and  be  fullj'  carried 
into  effect,  —  a  secret,  uncommuni- 
cated  intention  to  abandon,  resting 
in  the  minds  of  the  majority  as  in- 
dividuals, does  not  meet  the  require- 
ments of  equity." 

In  Blatchford  v.  Ross,  54  Barb. 
(N.  Y.)  42  (1869),  it  was  held  that  an 
injunction  restraining  the  consum- 
mation of  the  consolidation  of  two 
corporations  would  not  be  extended 
to  prevent  the  u.se  by  the  consolidated 
company  of  property  delivered  before 
the  injunction  was  applied  for,  but 
would  be  continued  to  prevent  the 
delivery  of  any  more  property  and 
the  taking  of  any  steps  to  enforce 
consolidation  upon  unwilling  stock- 
holders. 

*  Botts  V.  Simpsonville,  etc.  Turn- 
pike Road  Co.,  88  Ky.  54  (1888), 
(10  S.  W.  Rep.  134,  2  L.  R  .\. 
594). 

^  Chapman  v.  Mad  River,  etc.  R. 
Co.,  6  Ohio  St.  120  (1856);  Inter- 
national, etc.  R.  Co.  V.  Bremond,  53 
Tex.  96  (1880). 


In  Beling  v.  American  Tobacco 
Co.  (N.  J.  1907),  65  Atl.  Rep.  725, 
where,  after  a  consolidation  had  been 
effected,  the  consolidated  corporation 
carried  on  the  busine.ss  of  the  con- 
stituent companies,  sold  and  ex- 
changed some  of  their  assets  and 
commingled  the  proceeds  with  other 
funds  it  was  held  that  a  stockholder 
in  a  constituent  corporation  who 
made  no  objection  for  six  months 
while  the  business  was  carried  on 
and  whose  a.ssignee  had  received 
notice  of  the  meeting  at  which  the 
merger  agreement  was  acted  upon, 
was  not  entitled  to  a  decree  in  eq- 
uity vacating  the  merger  agreement. 
The  Court  .said  (p.  729):  "The  com- 
plainant argues  with  great  force  that 
the  negligence  or  laches  of  his  prede- 
cessor in  title  cannot,  upon  any 
legal  or  equitable  principles,  be  ex- 
tended so  far  as  to  forfeit  his  rights. 
Granting  the  general  proposition  to 
be  as  claimed  by  him,  yet  the  com- 
plete answer  is  that  the  refusal  to 
grant  his  decree  does  not  work  any 
forfeiture  of  his  rights,  but  simply 
has  its  weight,  in  connection  with 
other  circumstances,  in  debarring  him 
from  the  special  and  extraordinary 
relief  which  he  is  asking." 

In  Dana  r.  American  Tobacco 
(X.  .1.  1907),  65  Atl.  Rep.  730,  the 
court  held  another  stockholder  who 
complained  of  the  same  con.solida- 
tion  as  in  the  Beling  case,  supra,  also 
guilty  of  laches  on  account  of  some 

95 


50 


INTERCORPORATE    RELATIONS 


[part  I 


however,  sufTicient.'  Acquiescence  for  an  extended  period, 
during  which  time  the  interests  of  third  persons  have  inter- 
vened, may  itself  constitute  laches  and  prevent  a  stockholder 
from  attacking  a  consolidation  even  on  the  ground  of  fraud. ^ 
§  50.  Can  a  Majority  effect  Consolidation  upon  giving  Secur- 
ity to  Dissenting  Stockholders?  —  It  was  held  by  the  Supreme 
Court  of  Pennsylvania  in  an  early  case  that  a  consolida- 
tion might  be  effected  by  the  action  of  a  majority  of  the 
stockholders  of  the  consolidating  corporations,  provided  dis- 
senting stockholders  were  secured  from  loss  and  their  stock 


eight  weeks  delay,  placing  its  decision 
principally  upon  the  ground  that 
"the  injury  and  disturbance  to  busi- 
ness affairs  is  too  great  and  serious 
as  compared  to  the  benefit  to  be  de- 
rived therefrom  by  the  complainant 
to  justify  that  extraordinary  remedy." 
See  also  Tanner  v.  Lindell  R.  Co., 
ISO  Mo.  1  (1904),  (79  S.  W.  Rep.  155). 
It  is  apparent  from  the  decisions 
in  these  recent  New  Jer.sey  cases  that 
a  stockholder  who  seeks  equitable  relief 
in  case  of  an  unauthorized  consolida- 
tion must  act  with  extreme  prompti- 
tude in  that  State.  The  doctrine, 
however,  that  great  weight  should  be 
given  to  the  fact  that  the  unauthor- 
ized consolidation  has  been  consum- 
mated and  business  commenced  is  not 
without  danger.  It  seems  to  offer  an 
inducement  to  hurried  action  when 
rights  are  doubtful. 

1  Mills  V.  Central  R.  Co.,  41  N.  J. 
Eq.  1  (18S8),  (2  Atl.  Rep.  453). 

2  Bell  V.  Pennsylvania  R.  Co.  (N.  J. 
1887),  10  Atl.  Rep.  741  (1887).  In 
this  case  there  was  five  years  delay. 

\yhen  a  stockholder  fails  for  two 
years  to  bring  suit  to  annul  a  con- 
solidation and  the  rights  of  third 
persons  have  intervened  a  court  of 
equity  will  not  interfere. 

Spencer  v.  Seaboard  Air  Line 
R.  Co.,  137  N.  C.  107  (1904),  (49 
S.  E.  Rep.  96). 

This  section  is  quoted  with  ap- 
proval in  Hill  V.  Atlantic,  etc.  R.  Co., 

96 


143  N.  C.  562  (1906),  (55  S.  E.  Rep. 
854). 

In  Rabe  v.  Dunlap,  51  N.  J.  Eq.  40 
(1893),  (25  Atl.  Rep.  959),  it  was  held 
that  where  a  corporation  chartered 
prior  to  the  passage  of  the  consolida- 
tion act,  consolidated  with  other 
corporations  for  the  purpose  of  carry- 
ing on  a  business  essentially  different 
from  that  for  which  it  was  organized, 
equity  might  protect  the  non-assenting 
stockholders,  if  application  were  made 
promptly ;  but  that  equity  would  not 
dissolve  the  consolidated  companj', 
and  return,  free  from  all  liens,  the 
propert}^  contributed  by  the  corpora- 
tion in  which  complainants  were 
stockholders  where  for  three  years 
they  had  neglected  to  ask  the  aid 
of  equity,  and  had  stood  quietly  by 
while  the  consolidated  corporation 
had  incurred  liabilities  and  the  rights 
of  third  persons  had  intervened. 

In  Douglass  v.  Concord,  etc.  R. 
Co.,  72  N.  H.  26  (1903),  (54  Atl.  Rep. 
883),  where  the  certificate  for  a  non- 
dividend  paying  stock  had,  without 
the  owner's  knowledge,  remained 
in  the  name  of  her  agent  for  twenty- 
seven  years,  when  she  examined  it 
and  then  learned  for  the  first  time 
that  the  corporation  had  been  merged 
with  another  nine  j^ears  before, 
it  was  held  that  as  no  one  had  acquired 
rights  or  changed  his  position  by 
reasons  of  her  non-action  she  had 
not  lost  her  right  to  relief  bv  laches. 


CHAP.  IV] 


ASSENT   OF   STOCKHOLDERS 


§50 


taken  at  an  appraisal,  although  no  statutory  provision  sanc- 
tioned such  course  nor  removed  the  necessity  for  unanimous 
consent.^ 

While  this  decision  has  been  referred  to  apparently  with 
approval  in  other  cases,  it  is  opposed  to  the  weight  of  author- 
ity and  contravenes  fundamental  principles.  It  is  not  within 
the  power  of  courts  of  law  or  of  equity,  in  the  absence  of  special 
statutory  authority  authorizing  the  exercise  of  the  power  of 
eminent  domain  with  respect  to  g^iasi-public  corporations, 
to  decree  that  the  stock  of  dissenting  stockholders  shall  be 
taken  for  the  purpose  of  c;[uieting  opposition." 

The  language  of  Lord  Eldon  in  granting  an  injunction  against 
an  unauthorized  extension  of  the  business  of  a  voluntary  asso- 
ciation at  the  suit  of  a  dissenting  member,  although  it  was 


'  Lauman  v.  Lebanon  Valley  R. 
Co.,  30  Pa.  St.  42  (1852),  (72  Am. 
Dec.  664).  See  also  State  v.  Bailey, 
16  Ind.  46  (1861),  (79  Am.  Dec.  410). 

The  decision  in  the  Pennsylvania 
case  seems  still  to  be  the  law  of  that 
State.  In  Barnett  v.  Philadelphia 
Market  Co.,  218  Pa.  649  (1907), 
(67  Atl.  Rep.  912),  the  Court 
said:  "The  act  .  .  .  authorizes 
consolidation,  but  does  not  take 
away  tlie  right  of  a  stockholder  to 
refuse  to  surrender  his  stock  for  that 
in  a  new  corporation  or  to  take  any- 
thing less  for  it  than  its  actual  value, 
if  this  company  is  to  be  practically 
dissolved.  This  is  all  the  decree 
secures  to  the  appellees,  and  to  it 
they  were  entitled.  Lauman  v. 
Lebanon  Valley  R.  Co.,  30  Pa.  42 
(1852).  A  dissatisfied  stockholder 
voting  against  consolidation  '  may ' 
have  his  damages  and  the  value  of 
his  stock  ascertained  and  payment 
of  the  same  secured  in  the  mode 
pointed  out  in  that  act,  but  this 
remedy  is  not  his  only  one.  He  may 
adopt  it  if  he  prefers  it,  but  he  is  not 
required  to  do  so.  The  protection 
given  the  stockholder  in  Lavman  v. 
Lebanon  R.  Co.  is  still  to  be  found  in 
chancery,    assuring   him   actual    pay- 


ment for  his  stock,  if  he  is  compelled 
to  part  with  it." 

In  McVicker  v.  Ro.ss,  .55  Barb. 
(N.  Y.)  247  (1869),  it  was  held,  in  the 
case  of  a  consolidation  of  two  joint 
stock  companies,  that  although  a  dis- 
senting shareholder  was  not  obliged 
to  surrender  his  interests  to  remain- 
ing associates  at  an  estimated  valu- 
ation, but  had  the  right  to  have  the 
valuation  actually  ascertained  by 
a  sale,  in  the  ordinary  manner  of 
closing  up  partnerships  where  there 
is  no  express  stipulation;  yet  that 
where  the  amount  of  dissenting  stock 
was  inconsiderable  in  comparison  with 
the  stock  who.se  owners  had  acqui- 
esced in  the  agreement  of  consolida- 
tion, the  court  would  order  the  con- 
solidated company  to  give  a  bond 
conditioned  that  ujwn  final  judgment 
all  the  propertj'  transferred  should, 
if  required,  be  delivered  into  the  cus- 
tody of  tiie  Court  for  the  protection 
of  all  the  shareholders. 

2  Mills  r.  Central  R.  Co.,  41  N.  J. 
Eq.  1  (1S86),  (2  Atl.  Rep.  453); 
Black  V.  Delaware,  etc.  Canal  Co.,  22 
N.  .1.  Eq.  406  (1871);  Mowrey  v. 
Indianai)olis,  etc.  R.  Co.,  4  Biss. 
(U.  S.)  84  (1866). 

97 


§51 


INTERCORPORATE    RELATIONS 


[part  I 


proposed  to  indemnify  him,  is  appropriate:  "  The  right  of  a 
partner  is  to  hold  to  the  specific  purposes  his  paitners  while 
the  partnership  continues,  and  not  to  rest  upon  indemnities 
with  respect  to  what  he  has  not  proposed  to  engage  in."  ^ 

§  51.  The  Right  to  condemn  Stock.  — The  legislature  has 
power  to  authorize  the  consolidation  of  railroad  and  other 
(/imst-public  corporatioas,  without  the  unanimous  consent  of 
their  stockholders,  when  it  makes  provision  for  appraising  and 
paying  for  the  stock  of  dissenting  stockholders.  This  power 
is  entirely  unaffected  by  the  constitutional  prohibition  against 
impairing  the  obligations  of  contracts  and  is  based  upon  the 
sovereign  power  of  eminent  domain.  Corporate  shares,  as 
well  as  all  other  property,  are  subject  to  the  paramount  neces- 
sities of  the  State  for  the  promotion  of  public  interests.^  Ac- 
cordingly, in  exceptional  instances,  statutes  have  been  passed,^ 


1  Natusch  V.  Irving,  2  Cooper  Ch. 
358  (1824).  See  also  Stevens  v.  Rut- 
land, etc.  R.  Co.,  29  Vt.  545  (1851). 

^  In  Spencer  v.  Seaboard  Air  Line 
R.  Co.,  137  N.  C.  107  (1904),  (49  S.  E. 
Rep.  96),  the  Court  said  (p.  121): 
"Tlie  legislature  in  the  exercise  of  its 
power  confers  upon  a  majority  of  the 
stockholders  the  power  to  consoli- 
date with  the  other  constituent  com- 
panies and  accept  in  consideration 
therefor  such  number  of  shares  in 
the  new  or  consolidated  coqjoration 
as  may  be  agreed  upon.  This  can  be 
done  only  with  the  consent  of  the 
legislature.  The  legislature  having 
decided  that  such  consolidation  was 
promotive  of  the  public  welfare, 
recognized  that  it  had  no  power  to 
compel  a  dissenting  stockholder  to 
accept  stock  in  the  new  corporation. 
Therefore,  in  the  exercise  of  the  right 
of  eminent  domain  it  empowers  the 
corporation  to  condemn  the  stock  of 
such  dissenting  stockholder  when  it 
cannot  otherwise  be  acquired."  (Cit- 
ing this  work.) 

(p.  125)  "We  are  of  the  opinion 
that  the  legislature  had  the  power 
to  confer  on  the  corporation  the 
right     to     condemn     the     dissenting 

98 


stock,  and  that  upon  a  reasonable 
interpretation  of  the  statute  it  has 
done  so.  We  find  no  valid  objection 
to  the  mode  prescribed  for  ascertain- 
ing the  value  of  the  stock;  it  is 
expressly  provided  that  the  value  so 
assessed  must  be  paid  before  the 
stock  is  transferred.  It  would  seem 
that  the  mode  prescribed  is  exclusive 
and  must  be  pursued." 

In  Black  v.  Delaware,  etc.  Canal 
Co.,  24  N.  J.  Eq.  469  (1873),  it  was 
held  that  in  the  exercise  of  the  right 
of  eminent  domain  the  legislature 
might  authorize  shares  in  corpora- 
tions and  corporate  franchise  to  be 
taken  for  public  purposes  upon  just 
compensation,  and  that  the  legisla- 
ture might,  when  public  necessity 
required  it,  grant  authority  to  con- 
solidate or  lease,  if  it  provided  just 
compensation  for  the  shares  of  such 
stockholders  as  dissenteU,  and  that 
the  act  in  question  did  provide  com- 
pensation for  unwilling  stockholders, 
before  their  property  was  taken. 

See  also  an  article  entitled  "Cor- 
porate Shares  and  Eminent  Domain," 
bj'  Leonard  M.  Daggett,  published  in 
Yale  Law  Journal,  May,  1896. 

3  The  statute  under  consideration 


CHAP.  IV] 


ASSENT   OF   STOCKHOLDERS 


§51 


for  the  promotion  of  I'ailroacl  and  similar  consolidations,  pro- 
viding, under  varying  conditioas,  that  the  stock  of  dissenting 
minority  stockholders  may  be  appraised  and  condemned, 
and  such  statutes  have  been  held  to  be  constitutional.^  Stat- 
utes of  this  character  are,  however,  strictly  construed,  and 
it  has  been  held  that  authority  to  condemn  the  shares  of  dis- 
sentient stockholders  for  the  purposes  of  consolidation  does 
not  warrant  the  taking  of  such  shares  for  the  purposes  of  a 
lease.^ 

These  statutes  must  be  distinguished  from  the  provisions 
in  modern  consolidation  acts  authorizing  as  a  condition  of 
consolidation  an  appraisal  of,  and  payment  for,  the  stock  of 
objecting  stockholders.^  It  is  not  the  purpose  of  these  pro- 
visions to  authorize  the  condemnation  of  stock  in  order  to 
quiet  opposition.  Consolidation  statutes  containing  them  do 
not  require  unanimous  stockholders'  consent  nor  can  such 
provisions  be  made  available  to  obtain  the  required  consent. 
Their  design  is  to  afford  the  dissenting  stockholder  an  addi- 
tional remedy,  —  to  give  him  the  privilege  of  selling  out  in- 
stead of  embarking  in  the  new  enterprise. 


in  Black  v.  Delaware,  etc.  Canal  Co., 
24  N.  J.  Eq.  469  (1873),  was  the  New 
Jersey  act  of  March  17,  1870.  See  also 
Illinois  Stat.  1897,  eh.  32,  authorizing 
the  exercise  of  the  right  of  eminent 
domain  in  aid  of  the  consolidation  of 
gas  companies.  Also  Connecticut  Gen. 
Stat.  (1902)  §§  3694,  3695,  providing 
for  the  condemnation  of  minority 
stock  interests  in  railroad  and  other 
corporations  where  the  majority  of 
the  stock  is  held  by  a  railroad  com- 
pany, and  a  court  finds  that  such 
action  will  be  for  the  public  interest. 


'  Mills  V.  Central  R.  Co.,  41  N.  J. 
Eq.  1  (1886),  (2  Atl.  Rep.  453). 

In  Officld  V.  New  York,  etc.  R.  Co., 
203  U.  S.  372  (1906),  (27  Sup.  Ct.  Rep. 
72),  affirming  78  Conn.  1  (1904),  (59 
.\tl.  Rep.  510),  the  Connecticut 
statutes  referred  to  in  the  jireceding 
note  were  held  to  be  con.stitutional 
and  valid,  —  the  taking  being  for  a 
public  use. 

2  Mills  V.  Central  R.  Co.,  41  N.  .1. 
E(i.  1  (1886),  (2  Atl.  Rep.  453). 

^  See  "Statutory  Provisions  for  Ap- 
praisal of  Stock,"  post,  §  57. 


99 


§  52 


INTERCOIli'OKATE    RELATIONS 


[part  I 


CHAPTER    V 

METHOD    OF    CONSOLIDATION 

§  52.    Formal    Statutory  Requisites. 

§  53.   When  Consolidation  is  effected. 

§  54.   Construction  of  Statutes  prescribing  Mode  of  Consolidation. 

§  55.   What  Statutory  Pro\'isions  Conditions  Precedent. 

§  56.   What  Statutory  Pro^•isions  not  Conditions  Precedent. 

§  57.    Statutory  Pro\dsions  for  Appraisal  of  Stock. 

§  52.  Formal  Statutory  Requisites.  —  Although,  as  ah'eady 
noted,  it  has  been  held  that  the  consohdation  of  corporations 
may  be  effected  by  the  direct  act  of  the  legislature,  without 
any  antecedent  action  on  the  part  of  the  corporations,^  such 
legislative  power,  if  existent,  is  seldom  exercised.  Nearly  all 
the  States,  however,  authorize  the  consolidation  of  corpora- 
tions of  their  own  volition  and  many  have  enacted  general 
statutes  designating  the  steps  necessary  to  bring  about  that 
result.^     These  statutes,   while  varying  in  detail,  are  similar 


>  Bishop  V.  Brainerd,  2S  Conn.  289 
(1859). 

^Alabama.  Code  1896,  ch.  28, 
§  1166  (as  amended  by  acts  1900- 
1901,  p.  237):  Directors  of  railroad 
companies  consolidating  enter  into 
an  agreement  under  corporate  seal  for 
consolidation,  prescribing  the  terms 
and  conditions  thereof,  etc.  Agree- 
ment must  be  submitted  to  separate 
stockholders'  meetings  and  must  be 
sanctioned  by  a  vote  of  at  least  two- 
thirds  in  amount  of  the  stockholders 
present. 

Gen.  Laws  1903,  No.  117,  §  2, 
prescribe  method  of  consolidating  cor- 
porations other  than  railroads. 

Arizona.  R.  S.  1901,  par.  864  : 
In  consolidation  of  railroad  companies 
agreement  "  upon  such  terms  as  di- 
rectors of  respective  companies  may 
agree  upon"  must  be  submitted  to 
stockholders  of  the  respective  cor- 
porations representing  three-fourths  of 

100 


the  subscribed  capital  stock  and  must 
be  ratified  and  confirmed  by  such 
stockholders. 

Arkansas.  Kirby's  Digest,  1904, 
§  6736 :  To  effect  consolidation,  con- 
tract, fixing  terms  and  conditions, 
must  be  assented  to  by  two-thirds  in 
interest  of  all  the  issued  capital  stock 
of  the  companies  proposing  to  con- 
solidate, at  a  stockholders'  meeting 
'  regularly  called  for  the  purpose. 

California.  Pom.  Code  1901,  §  473 : 
Method  of  consolidating  railroads 
same  as  Arizona,  ante.  Code  1886, 
§  361 :  Consolidation  of  mining  com- 
panies requires  consent  of  holders  of 
two-thirds  of  capital  stock. 

Colorado.  Mills  Anno.  Stat.  1891, 
§  605,  authorizes  consolidation  of  rail- 
road companies  under  certain  con- 
ditions by  majority  vote,  and  §  625 
requires  a  ttvo-thirds  vote  —  appli- 
cable to  consolidation  under  different 
statutes. 


CHAP.  V] 


METHOD    OF   CONSOLIDATION 


52 


in  their  general  nature,  and  the  process  of  consolidation  as 
prescribed  in  most  of  them  may  be  outlined  as  follows: 


Consolidation  of  business  corpora- 
tions requires  vote  of  three-fourths  of 
stock,  lb.  §  628. 

Connecticut.  G.  S.  1902,  §§  3675, 
3676:  Directors  of  railroad  com- 
panies enter  into  joint  agreement 
prescribing  terms  and  conditions  of 
corLsolidation.  Agreement  must  be 
submitted  to  stockholders  of  each 
company  at  a  special  meeting  thereof, 
called  separately  for  the  purpose,  and 
if  two-thirds  of  all  the  votes  of  all  the 
stockholders  are  for  the  adoption  of 
the  agreement,  the  companies  may 
consolidate.  P.  A.  1903,  ch.  194, 
§§  76,  77,  prescribes  a  similar  method 
for  consolidation  of  business  corpora- 
tions. 

Delaware.  Laws  1899  (Corp.  Law), 
§  54  :  Directors,  or  majority  of  them, 
enter  into  an  agreement  under  the 
corporate  seal  of  respective  corpora- 
tions prescribing  terms  and  condi- 
tions. The  icritten  consent  of  the 
owners  of  at  lea.st  two-thirds  of  the 
capital  stock  of  each  corporation  is 
necessary  to  the  validity  and  adop- 
tion of  the  agreement. 

Gen.  Corp.  Law,  1903,  §  59  : 
Directors,  or  majority  of  them,  enter 
into  an  agreement  under  corpo- 
rate seals  of  respective  corporations. 
Agreement  submitted  to  stockholders 
of  each  corporation  at  a  meeting 
called  separately  for  the  purpo.se, 
and  must  be  ratified  by  two-thirds 
in   amount  of  the  capital   stock. 

Idaho.  Laws  1901,  p.  214  :  Arti- 
cles stating  terms  of  consolidation 
must  be  approved  by  each  corporation 
by  a  vote  of  the  stockholders  owning 
a  majority  of  the  stock  (Applies  to 
Laws   1901,    "Consolidation"). 

R.  S.  1887,  §  2673  :  No  amalgama- 
tion or  consolidation  can  take  place 
without  the  written  consent  of  the 
holders  oi  three- fourths  in  value  of  all 
the  stock  in  each  corjioration. 


Illinois.  R.  S.  1901,  §  39,  p.  1376: 
Terms  of  con.solidation  must  be  ap- 
proved by  stockholders  owning  not 
le.ss  than  two-thirds  in  amount  of  the 
capital  stock  of  each  corporation. 

Indiana.  R.  S.  1901  (Burns'), 
§  5257:  Consolidation  may  be  upon 
such  terms  as  corporations  may 
mutually  agree  upon  in  accordance 
with  the  laws  of  the  adjoining  State 
with  whose  road  or  roads  connections 
are  formed. 

Iowa.  Code  1897,  §  2036:  Consoli- 
dation must  be  made  with  tlie  con- 
sent of  three-fourths  in  interest  of  all 
the  stockholders  upon  such  terms  as 
may  be  agreed  upon. 

Kansas.  G.  S.  1905,  ch.  84,  §  6325: 
Companies  contract,  fixing  terms, 
which  must  be  ratified  and  approved 
by  holders  of  two-thirds  of  all  the 
stock  of  each  company,  either  at  a 
meeting  of  the  stockholders  called 
for  the  purpo.se  or  by  approval  in 
writing. 

Kentucky.  Stat.  1903,  ch.  32, 
§  555,  Art.  1 :  Directors  enter  into 
agreement  prescribing  terms  and  con- 
ditions, which  must  be  ratified  by 
the  owners  of  at  least  two-third.^  of 
the  capital  .stock  of  each  corpora- 
tion. 

Louisiana.  R.  L.  vol.  2,  1904,  p. 
1485:  Terms  and  conditions  are 
agreed  upon  in  writing  by  corpora- 
tions and  must  be  approved  by  a 
majority,  or  such  a  number  as  may 
be  required  by  the  original  charters 
of  consolidating  companies. 

R.  L.  vol.  2,  1904,  p.  1486:  Only 
formalities  required  for  con.solidation 
are  the  iia.s.sage  of  a  resolution  to  con- 
solidate by  the  vote  of  three-fourths 
of  all  the  stockholders,  at  a  special 
meeting  called  for  the  purpose. 
Louisiana  statute  relating  to  consoli- 
dation of  business  corjjorations  (Act 
of  Dec.  12,  1874)  re<iuires   the   assent 

101 


§52 


INTERCORPORATE    RELATIONS 


[part  I 


(1)  The  directors  of  the  corporations  proposing  to  consoU- 
date  enter  into  an  agreement  for  the  consoUdation  thereof, 


of  the  owners  of  three-fifths  of  the 
stock. 

Maryland.  Pub.  Gen.  Laws  1904, 
Art.  23,  §  45:  Special  meeting  must 
be  called  for  the  purpose  of  consider- 
ing agreement  which  must  be  sanc- 
tioned by  the  holders  of  a  majority  of 
the  stock  of  the  companies. 

Michigan.  Public  Acts  1899,  p. 
450:  Directors  enter  into  an  agree- 
ment under  corporate  seal  prescribing 
terms  and  conditions  and  mode  of 
carrying  same  into  effect.  Agreement 
must  be  submitted  to  the  stock- 
holders of  each  corporation  separately 
and  sanctioned  by  votes  of  majorities 
in  interest. 

Minnesota.  Rev.  Laws  1905,  ch. 
58,  §  2897:  Certificate  stating  terms 
of  consolidation  must  be  approved 
by  each  corporation  by  vote  of  stock- 
holders owning  a  majority  of  the 
stock  or  by  the  written  consent  of  a 
majority  of  the  stockholders  attached 
to  the  certificate. 

Mississippi.  Code  1906,  §  4089: 
Consolidation  is  had  by  the  consent 
of  the  railroad  commission  and  upon 
such  terms  'as  the  companies  may 
agree  upon. 

Missouri.  Anno.  Stat.  1906,  § 
1059:  Railroad  companies  enter  into 
agreement  which  must  be  ratified 
and  approved  by  a  majority  in  in- 
terest of  all  the  stock  held  in  each 
company,  either  at  stockholders' 
meetings  or  by  a  certificate  signed 
by  such  majority  stockholders. 

Consolidation  of  business  corpora- 
tions requires  assent  of  three-fifths 
of  stockholders.  Anno.  Stat.  1906, 
§   1334. 

Montana.  Civil  Code  1895,  vol.  2, 
§  911:  Agreement  for  consolidation 
of  railroad  companies,  entered  into 
under  corporate  seals,  signed  by  presi- 
dent and  secretaries,  containing  terms 
and  conditions,  must  be  approved  by 

102 


stockholders  at  regular  or  special 
meeting  by  a  vote  of  holders  of  at 
least  three-fifths  in  amount  of  capital 
stock.  Consolidation  of  mining  com- 
panies requires  consent  of  stock- 
holders holding  three-fifths  of  stock. 
Code,    §  527. 

Nebraska.  Comp.  Stat.  1905,  §§ 
2023,  2024 :  Directors  enter  into  agree- 
ment stating  terms  and  •  conditions 
wliich  is  deemed  the  agreement  of 
the  corporations  when  it  has  been 
submitted  to  the  stockholders  of  each 
corporation  and  sanctioned  by  vote 
of  at  least  two-thirds  in  amount  of 
stock  represented. 

Nevada.  Cutting's  Comp.  Stat. 
(1861-90)  §  1011:  Manner  of  con- 
solidation of  railroad  companies  de- 
termined by  directors.  No  amalga- 
mation can  take  place  without  the 
written  consent  of  three-fourths  of 
stockholders  in  interest  of  each 
companj'. 

lb.  §  1075:  "All  and  any  corpora- 
tions" may  consolidate  upon  the 
written  consent  or  request  of  the 
holders  of  three-fourths  of  the  stock 
upon  terms  agreed  upon  by  directors 
or  trustees. 

N'eiv  Jersey.  Gen.  Corp.  Act  1896, 
§  105,  subdiv.  11:  Agreement  for 
consolidation  of  business  corporations 
must  be  submitted  to  stockholders, 
and  vote  of  two-thirds  of  stock  of 
each  company  is  necessary  for  its 
adoption. 

.  New  Mexico.  Comp.  Laws  1897, 
§  3847 :  Consolidation  agreement 
must  be  ratified  in  writing  by  stock- 
holders of  respective  corporations 
representing  three-fourths  of  the  sub- 
scribed capital  stock.  (Applies  to 
consolidation  authorized  in  that 
section.) 

lb.  §  3893:  Stockholders  agree 
upon  terms  and  conditions,  and  sub- 
mit   them    to    stockholders    of    each 


CHAP.  V] 


METHOD    OF    CONSOLIDATION 


§52 


prescribing   the   terms    and   conditioas   of    consolidation,    the 
mode  of  carrying  the  same  into  effect,  the  name  of  the  new 


company  at  a  meeting  called  sepa- 
rately for  that  purpose.  A  vote  by 
ballot  taken,  and  if  two-thirds  of  all 
the  votes  of  all  the  stockholders  shall 
be  for  the  adoption  of  the  agreement, 
companies  are  consolidated.  (Ap- 
plies to  ib.  §  3892.) 

New  York.  Birdseye's  Rev.  Stat. 
vol.  3,  p.  2962  (Railroad  Law,  §71): 
Form  of  consolidation  .substantially 
that  stated  in  text.  Approval  of 
stockholders  owning  two-thirds  of 
stock  of  each  corporation  is  necessary. 
Business  Corp.  Law,  §  9,  contains 
similar  provisions. 

North  Dakota.  Rev.  Codes  1905, 
§  4273 :  Articles  stating  the  terms  of 
consolidation  must  be  approved  by 
each  corporation  by  a  vote  of  the 
stockholders  owning  a  majority  of  the 
stock,  at  a  meeting  called  for  the 
purpose. 

Oklahoma.  Rev.  Stat.  1903,  vol.  1, 
p.  360,  §  99:  Articles  stating  the 
terms  of  consolidation  must  be  ap- 
proved by  a  vote  of  stockholders 
holding  a  majority  of  the  stock  at 
annual  or  special  meeting,  or  by  con- 
sent of  such  stockholders  in  writ- 
ing. 

Ohio.  Bates'  Anno.  Stat.  1787- 
1902,  §  3381:  Directors  enter  into 
joint  agreement  under  corporate  seal 
prescribing  terms,  conditions,  etc., 
which  must  be  submitted  to  stock- 
holders of  each  company  at  meeting 
called  for  the  purpose;  vote  by 
ballot,  and  if  two-thirds  of  all  the 
votes  cast  at  meeting  be  for  adoption, 
the  companies  may  consolidate. 

Pennsylvania.  Bright,  Pur.  Dig., 
1894,  §  108,  p.  1801:  Directors  agree 
jointly  under  corporate  seal  of  each 
corporation,  and  prescribe  terms  and 
conditions.  Agreement  is  subinitted 
to  .stockholders  of  each  corporation 
at  a  meeting  called  separately ;  vote 
by  ballot,  and  if  a  majority  of  all  the 


votes  cast  at  each  of  such  meetings 
shall  be  in  favor  of  the  agreement, 
companies  may  con.solidate.  (Ap- 
plies to  p.  1801,  §  107,  "Consolida- 
tion.") 

Ib.  §  115,  p.  1803:  Directors  agree 
jointly,  prescribe  terms,  etc.  Meet- 
ing of  each  corporation  called  sepa- 
rately. Agreement  submitted  to 
stockholders;  vote  by  ballot.  Two- 
thirds  of  all  votes  of  stockholders 
required.  (Applies  to  ib.  §  114,  p. 
1803). 

See  also  ih.  §  126,  p.  1805;  §  182, 
p.  1814. 

South  Carolina.  Code  1902,  vol.  1, 
§  2051 :  Directors  enter  into  joint 
agreement  prescribing  terms,  condi- 
tions, etc.  Agreement  is  submittetl 
to  stockholders  of  each  corporation 
at  a  meeting  thereof  called  separately 
for  that  purpose.  Vote  by  ballot. 
Majority  of  votes  of  all  the  stock- 
holders is  required. 

South  Dakota.  Anno.  Stat.  1901, 
§  3906 :  Terms  and  conditions  agreed 
upon  by  directors,  but  mu.st  be  ratified 
and  approved  by  persons  holding  or 
representing  a  majority  in  amount  of 
the  capital  stock  of  each  of  said 
companies,  at  annual  or  special  meet- 
ing or  by  approval  in  writing  of 
majority  in  interest  of  the  stock- 
holders of  each  companj'. 

Tennessee.  Code  1896,  §§  1523, 
1524:  Agreement  .shall  be  in  writing 
and  set  forth  the  terms  and  condi- 
tions. Must  be  approved  by  a  ma- 
jority of  the  stockholders  of  each  of 
the  consolidating  companies  at  a 
regular  meeting.  (Applies  to  §  1522, 
Code  1896,  "Consolidation.") 

§  1533:  Agreement  must  be  ap- 
proved by  majority  of  the  stock- 
holders of  each  of  the  con.solidating 
railroads.  (Applies  to  §  1532,  Coile 
1896,  "Consolidation.") 

Utah.      Laws   1901,  ch.  26,  p.   20, 

103 


§52 


INTERCORl'ORATE    RELATIONS 


[part  I 


corporation,  the  number  and  names  of  the  directors  and  other 
officers,  the  number  and  par  value  of  the  shares  of  the  capital 
stock,  and  the  manner  of  converting  the  capital  stock  of  the 
constituent  companies  into  that  of  the  consoUdated  corpora- 
tion, with  such  other  details  as  they  may  deem  necessary  to 
perfect  the  new  organization  and  the  consolidation  of  the 
companies. 


§  6 :  Agreement  must  specify  whether 
there  shall  be  a  merger  of  one  or 
more  companies  into  another  with- 
out creation  of  new  company  or  a 
consolidation  forming  a  new  consoli- 
dated corporation.  Agreement  must 
be  ratified  by  stockholders  of  domestic 
corporation  and  also  by  stockholders 
of  any  foreign  corporation  consolidat- 
ing, in  the  manner  prescribed  by  the 
laws  of  the  jurisdiction  where  such 
corporation  was  organized.  Two- 
thirds  vote  required  for  consolidation 
of  business  corporations.  R.  S.  1898, 
§340. 

Virginia.  Code  1904,  Tit.  17,  ch. 
46a,  §  1105e  (41):  Joint  agreement 
of  boards  of  directors  of  several  cor- 
porations prescribing  the  terms  and 
conditions  is  adopted  by  a  vote  of  a 
majority  of  the  stockholders  of  each 
merging  corporation.  The  vote  and 
agreement  must  then  be  certified  to 
the  State  Corporation  Commission 
which  decides  whether  certificate  of 
incorporation  shall  issue. 

Washington.  Ballinger's  Anno. 
Code  and  Stat.  1897,  §  4304:  Articles 
stating  terms  of  con.solidation  must 
be  approved  by  each  corporation  by 
a  vote  of  the  stockholders  owning  a 
majority  of  the  stock,  at  annual  or 
special  meeting,  or  by  consent  in 
writing  of  such  stockholders  annexed 
to  such  articles. 

West  Virginia.  Code  1906,  §  2346: 
Where  two  or  more  railroad  corpora- 
tions incorporated  under  laws  of  this 
State  are  located  or  surveyed  along 
the  same  line,  boards  of  directors 
may,  with  the  consent  of  a  majority 

104 


of  the  stockholders  of  each  corpora- 
tion, merge  or  consolidate. 

In  case  of  consolidation  of  foreign 
and  domestic  corporation,  agreement 
between  the  directors  of  the  different 
companies  must  be  ratified  by  two- 
thirds  of  the  votes  of  stockholders  of 
each  company. 

See  also  Acts  1901,  as  amended, 
p.  236,  ch.  108,  amending  and  re- 
enacting  §  53,  ch.  54,  of  Code  concern- 
ing consolidation  of  railroads. 

Under  this  statute  approval  of 
majority  of  stockholders  of  merging 
corporations  is  required. 

Wisconsin.  Sanborn's  Stat.  Supp. 
(1899-1906)  vol.  3,  ch.  87,  §  1833: 
Articles  stating  the  terms  of  consoli- 
dation must  be  approved  by  each 
corporation  by  a  vote  of  the  stock- 
holders holding  a  majority  of  the  stock 
at  annual  or  special  meetings  or  by 
the  consent  in  writing  of  such  stock- 
holders. 

Wyoming.  R.  S.  1899,  §  3202: 
Trustees  of  corporations  enter  into 
agreement  under  corporate  seal  of 
each,  prescribing  the  terms  and  con- 
ditions thereof,  etc.,  and  all  the  stock- 
holders in  either  of  such  corporations 
must  ratify.  (Applies  to  (A)  in  1899 
"Consolidation  Act.") 

§  3206 :  Trustees  or  directors  agree 
upon  terms  and  conditions  which 
must  be  ratified  and  approved  by  a 
majority  in  amount  of  the  capital 
stock  of  each  of  companies  at  annual 
or  special  meeting  or  by  approval  in 
writing  by  a  majority  in  interest  of 
such  stockholders.  (Applies  to  (B) 
in  1899  "Consolidation  Act.") 


CHAP.  V]  METHOD    OF   CONSOLIDATION  §  52 

(2)  The  agreement  of  the  directors  is  next  submitted  to  the 
stockholders  of  each  of  the  companies  at  a  meeting  thereof 
called  for  the  purpose  of  taking  the  same  into  consideration, 
after  due  notice  to  the  respective  stockhoklers. 

(3)  At  the  stockholders'  meeting  the  agreement  is  con- 
sidered and  a  vote  by  ballot  taken  for  its  adoption  or  rejec- 
tion. If  the  prescribed  proportion  of  the  stock  of  each  com- 
pany is  voted  for  the  adoption  of  the  agreement,  then  that 
fact  is  duly  certified  to,  and  the  agreement,  or  a  certified  copy 
thereof,  is  filed  in  the  office  of  the  Secretary  of  State,  thus 
completing  the  coasolidation. 

In  some  of  the  States,  as  will  be  observed,  the  written  con- 
sent of  a  majority  or  other  proportion  of  the  stockholders 
is  required  instead  of  their  votes  at  stockholders'  meetings. 
These  statutes  treat  consolidation  as  being  effected  by  the  act 
of  the  directors,  which  the  stockholders  may  approve  by  their 
individual  assents  as  well  as  by  their  votes. 

Where  the  act  authorizing  consolidation  uses  general  lan- 
guage and  does  not  clearly  designate  the  meaas  by  which  the 
result  is  to  be  obtained,  the  method  of  consolidation  is  to  be 
determined  by  the  contracting  corporations.^ 

Statutes  of  some  of  the  States  authorizing  the  consolidation 
of  corporations  provide  that  they  "  may  consolidate  their 
capital  stock"  and  under  such  a  statute  it  was  said,  in  a  New 
Jersey  case,  that  the  purchase  b}'  one  corporation  of  substan- 
tially the  entire  capital  stock  of  another  for  the  purpose  of 
consolidation,  followed  by  practical  consolidation,  would  be 
held  in  equity  to  be  a  consolidation  in  accordance  with  the 
statute.- 

As  a  general  rule,  the  duration  of  the  consolidated  corpora- 
tion may  be  fixed  in  the  agreement  for  consolidation,  and  the 

■  Dimpfel  v.   Ohio,   etc.    R.   Co.,   9  authority  referred  to,  for  the  purpose 

Biss.    (U.  S.)     127    (1879),     (8     Rep.  of  consolidation,  and  the  consequent 

641).  actual,  practical  and  absolute  consoli- 

2  Williamson  v.  New  Jersey  South-  dation,   completely   recognized   in   all 

ern  R.  Co.,  2G  N.  J.  Eq.  401   (1875):  things,  will  be  held  in  equity  to  be  a 

"In  fact,  the  consolidation  was  actual  consolidation  in  accordance  with  the 

and    complete    in    all    respects.     The  powers  of  the  .\cts.     If  the  proceed- 

purchasc    and    sale    and    delivery    of  ings  are  lacking  it  is  not  in  substance 

the  stock  (sixteen-seventeenths  of  the  but  in  form  merely;  the  consolidation 

whole),   by  virtue  of  the  legislative  has  been  fully  acquiesced  in." 

105 


§   54  INTERCORPORATE    RELATIONS  [I'ART  I 

period  is  not  restricted  by  the  life  of  any  of  the  constituent 
companies.* 

§  53.  When  Consolidation  is  effected.  —  As  the  steps  pointed 
out  by  the  coaso^idation  statute  must  be  taken,  in  addition 
to  the  execution  of  the  agreement,  to  make  a  coasoUdation 
effectual,  an  agreement  to  consolidate  does  not  work  a  con- 
solidation. The  status  of  the  companies  is  not  affected  until 
the  consolidation  is  completed.^  The  precise  time  when  that 
result  takes  place  is  generally  prescribed  by  the  statute,  and 
it  is  usually  provided  that  the  corporations  shall  be  consoli- 
dated upon  filing  the  agreement  of  consolidation  in  the  office 
of  the  Secretary  of  State.  Under  such  a  statute  it  has  been 
held  that  corporations,  parties  to  an  agreement  to  consoUdate, 
continue  in  the  full  enjoyment  of  their  franchises  and  may 
accept  subscriptions  to  their  capital  stock  until  the  agreement 
is  filed.' 

§  54.  Construction  of  Statutes  prescribing  Mode  of  Con- 
solidation. —  Under  a  statute  authorizing  the  coasolidation  of 
corporations,  upon  the  written  consent  of  three-fourths  in 
value  of  the  stock  of  such  corporations,  the  proportion  is 
based  upon  the  number  of  shares  issued  and  not  upon  the 
number  authorized;*  and  under  the  same  statute  it  was  held 
that  the  fact  that  trustees  consented  as  the  legal  owners  of 
stock  did  not  affect  the  validity  of  a  consolidation.^ 

1  New  York  Central  etc.  R.  Co.  v.  ^  Mansfield,  etc.  R.  Co.  v.  Brown, 
City  of  Yonkers,  103  N.  Y.  Supp.  252  26  Ohio  St.  223  (1875).  In  McClure 
(1907).  See  also  Market  St.  R.  Co.  v.  Peoples  Freight  R.  Co.,  90  Pa.  St. 
V.  Hellman,  109  Cal.  571  (1895),  (42  269  (1879),  where  a  subscription  was 
Pac.  Rep.  225) ;  Rio  Grande  R.  Co.  made  after  the  agreement  for  consoli- 
V.  Telluride  Power,  etc.  Co.,  16  Utah  dation  had  been  signed,  but  before  it 
125  (1897),  (51  Pac.  Rep.  146).  And  was  filed  in  the  office  of  the  secretary- 
see  post,^  ^  60,  "As  a  General  Ride,  of  the  Commonwealth,  it  was  held 
Effect  of  Consolidation  is  Creation  of  that  the  filing  of  the  agreement  in  the 
New  Corporation  and  Dissolution  of  office  of  the  secretary  was  not  neces- 
Constituents."  sary  to  validate  the  subscription. 

2  Shrewsbury,  etc.  R.  Co.  v.  Stour  *  Market  St.  R.  Co.  v.  HeUman,  109 
Valley  R.  Co.,  21  Eng.  L.  &  Eq.  628  Cal.  571  (1895),  (42  Pac.  Rep.  225). 
(1853),  2  De  Gex,  M.  &  G.  866.  «  Market  St.  R.  Co.  v.  Hellman.  109 

A  preliminary  plan  for  consolida-  Cal.  571  (1895),  (42  Pac.  Rep.  225). 
tion   cannot    vary   the   terms   of   the  It  has  also  been  held  in  a  suit  b_v  a 

certificate    of    consolidation    as   filed.  stockholder  to   enjoin   an   attempted 

State   V.    Consolidated    Gas    Co.,    104  consolidation  that  the  record  of  stock- 

Md.  364  (1906),  (65  Atl.  Rep.  40).  holders  upon  the  stock  book  must  de- 

1G6 


CHAP.  V]  METHOD    OF   CONSOLIDATION  §   54 

Railway  companies  coasolidating  under  the  Ohio  consoHda- 
tion  act,  may  agree  upon  the  number  and  amount  of  shares 
of  the  proposed  consoUdated  company,  may  classify  such 
stock  into  "common"  and  "preferred,"  and  may  issue  a 
greater  or  less  number  of  shares  than  the  aggregate  of  the 
constituent  companies  in  order  to  secure  a  just  and  equi- 
table division  of  property  between  the  shareholders  of  such 
corporations.^ 

A  statute  authorizing  the  directors,  with  the  assent  of  three- 
fifths  of  the  stockholders  of  the  original  corporations,  to  effect 
a  consolidation,  does  not  authorize  them  to  place  stock  of 
non-participating  stockholders  on  an  inferior  footing  to  their 
own  nor  to  transfer  the  rights  of  such  stockholders  to  a  third 
person  without  their  consent.^ 

A  statute  ^  providing  that  any  railroad  corporation  may 
consolidate  its  stock  with  that  of  a  corporation  in  an  adjoin- 
ing State  "  upon  such  terms  as  may  be  agreed  upon,  in  accord- 
ance with  the  laws  of  the  adjoining  State,"  does  not  require 
that  a  meeting  of  the  stockholders  of  a  domestic  corporation 
for  the  purpose  of  acting  upon  a  proposition  to  consolidate 
with  a  corporation  of  an  adjoining  State  should  be  called  and 
conducted  in  accordance  with  the  laws  of  such  State,  but  only 
that  the  terms  of  consolidation  should  not  conflict  with  those 
laws.* 

torniine  the  persons  entitled  to  vote  should    bo    excliangctl    for    the    new 

upon   the   question   of   consolidation.  stock,  the  latter  would  be  cancelled, 

Langan  v.   Franklyn,  29  Abb.   N.   C.  thus    reducing    the    amount    of    the 

102  (1892),  (20  N.  Y.  Supp.  404).  consolidated  stock.     It  was  held  that 

'  Burke  v.  Cleveland,  etc.   R.  Co.,  as  the  consolidated  corporation  issued 

22  Weekly  Law   Bulletin   (Ohio),    11  the    larger   amount    of   stock    it    was 

(1889).  obliged  to   pay  the  tax  upon  it,   al- 

A  Mar/yiand  statute  (Code,  Art.  81,  tliough   provision   was  made   for  the 

§  98)  provides  that  each  new  corpora-  cancellation   of   part  —  that  it   could 

tion  shall  pay  a  State  tax  based  upon  not  be  cancelled  unless  it  were  issued, 
the    amount    of    stock    which    it    is  State  v.  Consolidated  Gas  Co.,  104 

"authorized  to  have."     A  consolida-  Md.  304  (1900),  (65  Atl.  Rep.  40). 
tion   was   effected   between   two   cor-  ^  Fee   v.    New    Orleans   Gas    Light 

porations,   one  of  which  heUl  a  con-  Co.,  35  La.  Ann.  413  (1883). 
trolling   interest  in   the  stock  of  tlie  ^  Indiana  Rev.  Stat.  (1894),  §  5257. 

other.     The   certificate   of   consolida-  *  Bradford    i'.    Frankfort,    etc.    R. 

tion  provided  for  an  original  issue  of  Co.,    142   Ind.  383  (1895),   (40  N.  E. 

stock  of  a  certain  amount  but  stated  Rep.  741). 
that    when    said    controlling    interest 

107 


§   55  INTERCORPORATE   RELATIONS  [pART  1 

A  statute  empowering  the  directors  of  corporations  con- 
solidating to  enter  into  an  agreement  prescril^ing  the  terms 
and  conditions  of  the  consolidation,  and  the  manner  of  con- 
verting the  stock  of  each  company  into  that  of  the  consolidated 
company,  authorizes  the  insertion  in  such  agreement  of  a  pro- 
vision that  each  constituent  company  shall  come  into  the  con- 
solidation free  from  all  indebtedness  and  the  further  provision, 
to  accomplish  such  result,  that  sufficient  of  the  stock  appor- 
tioned to  each  company  shall  be  sold  to  pay  its  debts  and  the 
remainder  only  distributed  among  its  stockholders.^ 

§  55.  What  Statutory  Provisions  Conditions  Precedent.  — 
When  corporations  undertake  to  consolidate,  the  preliminary 
steps  which  the  statute  points  out  —  in  so  far  as  they  con- 
stitute conditions  precedent  as  distinguished  from  mere  direc- 
tions —  must  be  taken  before  the  consolidation  takes  effect 
and  the  new  company  comes  into  existence.  Thus,  if  the 
statute  require  the  consolidation  agreement  or  a  certificate 
of  consolidation  to  be  filed  with  the  Secretary  of  State,  until 
that  is  done  the  new  corporation  does  not  exist.  "The  new 
corporation,  deriving  its  franchises  from  the  State  law,  cannot 
act  until  the  State  has  the  requisite  evidence  of  its  claim  to 
corporate  existence.  The  statute  is  the  only  source  of  such 
existence  and  its  conditions  are  imperative."  ^  Where  it 
appeared,  however,  that  the  certificate  was  deposited  with  the 
Secretary  of  State,  it  was  held  that  the  law  would  presume 
that  it  was  recorded,  and  that  the  Secretary  could  be  com- 
pelled by  mandamus  to  do  any  necessary  ministerial  act  in 
the  matter,^     Where  the  statute  provides  for  the  payment  of 

^  Cleveland    City    R.    Co.    v.    First  retarj^    of     the    Commonwealth     the 

National  Bank,  68  Ohio  St.  582  (1903),  certificate  of  consolidation  of  certain 

(67  N.  E.  Rep.  1075).  railroad    companies    constituted    the 

^  Peninsular   R.   Co.    v.   Tharp,   28  one    company    thus    created    a    legal 

Mich.  507  (1874).     See  also  Common-  corporation  in  Pennsylvania, 
wealth  V.  Atlantic,  etc.  R.  Co.,  53  Pa.  (b)  In  a  quo  warranto  against  such 

St.  9  (1866);    Mansfield,  etc.  R.  Co.  company  "ni/Z  tiel  record"  is  well  re- 

V.    Brown,    26    Ohio   St.    223    (1875);  plied  to  a  plea  that  the  defendants 

Mansfield,  etc.  R.  Co.  v.  Drinker,  30  became  a  corporation  by  contract  of 

Mich.  124  (1874).  consolidation  under  said  act. 

'  In  Commonwealth  v.  Atlantic,  etc.  (c)  It  being  proved  that  the  cer- 
R.  Co.,  53  Pa.  St.  9  (1866),  it  was  held  tificate  was  deposited  with  the  see- 
that  :  retary   of  the   Commonwealth   in   his 

(a)   Filing  in  the  office  of  the  sec-  office,    the    presumption    is    that    he 

108 


CHAP,  v] 


METHOD    OF   CONSOLIDATIOX 


56 


fees  before  the  consolidation  agreement  can  l)e  filed  or  re- 
corded the  payment  of  such  fees  is  essential  to  consolidation.' 
The  consolidation  agreement  must  follow  the  provisions  of 
the  statute,  and  it  has  been  held  that  a  failure  to  set  forth 
therein  the  residences  of  the  directors  of  the  consolidated 
company  as  required  by  the  statute  renders  a  consolidation 
invalid  when  attacked  in  quo  warranto  proceedings  by  the 
State."  The  election  of  a  new  board  of  directors  has  also 
been  held,  under  one  statute,  to  constitute  a  condition  pre- 
cedent to  the  acquisition  by  the  consolidated  company  of  the 
rights  and  franchises  of  the  constituent  companies.^ 

§  56.  What  Statutory  Provisions  not  Conditions  Precedent.  — 
A  provision  in  a  consolidation  act  requiring  each  of  the  con- 
solidating corporations  to  file  with  the  Secretary  of  State  a 
resolution  adopted  by  the  corporation  accepting  the  provisions 
of  the  act  before  they  can  consolidate,  is  directory,  and  a  fail- 
ure to  comply  therewith  does  not  affect  the  consolidation,  as 


filed  the  same  of  record  and  tliat  it 
remains  of  record  there. 

(d)  Under  a  rejoinder  that  there 
is  such  a  record  with  a  prout  patet 
per  recordum,  tipon  inspection  of  the 
record  and  sncli  proof,  judgment  will 
be  entered  for  the  defendants. 

(e)  A  mandamus  will  issue,  if  nec- 
essary, to  the  secretary,  to  add  the 
date  of  filing  and  any  other  necessary 
act  in  the  premises. 

'  State  V.  Chicago,  etc.  R.  Co.,  145 
Ind.  229  (1896),  (43  N.  E.  Rep.  22G). 
See  also  Ashley  v.  Ryan,  49  Ohio  St. 
504  (1892),  (31  N.  E.  Rep.  721), 
affirmed  153  U.  S.  436  (1894),  (14  Sup. 
Ct.  Rep.  865). 

estate  V.  Vanderbilt,  37  Ohio  St. 
645  (1882):  "A  fatal  defect  in  the 
organization  of  this  companj-  is  found 
in  the  fact  that  under  Rev.  Stats,  § 
3381  (Ohio),  the  directors  of  the  con- 
solidating companies  must  set  forth 
in  their  joint  agreement  the  places 
of  residence  of  tlie  new  directors,  as 
well  as  their  number.  This  provision 
of  the  statute  has  not  been  complied 
with.     There  is  no  designation  of  any 


such  place  of  residence.  We  are  not 
to  .speculate  as  to  the  propriety  of 
this  provision  nor  as  to  the  manner  it 
became  incorporated  into  the  statutes 
in  its  present  form.  It  is  sufficient  to 
say  that  the  pro\'ision  is  in  no  sen.se 
directory  and  that  a  compliance  with 
it  is  indispcn.sable." 

'  Mansfield,  etc.  R.  Co.  v.  Drinker, 
30  Mich.  126  (1874):  "By  that  law 
it  will  be  seen  that  the  corporations 
were  not  to  become  merged  until  the 
agreement  for  con.solidation  was  duly 
filetl  in  the  office  of  the  Secretary  of 
State.  Tliis  was  not  done  until  May 
23,  1871.  Before  that  time  only  an 
inchoate  agreement  for  consolidation 
existed  and  no  merger ;  and  it  was 
impossible  that  any  action  as  a  con- 
solidated corporation  coidd  take  place. 
The  circuit  judge  hold  that  the  elec- 
tion of  a  board  of  directors  was  a  con- 
dition precedent  to  it.s  ac(iuiring  the 
rights  and  franchises  of  the  respective 
companies,  and  in  that  he  is  support etl 
by  the  unambiguous  provisions  of  the 
statute  itself." 

100 


§   56  INTERCORPORATE    RELATIONS  [PART  I 

between  stockholders  of  a  constituent  corporation  and  bond- 
holders of  the  consolidated  company.^  A  statute  authoriz- 
ing the  consolidation  of  a  domestic  corporation  with  a  corpo- 
ration of  an  adjoining  State  "  in  accordance  with  the  laws  of 
such  State  "  does  not  require  that  all  the  enactments  concern- 
ing consolidation  in  such  other  State  should  be  strictly  fol- 
lowed;^ nor  are  statutory  provisions  relating  to  incorporation 
applicable  to  foreign  corporations  consolidating,  under  legis- 
lative authority,  with  domestic  ones.^ 

The  provisions  of  a  general  incorporation  act  requiring 
directors  to  be  stockholders  do  not  apply  to  a  consolidated 
corporation  formed  under  a  special  act  containing  no  such 
provision.^  Where  the  consohdation  act  did  not  require  notice 
to  be  given  to  the  directors  of  the  meeting  of  the  board  to  act 
upon  an  agreement  for  consolidation,  and  it  was  not  shown 
that  the  articles  of  association  or  bj^-laws  of  the  company 
required  such  notice,  the  unanimous  action  of  a  majority  of 
the  directors,  being  a  quorum,  at  a  meeting  held  without 
notice  to  all  the  directors  was  held  valid.^  The  certification 
upon  the  agreement  of  consolidation  by  the  secretaries  of  the 
constituent  corporations  that  it  has  been  adopted  by  their 
respective  companies  is  not  essential.®     A  statutory  provision 

>  In  Leavenworth  v.  Chicago,  etc.  act  were  complied  with,  it  does  not 

R.  Co.,  134  U.  S.  688  (1890),  (10  Sup.  necessarily  follow  that  the  whole  pro- 

Ct.  Rep.  708),  where  a  pro\'ision  for  ceeding  would  be  void  for  a  failure 

filing  with  the  Secretary  of  State,  by  to  comply  with  this  direction  of  the 

each  of  the  consolidating  companies,  act." 

of  a  resolution  accepting  the  pro\n-  ^  Bradford  v.  Frankfort,  etc.  R.  Co., 

sions  of  the  act,  passed  by  a  majority  142  Ind.  383  (1895),  (40  N.  E.  Rep. 

of    the    stockholders,    at    a    meeting  741). 

called  for  the  purpose,   was  not  ob-  ^  Monroe  v.  Fort  Wayne,  etc.  R. 

served,  it  was  held  that  its  nonobserv-  Co.,  28  Mich.  271  (1873). 
ance    did    not    render   the  consolida-  *  Camden  Safe  Deposit,  etc.  Co.  v. 

tion    void.     The   Court    quoted   with  Burlington  Carpet  Co.  (N.  J.  1895),  33 

approval    the    following    language    of  Atl.  Rep.  479. 

the  Circuit  Court:    "It  is  also  a  pro-  ^  Wells   v.   Rodgers,   60  Mich.   527 

vision  which  may  well  be  held  to  be  (1886),  (27  N.  W.  Rep.  671). 
directory,    and    designed    to    secure  ^  Phinizj^  v.  Augusta,  etc.  R.  Co., 

evidence  that  each  of  the  companies  62  Fed.  684  (1894). 
intending    to    consolidate    recognized  An   agreement    for   the   consolida- 

the  statute  as  the  sole  authority  for  tion  of  two  railroad  companies  which 

such  consolidation,  and  their  obUga-  was   duly   signed   and   sealed   by  the 

tion  to  be  governed  by  its  provisions.  president   after   the   meetings   of  the 

If  the  other  essential  provisions  of  the  directors  of  both  companies  had  been 

110 


CHAP.  V] 


METHOD    OF    CONSOLIDATION 


§o7 


requiring  notice  of  consolidation  to  be  published  "  one  month  " 
was  held  to  be  complied  with  by  publication  in  five  consecu- 
tive issues  of  a  weekly  paper  and  by  publication  from  Octo- 
ber 18  to  November  17,  inclusive,  in  a  daily  paper. ^ 

§  57.  Statutory  Provisions  for  Appraisal  of  Stock.  —  While 
a  stockholder  in  a  corporation  organized  while  general  consoli- 
dation statutes  are  upon  the  statute  book  takes  his  stock 
subject  to  the  possibility  that  the  prescribed  majority  may 
effect  consolidation  without  his  consent,  the  change  is  still  of 
a  fundamental  nature  and  may  materially  affect  his  interests. 
Recognizing  this  position  of  minority  stockholders,  the  policy 
of  several  States,  as  indicated  in  their  consolidation  acts,  is  to 
provide,  as  a  part  of  the  process  of  consolidation,  for  the  ap- 
praisal of,  and  payment  at  the  appraisement  for,  the  shares  of 
stockholders  who  are  unwilling  to  participate  in  the  new  enter- 
prise.^    As  said  by  the  Supreme  Court  of  Ohio  in   Pittsburg, 


held  and  tlie  consolidation  ordered, 
was  not  rendered  invalitl  by  the  fact 
that  it  bore  date  prior  to  the  meeting 
of  the  directors  of  one  company. 
Wells  V.  Rodgers,  60  Mich.  555  (1886), 
(27  N.  W.  Rep.  671). 

'  Market  St.  R.  Co.  v.  Hellman,  109 
Cal.  571  (1895),  (42  Pac.  Rep.  225). 

^  The  Delaware  statute  (Laws  1903, 
p.  782,  ch.  394,  §  61),  applicable  in 
the  consolidation  of  business  corpora- 
tions is  illustrative  of  appraisal  stat- 
utes:  "If  any  stockhokler  in  either 
corporation  consolitlating  as  afore- 
said, who  objected  tliereto  in  writ- 
ing, shall  within  twenty  days  after 
the  agreement  of  consolidation  has 
been  filed  and  recorded  as  aforesaid, 
demand  in  writing  from  the  con- 
solidated corporation  payment  of  his 
stock,  such  corporation  shall  within 
three  months  thereafter  pay  to  him 
the  value  of  the  stock  at  the  date  of 
such  consolidation ;  in  ca.'ic  of  di.s- 
agreement  as  to  the  value  thereof,  it 
shall  be  ascertained  by  three  disin- 
terested persons,  one  of  whom  shall 
be  cho.sen  by  the  stockhoKlcr,  one  by 
the  directors  of  the  consolidated  cor- 
poration, and  the  other  by  the  two 


selected  as  aforesaid ;  and  in  case  the 
said  award  is  not  paid  within  sixty 
daj-s  from  the  making  thereof  and 
notice  thereof  given  to  said  stock- 
holder and  consolidated  corporation, 
the  amount  of  the  award  shall  be 
evidence  of  the  amount  due  by  said 
corporation  and  ma\'  be  collected  as 
other  debts  arc  collectible  by  law;  on 
receiving  payment  of  the  award  said 
stockholder  shall  transfer  his  stock 
to  the  consolidated  corporation  to  be 
disposed  of  by  the  directors  thereof 
or  to  be  retained  for  the  benefit  of 
the  remaining  stockholders." 

See  also  : 

Alabama:  Acts  1900-1901,  p.  237, 
amending  Code  1896,  §  1166  (rail- 
roads). 

Connecticut:  Pub.  Acts  1903,  ch. 
194,  §  79.  Almost  identical  with 
Delaware  statute. 

Ncbra.ska:  Comp.  Stat.  1907,  § 
89,   p.   535   (railroads). 

A'ew  York:  Husiness  Corp.  Law  as 
ameiuled  to  1907,  §  9,  is  similar  to 
the  Connecticut  and  Delaware  stat- 
utes except  that  it  pro^-ides  for  the 
apjMiintment  of  appraisers  by  the 
courts  instead  of  by  the  parties,  and 

111 


§57 


INTERCORPORATE    RELATIONS 


[part  I 


etc.  R.  Co.  V.  Garrett.^  "From  the  first  statute  to  the  present 
authorizing  the  consoUdation  of  raih-oad  companies  in  this 
State,  it  has  been  the  pohcy  of  the  legislature  to  require  pay- 
ment to  be  made  to  the  stockholder  of  the  value  of  his  stock 
when  he  refuses  to  convert  it  into  the  stock  of  the  new  com- 
pany." 


that  both  the  stockholder  and  the 
consolidated  company  may  apply  for 
their  appointment. 

In  Langan  v.  Franklyn,  20  N.  Y. 
Supp.  404  (1892),  it  was  held  that 
this  statute  did  not  afford  a  dissent- 
ing stockholder  his  exclusive  remedj^ 
but  that  he  might  seek  relief  in  equity. 

As  to  whether  stockholder  is  en- 
titled to  interest  on  appraised  value 
of  stock,  see  Trask  v.  Peeskill  Plow 
Works,  6  Hun  (N.  Y.),  236  (1875). 

New. Jersey:  Corp.  Act  1896,  §  108. 
This  act  is  similar  to  that  of  New 
York  in  its  form  of  procedure  but  ap- 
plied only  to  such  corporations  au- 
thorized to  consolidate  as  "shall  have 
the  right  to  exercise  any  franchise  for 
public  use." 

Law  1902,  ch.  241  applies  to  cor- 
porations "which  do  not  have  the 
right  to  exercise  any  franchise  for 
public  use,"  and  authorizes  appraisal 
of  stock  of  stockholders  not  in  favor 
of  consolidation. 

The  directors  are  bound  to  propose 
a  consolidation  agreement  which  docs 
not  unfairly  impair  the  rights  of  any 
class  of  stockholders  and  in  case  an 
unfair  agreement  is  proposed,  a  stock- 
holder is  not  bound  to  exercise  an 
option  between  joining  in  the  con- 
solidation and  surrendering  his  stock 
for  appraisal  and  compensation  under 
the  statute  just  referred  to. 

Colgate  V.  U.  S.  Leather  Co.  (N.  J. 
Ch.  1907),  67  Atl.  Rep.  657. 

Ohio :  Anno.  Stat,  as  amended  to 
1906,  §  3388  (railroads),  tender  this 
act  it  is  the  duty  of  the  railroad  com- 
pany   proposing    to    consolidate    to 


ascertain  who,  if  any,  of  its  stock- 
holders, refuse  to  convert  their  stock 
into  stock  of  the  consolidated  corpora- 
tion and  to  cause  the  value  of  the 
stock  of  anj^  who  refuse  to  be  ascer- 
tained and  paid  "before  the  consoli- 
dation takes  effect  "  ;  and  it  was  held 
that  a  failure  to  make  demand  before 
the  proposed  consolidated  company 
acquired  the  status  of  an  incorporated 
company  or  a  failure  to  make  an  at- 
tempt to  agree  with  the  company 
as  to  the  value  of  the  stock,  did  not 
defeat  the  right  of  a  stockholder, 
refusing  to  convert  his  stock,  to  be 
paid  its  full  value.  Pittsburgh,  etc. 
R.  Co.  V.  Garrett,  50  Ohio  St.  405 
(1893),  (34  N.  E.  Rep.  493). 

Pennsylvania:  Laws  1901,  p.  349- 
352,  §  5. 

It  is  held  that  a  dissenting  stock- 
holder is  not  bound  to  pursue  his  rem- 
edy under  this  statute  and  have  the 
value  of  his  stock  determined,  but 
may  bring  a  bill  in  equity  to  enforce 
paj'ment  of  its  value. 

Barnett  v.  Philadelphia  Market 
Co.  218  Pa.  649  (1907),  (67  Atl.  Rep. 
912). 

Smith  Carolina :  Code  1902,  §  2057 
(railroad  companies). 

Wyoming:  Rev.  Stat.  1899,  §  3022, 
(railroads). 

England :  Companies'  Clauses  Con- 
solidated Act  (8  &  9  Vict.  ch.  16, 
§§  128-134),  construed  in  Re  Anglo 
Itahan  Bank,  L.  R.  2  Q.  B.  452  (1867). 

'  Pittsburgh,  etc.  R.  Co.  v.  Garrett, 
50  Ohio  St.  414  (1893),  (34  N.  E.  Rep. 
493). 


112 


CHAP.  Vl]  EFFECT  OF   CONSOLIDATION  §  58 


CHAPTER    VI 

EFFECT    OF    CONSOLIDATION    UPON    STATUS     OF    CONSOLIDATING 
CORPORATIONS    AND    THEIR    STOCKHOLDERS 

§  58.    Effect  of  Consolidation  may  be  Fusion,  Merger  or  Continued  Existence. 

§  59.    Effect  of  Consolidation  depends  upon  Terms  of  Consolidation  Act. 

§  60.  As  a  General  Rule,  Effect  of  Consolidation  is  Creation  of  New  Cor- 
poration and  Dissolution  of  Constituents. 

§  61.    Exceptions  to  the  Rule  —  Merger  and  Continuance  of  Corporations. 

§  62.  Construction  of  Particular  Consolidation  Acts.  Cases  showing  Crea- 
tion of  Distinct  Corporation. 

§  63.  Construction  of  Particular  Consolidation  Acts.  Cases  of  Absorption  or 
Merger. 

§  64.  Effect  of  Valid  Consolidation  upon  Stockholders  of  Constituent  Corpo- 
rations. 

§  58.  Effect  of  Consolidation  may  be  Fusion,  Merger  or 
Continued  Existence.  —  As  already  shown,  the  term  "  consoli- 
dation" as  used  in  statutes  and  charters  authorizing  the  union 
of  corporations  has  acquired  no  well-defined  meaning  but  is 
used  to  describe  three  forms  of  corporate  conjunction:  * 

(1)  The  dissolution  of  all  the  constituent  corporations  and 
the  creation,  at  the  same  instant,  in  their  stead,  of  a  new  and 
distinct  corporation,  with  franchises,  privileges  and  property 
derived  from  those  passing  out  of  existence. 

(2)  The  merging  of  one  corporation  in  another,  by  which 
the  former  only  is  dissolved  and  the  latter  continues  its  exist- 
ence, with  the  franchises,  privileges  and  property  of  the  merg- 
ing corporation  added  to  its  own. 

(3)  The  continuance  of  all  the  consolidating  corporations, 
for  all  purposes,  or  for  formal  purposes  connected  with  the 
winding  up  of  their  affairs. 

Consolidating  corporations  often  possess  valuable  privileges 
and  immunities  which  the  consolidated  corporation  is  desirous 
of  succeeding  to,  but  which  the  courts,  as  a  rule,  do  not  favor,- 
so  that  the  question  whether  the  effect  of  a  particular  consoli- 

'  See  ante,  §  8  :  "  Uses  of  the  Term  U.  S.  20(1901),  (21  Sup.  Ct.  Rep.  240)  ; 
distinguished. "  St.  Louis  etc.  R.  Co.  v.  Berrj',  1 1.3  U.  S. 

2  Yazoo,  etc.  R.  Co.  v.  Adams,  180        465  (1885),  (5  Sup.  Ct.  Rep.  529). 

113 


§   59  INTERCORPORATE    RELATIONS  [PART  I 

dation  is  to  dissolve  the  constituent  companies  is  often  of 
much  importance. 

§  59.  Effect  of  Consolidation  depends  upon  Terms  of  Con- 
solidation Act.  —  The  word  "  consoUdation  "  being  apphed  to 
different  processes  producing  different  results,  the  effect  of  a 
consolidation  authorized  by  statute,  upon  the  existence  and 
status  of  the  constituent  corporations,  depends  entirely  upon 
the  terms  and  provisions  of  such  statute  and  the  acts  and 
agreements  of  the  consolidating  corporations  pursuant  thereto.* 

In  People  v.  New  York,  etc.  R.  Co?  the  New  York  Court  of 
Appeals  said:  "It  is  perfectly  competent  for  the  legislature, 
in  consolidation  acts,  to  declare  what  shall  be  the  status  of 
domestic  corporations  which  shall  avail  themselves  of  their 
provisions,  and  also  of  the  consolidated  company.  Whether 
the  consolidation  shall  create  a  mere  business  union  between 
the  constituent  companies,  leaving  them  in  existence  as  cor- 
porations, or  whether  it  shall  operate  as  a  surrender  of  the 
corporate  franchises  and  .the  extinguishment  of  their  corpo- 
rate existences,  and  a  creating  a  new  corporation  combining, 
to  the  extent  permitted  by  the  act,  the  powers  of  the  corpora- 
tions out  of  which  it  was  formed,  and  vesting  in  it  the  property 
of  the  constituent  companies,  depends  upon  the  legislative 
intention." 

The  Supreme  Court  of  the  United  States  has  said  that  "if 
in  the  statutes  there  be  no  words  of  grant  of  corporate  powers 
it  is  difficult  to  see  how  a  new  corporation  is  created.  If  it  is, 
it  must  be  by  implication,  and  it  is  an  unbending  rule  that 
a  grant  of  corporate  existence  is  never  implied."  ^  Notmth- 
standing  this  dictum,  as  controversies  concerning  the  effect  of 
consolidation  nearly  always  arise  in  cases  turning  upon  the 

^  Keokuk,  etc.  R.  Co.  v.  Missouri,  See    also    Yazoo,    etc.    R.    Co.    v. 

152  U.   S.   305   (1894),  (14    Sup.    Ct.  Adams,  180  U.  S.  1   (1901),  (21  Sup. 

Rep.  592):    "In  the  numerous  cases  Ct.     Rep.     240);      Railroad     Co.     v. 

which  have  arisen  in  this  court  as  to  Georgia,  98  U.  S.  362  (1878). 
the  effect  of  a  consolidation  upon  the  ^  People  ?'.  New  York,  etc.  R.  Co., 

existence  and  status  of  the  constituent  129  N.  Y.  482  (1892),  (29  N.  E.  Rep. 

corporations  it  has  been  held  that  the  959,  15  L.  R.  A.  82). 
question  of  the  dissolution  of  such  cor-  ^  Central  R.,  etc.  Co.  v.  Georgia,  92 

porations    depended    upon    the    Ian-  U.  S.  670  (1875). 
guage  of  the  statute  under  which  the 
consolidation  took  place." 

114 


CHAP.  Vl]  EFFECT   OF    CONSOLIDATION  §   60 

question  whether  the  consoHdated  corporation  has  inherited 
certain  exemptions  and  immunities  from  the  old  companies, 
not  favored  by  the  law,  in  case  the  consolidation  statute  speaks 
of  the  consolidated  corporation  as  a  "new"  corporation,  or 
in  any  way,  even  in  general  terms,  indicates  an  intention  to 
create  a  new  corporation,  the  courts  will  not  be  slow  in  holding 
that  the  effect  of  the  consolidation  is  to  dissolve  the  old  com- 
panies and  extinguish  their  special  exemptions.  "Indeed,"' 
says  Mr.  Justice  Brown  in  a  recent  case,  "it  is  not  too  much 
to  say  that  courts  are  astute  to  seize  upon  evidence  tending 
to  show  either  that  such  exemptions  were  not  really  intended, 
or  that  they  have  become  inoperative  by  changes  in  the  original 
constitution  of  the  companies."  * 

It  is  not  necessaiy  that  the  powers  of  the  new  corporation 
should  be  specialty  enumerated  nor  is  its  status  affected  by 
reference  to  the  charters  of  the  old  companies. - 

§  GO.  As  a  General  Rule,  Effect  of  Consolidation  is  Creation 
of  New  Corporation  and  Dissolution  of  Constituents.  —  One  of 
the  earliest  deci-sions  upon  the  subject  of  the  consolidation 
of  corporations  was  rendered  by  the  Supreme  Court  of  Indiana, 
which  held  in  McMahon  v.  Morrison  ^  that  the  effect  of  a  con- 
solidation by  legislative  authority  was  a  dissolution  of  the 
original  corporations  and,  at  the  same  instant,  the  creation  of 
a  new  corporation  with  property,  liabilities  and  stockholders 
derived  from  those  passing  out  of  existence.  This  decision 
was  approved  by  the  Supreme  Court  of  the  United  States,* 
and  the  conclusion  there  reached  has  been   adopted  as   appli- 

>  Yazoo,  etc.  R.  Co.  v.  Adams,  ISO  distinct    body.     .\    new    corporation 

U.S.  22  (1901),  (21  Sup.  Ct.  Rep.  240).  may   be   as   readily   created    by    the 

2  Railroad   Co.   v.  Maine,  96  U.    S.  union   of    two   or   more   corporations 

510    (1877):      "The    Maine    Central  as  by  the  union  of  indi^•iduaIs;    and 

Railroad    Company    was,    upon    the  its  powers  and  privileges  may  as  well 

consolidation    of    the    original    com-  be    designated    by    reference    to    the 

panics,  a  new  corporation,  as  distinct  charters    of    other    companies    as    by 

from    them    as    though    it    had    been  special  enumeration." 

created   before  their  existence.     The  See  also  Shields   v.  Ohio,  95  U.   S. 

fact  that  the  powers,  pri\'ileges,  and  319  (1877). 

imnuuiities     which     they     had     pos-  ^  McMahon  v.  Morrison,  16  Ind.  172 

sessed  were  conferred  upon  the  new  (1861),  (79  Am.  Dec.  468). 

company,    so    far    as    they    could    be  *  Clearwater   v.   Meretlith,    1    AN  :ill. 

exercised    or    enjoyed    by    it,    in    no  (U.  S.),  40  (1863). 
respect    affected    its    character    as    a 

11.') 


§60 


INTERCORPORATE    RELATIONS 


[part  I 


cable  to  different  consolidation  statutes  in  a  long  line  of  deci- 
sions from  many  States.' 


1  United  States:  Yazoo,  etc.  R.  Co. 
V.  Adams,  180  U.  S.  1  (1901),  (21  Sup. 
Ct.  Rep.  240) ;  Minneapolis,  etc.  R. 
Co.  V.  Gardner,  177  U.  S.  332  (1900), 
(20  Sup.  Ct.  Rep.  656) ;  Keokuk,  etc. 
R.  Co.  V.  Missouri,  152  U.  S.  301  (1894), 
(14  Sup.  Ct.  Rep.  592);  Pullman 
Palace  Car  Co.  v.  Missouri  Pac.  R. 
Co.,  115  U.  S.  587  (1885),  (6  Sup.  Ct. 
Rep.  194) ;  Railroad  Co.  v.  Georgia, 
98  U.  S.  364  (1878) ;  Railroad  Co.  v. 
Maine,  96  U.  S.  510  (1877) ;  Shields  v. 
Ohio,  95  U.  S.  320  (1877) ;  Ridgway 
Township  v.  Griswold,  1  McCrary 
(U.  S.),  151  (1878). 

Georgia:  Central  R.,  etc.  Co.  v. 
State,   54  Ga.   401    (1875). 

Illinois:  Ohio,  etc.  R.  Co.  v. 
People,  123  111.  467  (1888),  (14  N.  E. 
Rep.  874). 

Indiana:  Eaton,  etc.  R.  Co.  v. 
Hunt,  20  Ind.  457  (1863);  State  v. 
Bailey,  16  Ind.  46  (1861),  (79  Am. 
Dec.  405). 

Iowa:  Carey  v.  Cincinnati,  etc.  R. 
Co.,  5  Iowa  357  (1857). 

Louisiana:  Charitj'  Hospital  v. 
New  Orleans  Gas  Light  Co.,  40  La. 
Ann.  382  (1888),  (4  So.  Rep.  433); 
Fee  V.  New  Orleans  Gas  Light  Co.,  35 
La.  Ann.  413  (1883). 

Maine:  State  v.  Maine  Central  R. 
Co.,  66  Me.  488  (1877),  affirmed  96 
U.  S.  510  (1877). 

Missouri:  State  v.  Keokuk,  etc. 
R.  Co.,  99  Mo.  30  (1899),  (12  S.  W. 
Rep.  290,  6  L.  R.  A.  222) ;  Kinion  v. 
Kansas  City,  etc.  R.  Co.,  39  Mo.  App. 
382  (1889). 

North  Carolina:  Cheraw,  etc.  R. 
Co.  V.  An.son,  88  N.  C.  519  (1883). 

Ohio:  Shields  v.  State,  26  Ohio  St. 
86  (1875) ;  State  v.  Sherman,  22  Ohio 
St.  411  (1872). 

Pennsylvania :  Lauman  v.  Lebanon 
Valley  R.  Co.,  30  Pa.  St.  42  (1858), 
(72  Am.  Dec.  664). 

South  Carolina:  Charlotte,  etc.  R. 

116 


Co.  V.  Gibbes,  27  S.  C.  385  (1887),  (4  S. 
E.  Rep.  49). 

Tennessee:  Miller  v.  Lancaster, 
5  Cold.  514  (1868). 

Texas:  Indianola  R.  Co.  v.  Fryer, 
56  Tex.  609  (1882). 

Utah :  Rio  Grande  R.  Co.  v.  Tellu- 
ride  Power,  etc.  Co.,  16  Utah  125 
(1897),  (51  Pac.  Rep.  146). 

The  rule  is  clearly  stated  in  a 
note  to  McMahon  v.  Morrison  in 
79  Am.  Dec.  424:  "The  effect  of 
consolidation  upon  former  com- 
panies, except  so  far  as  the  con- 
trary may  be  provided  by  the 
statute  authorizing  consolidation  is, 
as  a  general  rule,  to  dissolve  all  the 
old  corporations  and  to  create  a 
new  one,  assuming  the  liabilities,  and 
succeeding  to  the  rights  of  the  old 
companies." 

The  reasons  for  the  rule  are  pointed 
out  by  the  Supreme  Court  in  Keokuk, 
etc.  R.  Co.  V.  Missouri,  supra:  "It  is 
impossible  to  conceive  of  a  corpora- 
tion existing  without  stock,  or  cer- 
tificates representing  the  interests  of 
the  corporators  in  the  organization. 
Now  if  the  act  pro\'ides  that  these 
certificates  shall  be  surrendered  and 
certificates  of  another  company  is- 
sued in  their  place,  what  becomes  of 
the  prior  companies?  Who  are  their 
stockholders?  Who  are  their  offi- 
cers? If  the  stock  in  the  new  com- 
pany is  sold,  what  interest  in  the  prior 
companies  passes  by  the  sale  ?  There 
can  be  but  one  answer  to  these  ques- 
tions. The  property  and  franchises 
of  the  prior  companies  are  gone  as 
much  as  if  they  had  formally  sur- 
rendered their  charters.  The  new 
company  may  doubtless  receive  by 
transmission  from  its  constituent  com- 
panies their  property,  rights,  privi- 
leges and  franchises,  including  any 
immunity  from  taxation ;  but  it 
receives    them    as    one    heir    receives 


CHAP.  Vl]  EFFECT   OF   CONSOLIDATION  §   60 

As  a  general  rule,  therefore,  the  effect  of  consolidation  is 
the  creation  of  a  new  and  distinct  corporation  and  the  disso- 
lution of  the  constituent  companies.  "  The  general  current  of 
authority  is  to  the  effect  that  statutes  for  the  consolidation  of 
domestic  corporations  are  to  be  treated  as  acts  of  incorpora- 
tion, and  that,  on  consolidation  being  effected  under  their  pro- 
visions, the  constituent  companies,  unless  such  an  intention 
is  excluded  by  the  language  of  the  statute,  are  deemed  to  be 
dissolved,  and  their  powers  and  faculties  to  the  extent  author- 
ized become  vested  in  the  consolidated  company  as  a  new  cor- 
poration created  by  the  act  of  consolidation."  ^ 

While  the  "  property,  liabilities  and  stockholders  "  of  the 
new  corporation  may,  in  the  language  of  McMahon  v.  Morri- 
son, be  "  derived  from  those  passing  out  of  existence,"  the 
proposition  that  legislative  consent  to  consolidation  has  the 
effect  of  dissolving  the  old  corporations  and  creating  eo  in- 
stanti  a  new  corporation  in  their  stead,  is  based  upon  the 
theory  that  the  consolidated  corporation  derives  its  powers 
from  the  act  authorizing  the  consolidation  and  not  from  the 
constituent  corporations.  As  said  by  Mr.  Justice  Swayne  in 
Shields  v.  Ohio:'^  "  The  new  organization  took  the  powers  and 
faculties  designated  in  advance  in  the  acts  authorizing  the 
consolidation  —  no  more  and  no  less.  It  did  not  acquire  any- 
thing by  mere  transmission.  It  took  everything  by  creation 
and  grant." 

From  the  principle  that  a  consolidated  corporation  takes 
its  rights  and  powers  by  creation  and  grant  and  not  by  trans- 
mission, it  follows  that  its  corporate  life  is  not  limited  to  the 

the  estate  of  his  ancestor,  or  as  the  must  be  kejjt  in  iiiiiul  that  the  con- 
grantee  receives  the  estate  of  his  solitlation  of  raihoads  does  not  create 
grantor,  by  inheritance,  succession  a  new  corporation,  witli  powers  of  its 
or  purchane.  The  result  is  not  a  own,  distinct  from,  greater  or  less 
mere  union  or  partnership  of  two  than  those  enjoyed  by  the  consolidat- 
companies,  nor  a  merger  of  the  ing  companies  separately." 
franchises  of  one  into  another,  but  '  People  v.  New  York,  etc.  R.  Co., 
the  extinguishment  of  one  and  the  129  N.  Y.  482  (1802),  (29  N.  E.  Rep. 
creation  of  another  in  its  place."  959),  {per  Andrews,  J.),  (15  L.  R.  A. 

As  oppo.scd  to  these  authorities  the  82). 
following  extract  from  the  opinion  in  ^  Shields    v.    Ohio,   95    U.   S.    323 

Phinizy  v.   Augusta,   etc.   R.   Co.  62  (1877). 
Fed.  684  (1894),  stands  alone:    "It 

117 


§61 


INTERCORPORATE    RELATIONS 


[part  1 


unexpired  terms  of  its  constituents  but  extends  for  the  full 
period  fixed  in  the  consolidation  agreement  under  the  statutes 
existing  at  the  time  of  its  execution.^ 

§  61.  Exceptions  to  the  Rule — -Merger  and  Continuance  of 
Corporations.  —  While,  as  a  general  rule,  the  effect  of  consoli- 
dation is  the  dissolution  of  the  constituent  companies,  the 
legislature,  by  appropriate  language,  may  authorize  a  consoli- 
dation by  merger  or  absorption,  in  which  case  the  existence 
of  only  the  merging  corporation  is  terminated.^  In  Chicago, 
etc.   R:   Co.  V.   Ashling,^  the  Supreme  Court  of  Illinois  said : 


*  In  New  Orleans  Gas  Light  Co.  v. 
Louisiana  Light,  etc.  Co.,  11  Fed.  277 
(1882),  Judge  Pardee  considered  it  a 
"  very  serious  question  .  .  .  whether, 
if  the  said  two  companies  could  and 
did  unite  under  the  said  consolidation 
act,  the  life  of  the  amalgamated  com- 
pany could  be  or  was  any  longer  than 
that  of  the  shorter  company  so  amal- 
gamated. ...  It  seems  to  be  un- 
disputed law  as  derived  from  the 
authorities  and  admitted  in  argument 
in  this  case,  that  where  two  com- 
panies consolidated  under  such  a  law 
as  that  of  1874  the  old  corporations 
are  dissolved,  and  a  new  corporation 
created.  What  is  the  hfe  of  this  new 
corporation  ?  The  law  is  silent.  It 
seems  impossible  for  either  corpora- 
tion to  grant  a  longer  life  than  it  has 
itself.  Whence  it  ought  to  follow 
that  the  life  of  the  new  corporation 
would  only  be  that  of  the  shorter- 
lived  amalgamating  corporation." 

The  error  in  this  course  of  reason- 
ing lies  in  the  assumption  that  the 
constituent  corporations  grant  pow- 
ers to  the  new  corporation.  On  the 
contrary,  the  latter  derives  its  powers 
wholly  from  the  consolidation  statute, 
and  not  at  all  from  them. 

The  weight  of  authority  supports 
the  text.  New  York  Central,  etc.  R. 
Co.  V.  aty  of  Yonkers,  103  N.  Y. 
Supp.  252  (1907);  Market  St.  R. 
Co.  V.  Hellman,  109  Cal.  571  (1895), 
(42  Pac.  Rep.  225) ;    Rio  Grande  R. 

118 


Co.  V.  Telluride  Power,  etc.  Co.,  16 
Utah  125  (1897),  (51  Pac.  Rep.  146)  ; 
Charity  Hospital  v.  New  Orleans  Gas 
Light  Co.,  40  La.  Ann.  382  (1888), 
(4  So.  Rep.  43.3). 

^  In  Ceatral  R.,  etc.  Co.  v.  Georgia, 
92  U.  S.  673  (1875),  the  Supreme 
Court  of  the  United  States  said  :  "  If 
then  this  construction  of  the  act  be 
correct  (and  we  cannot  doubt  that  it 
is),  that  act  contemplated  no  such 
union  and  consolidation  of  the  two 
companies  as  should  work  a  surrender 
of  their  charters  by  both  of  them, 
and  the  creation  of  a  new  company. 
At  most,  it  intended  a  merger  of  the 
Macon  aad  Western  Railroad  Cona- 
pany  into  the  other,  a  mode  of  trans- 
fer of  that  company's  franchise,  and 
property  and  pajTnent  therefor  with 
stock  of  the  Central  Company.  It  is 
of  no  importance  to  the  inquirj- 
whether  a  new  corporation  was  cre- 
ated by  the  union  and  consolidation, 
that  the  Central  acquired  under 
the  act  new  and  enlarged  powers  as 
well  as  new  stockholders." 

See  also  Meyer  v.  Johnston,  64  Ala. 
603  (1879)  ;  New  York  Central,  etc. 
R.  Co.  V.  Saratoga,  etc.  R.  Co.,  39 
Barb.  (N.  Y.)  289  (1861) ;  Eaton  v. 
Hunt,  20  Ind.  457  (1863).  Also 
Philadelphia,  etc.  R.  Co.  v.  Howard, 
13  How.  (U.  S.)  333  (1851). 

^  Chicago,  etc.  R.  Co.  v.  Ashling, 
160  111.  382  (1896),  (43  N.  E.  Rep. 
373). 


CHAP.  Vl] 


EFFECT   OF   CONSOLIDATION 


§61 


"  The  general  rule  that  the  coasolidation  of  two  or  more  cor- 
porations into  one  creates  a  new  company  and  works  a  dis- 
solution of  the  original  corporations  forming  the  consolidated 
company  is  subject  to  exceptions  and  depends  upon  the  statute 
under  which  the  consolidation  is  effected.  .  .  .  We  see  no 
reason  why,  under  the  statutes  in  question,  one  corporation 
may  not  be  consolidated  with  another  under  the  name  of  such 
other,  which  is  continued  in  existence  with  enlarged  powers, 
franchises  and  property  rights.  It  is,  in  substance,  so  pro- 
vided, and  such  consolidations  are  frequently  made." 

Merger,  as  so  authorized,  is  illustrated  by  the  ordinary  case 
of  the  absorption  by  one  railroad  company,  through  the  inter- 
change of  stock,  of  branches  and  short  connecting  roads. 

The  legislature  may  also  authorize  the  consolidation  of  cor- 
porations and  yet  provide  for  the  continued  existence  of  all  of 
them  for  such  formal  purposes  as  may  be  necessary  to  wind 
up  their  affairs.^     Indeed,   the  constituent  corporations   may 


«  The  California  Qvil  Code  (Sec. 
361)  authorizing  the  consolidation  of 
mining  companies  pro\-idcs  that  "no 
such  consolidation  shall  in  any  way 
relieve  such  companies  or  the  stock- 
holders thereof  from  any  and  all  just 
liabilities."  The  California  Supreme 
Court  held  in  Isom  v.  Rex  Crude  Oil 
Co.,  147  Cal.  663  (1905),  (82  Pac. 
Rep.  319),  in  ^^e\v  of  this  pro\'i.sion, 
that  while  a  consolidated  corporation 
was  a  distinct  entity  the  consolidation 
did  not  dissolve  the  constituent  com- 
panies but  that  they  were  preserved 
by  law  by  the  purpose  of  enforcing 
liabilities  against  them.  The  Court 
said  (p.  666)  :  "  In  the  case  of  a  railroad 
corporation  section  473  as  amended 
in  1901  makes  provision  that  a  de- 
mand against  a  constituent  company 
may  be  enforced  against  the  consoli- 
dated corporation.  No  such  pro^^- 
sion  is  found  in  the  act  relating  to 
mining  corporations,  and  if  neither 
the  companies  nor  their  stockholders, 
by  virtue  of  the  consolidation  arc 
to  be  relieved  from  any  just  liability, 
it  would  seem  to  require  little  argu- 


ment upon  the  proposition  that  their 
corporate  entities  are  preserved,  to 
the  end  that  they  may  be  served  with 
process  and  called  to  defend  any 
action  arising  either  from  contract 
or  from  tort  which  may  be  brought 
against  them." 

In  Edison  Electric  Light  Co.  v.  New 
Haven  El.  Co.,  3.5  Fed.  233  (1888),  it 
was  held  that,  by  the  con.solidation 
of  two  corporations,  the  old  corpora- 
tions did  not  become  extinct,  so  as 
not  to  be  unable  to  wind  up  their 
business,  but  that  the  assignment  of 
the  legal  title  of  a  patent  in  writing 
to  the  new  corporation,  by  the  presi- 
dent and  secretary  of  one  of  the  old 
coqjorations,  after  the  consolidation, 
in  pursuance  of  a  vote  of  its  execu- 
tive committee  passed  prior  thereto, 
was  sufficient  to  convey  such  title. 

Bi.shop  V.  Brainerd,  28  Conn.  299 
(1859):  "No  question  was  there 
made  as  to  the  competency  of  those 
legislatures  to  consolidate  these  cor- 
porations into  one,  or  even  to  extin- 
guish their  original  individual  exist- 
ence.    In  regard  to  the  effect  of  such 

119 


§   62  INTERCORPORATE  RELATIONS  [PART  I 

be  continued  in  existence  for  all  purposes;  but  this  form  of 
consolidation  as  distinguished  from  a  mere  alliance,  to  which 
the  term  "consolidation"  is  inappropriately  applied,  is  confined 
to  the  consoUdation  of  corporations  of  different  States.^ 

§  62.  Construction  of  Particular  Consolidation  Acts  —  Cases 
showing  Creation  of  Distinct  Corporation.  —  Where  a  Louisiana 
statute  authorized  the  consolidation  of  two  corporations  into 
"  one  consolidated  company  holding  and  enjoying  all  the 
rights  "  belonging  to  each,  it  was  held  that  the  consolidated 
corporation  was  a  new  corporation,  and  that  the  members  of 
the  constituent  corporations  were  transmuted  into  members 
of  the  consolidated  company.^ 

Under  a  Maine  act,  providing  that,  after  filing  the  consoli- 
dation agreement,  the  corporations  making  it  were  "to  be 
consolidated  and  together  to  constitute  a  new  corporation," 
it  was  held  that  the  consolidated  company  was  a  distinct  cor- 
poration and  that  the  old  companies  were  dissolved.' 

A  consolidation  effected  under  a  Mississippi  charter  provid- 
ing that  "  all  of  the  companies  so  consolidating  shall  be  merged 
into  and  become  one  company,  and  the  company  so  formed 
shall  be  deemed  and  held  to  be  a  corporation  created  by  the 
laws  of  this  State  "  under  which  two  companies  agreed  to 

a  consolidation  it  does  not  necessarily  case  of  complete  and  perfect  amal- 
follov/  that  it  would  extinguish,  to  all  gamation,  the  effect  of  which  was, 
intents  and  purposes,  the  existence  of  under  American  authorities,  to  ter- 
those  corporations.  It  is  possible  for  minate  the  existence  of  the  original 
them  still  to  subsist  for  certain  pur-  corporations,  to  create  a  new  corpora- 
poses  notwithstanding  they  should  be  tion,  to  transmute  the  members 
thus  amalgamated."  of  the   former   into   members   of   the 

See  also   Lightner  v.   Boston,   etc.  latter,   and  to   operate   a  transfer  of 

R.  Co.,  1  Lowell  (U.  S.)  338  (1869);  the  property  rights  and  liabilities  of 

United  States  v.  Southern  Pac.  Co.,  each  old  company  to  the  new  one." 
46  Fed.  683  (1891).      Compare  Solo-  See   also    New   Orleans  Gas   Light 

monovich  v.  Denver  Cons.   Tramway  Co.  v.  Louisiana,  etc.  Co.,  11  Fed.  277 

Co.,  89  Pac.  Rep.  60  (Col.  1907).  (1882),   where  the  same  statute  was 

'  See  post,  §  102:  "Effect  of  Inter-  under  consideration.  Compare,  how- 
state  Consolidation  upon  Status  of  Con-  ever,  Citizens  St.  R.  Co.  r.  Memphis, 
stituent  Corporations."  53  Fed.  715  (1893). 

2  Fee    V.    New    Orleans   Gas   Light  ^  State   v.    Maine   Central    R.    Co., 

Co.,  35  La.   Ann.   416   (1883):    "The  66  Me.  488  (1877),  affirmed  siib  nom. 

articles  of   association  and  the  legis-  Railroad  Co.   v.   Maine,  96  U.  S.   499 

lative  act  by  authority  of  which  they  (1877). 
were    executed,    evidently   present   a 

120 


CHAP.  Vl]  EFFECT   OF    CONSOLIDATION  §    62 

consolidate  their  stock,  take  a  new  name,  elect  a  new  board 
of  directors,  and  that  the  constituent  corporations  should 
cease  to  do  business,  created  a  new  corporation.^ 

An  Ohio  statute  spoke  of  the  consolidated  company  as  the 
"  new  corporation";^  a  Missouri  statute  spoke  of  "  one  com- 
pany "  and  provided  for  the  issue  of  stock  in  the  "  new  con- 
solidated company";  ^  a  statute  of  Arkansas  provided  that  all 
the  property  of  each  company  should  be  taken  and  deemed  to 
be  transferred  to  the  consolidated  company  "  as  such  new 
corporation"  ;  *  a  Missouri  consolidation  act  spoke  of  the  con- 
solidation as  "  making  one  company  of  the  two  ";■'  a  Georgia 
statute  gave  the  consolidated  company  the  same  name  as  one 
of  the  old  companies,  and  conferred  upon  it  full  corporate 
powers.®  In  all  these  cases  the  Supreme  Court  of  the  United 
States  held  that  new  and  distinct  corporations  were  created, 
and  that  the  constituent  companies  were  dissolved. 

A  general  law  of  New  York  authorized  any  railroad  com- 
pany "  organized  under  the  laws  of  this  State  ...  to  merge 
and  consolidate  its  capital  stock,  franchises  and  property  with 
the  capital  stock,  etc.,  of  any  other  railroad  company,  ..." 
and  provided  for  the  conversion  of  the  stock  of  the  consoli- 
dated companies  "  into  that  of  the  new  corporation,"  and  it 
was  held  that  such  consolidation  created  a  new  and  distinct 
corporation.  ^ 

Consolidation  under  the  California  Civil  Code,  which  pro- 
vides that  the  consolidation  of  corporations  may  be  made  "  in 
such  manner  as  may  be  agreed  upon  by  their  respective  direc- 
tors," has  been  held  to  make  the  consolidated  corporation 
"a  distinct  entity — a  new  corporation."^     It  would  seem, 

'  Yazoo,  etc.  R.  Co.  v.  Adams,  ISO  '  Keokuk,  etc.  R.  Co.  v.  Missouri, 

U.  S.  1  (1901),  (21  Sup.  Ct.  Rep.  240),  1.52  U.  S.  301  (1894),  (14  Sup.  Ct.  Rep. 

affirming    77    Miss.    194    (1890),'  (24  592).     See  State  v.   Keokuk,  etc.   R. 

So.  Rep.  200,  60  L.  R.  A.  .33).  Co.,  99  Mo.  30  (1889),  (12  S.  W.  Rep. 

2  Shields    V.     Ohio,   95  U.    S.    319  290). 

(1877).  '  Railroad  Co.  v.  Georgia,  98  U.  S. 

3  Pullman  Palace  Car  Co.  v.  Mis-  359  (1878).  See  Atlanta,  etc.  R. 
souri  Pac.  R>.Co.,  115  U.  S.  587  (1885),       Co.  v.  State,  63  Ga.  483  tl879). 

(6  Sup.  Ct.  Rep.  194).  '  People  v.  New  York,  etc.  R.  Co., 

♦  St.  Louis,  etc.  R.  Co.  v.  Berry.  113  01  Hun  (N.  Y.),  66  (1891),  (15  N.  Y. 

U.   S.    465   (1885),  (5  Sup.   Ct.    Rep.  Sujip.  635). 

529).  «  Market    St.    R.    Co.    v.    Hellman, 

121 


§   63  INTERCORPORATE    RELATIONS  [I'ART  I 

however,  under  such  a  statute,  which  involves  a  legislative 
delegation  of  powers,  that  the  effect  of  a  consolidation  should 
depend  upon  the  terms  of  the  agreement  actually  entered  into. 
A  new  corporation  might  or  might  not  be  created  by  such 
agreement.^ 

A  Colorado  consolidation  statute  provides  for  the  transfer 
of  the  property  of  the  constituent  companies  to  the  consoli- 
dated corporation,  for  the  surrender  and  exchange  of  stock, 
and  for  the  assumption  of  the  habilities  of  the  old  companies 
by  the  new  corporation.  It  also  provides  that  the  stock  of 
the  constituent  companies,  whether  exchanged  or  not,  shall 
represent  only  an  interest  in  the  coasolidated  corporation.  It 
is  held  that,  upon  consolidation,  the  constituent  companies 
cease  to  exist,  notwithstanding  other  provisions  in  the  statute 
that  the  consolidation  shall  not  affect  pending  suits  or  rights 
of  action.^ 

§  63.  Construction  of  Particular  Consolidation  Acts  —  Cases 
of  Absorption  or  Merger.  —  Where,  under  a  Georgia  statute, 
two  railroad  companies  were  authorized  "  to  unite  and  consoli- 
date "  their  "  stocks  "  and  all  their  "  rights,  privileges,  im- 
munities, property  and  franchises,"  under  "  the  name  and 
charter  "  of  one  of  the  companies  through  the  exchange  of 
shares,  it  was  held  by  the  Supreme  Court  of  the  United  States 

109   Cal.   571    (1895),    (42   Pac.    Rep.  ion,  have  the  effect  of  keeping  alive 

225).     Compare  Isom    v.    Rex    Crude  the  corporations  formed  into  a  new 

Oil  Co.,  147  Cal.  663  (1905),  (82  Pac.  company      by     consolidation.    .    .    . 

Rep.  319).  The    new    company,    as    to    pending 

'  See    Green    County   v.    Conness,  suits,  if    it    does  not  want  judgment 

109  U.  S.  104  (1883),  (3  Sup.  Ct.  Rep.  taken,    must    defend    the    action    or 

69).  the  suit  will  not  abate.     As  to  causes 

^  Solomonovich    v.     Denver    Cons.  of   action    upon   which   suit    has   not 

Tramway     Co.,     89     Pac.     Rep.     57  been  brought  the  new  companj'  may 

(Col.    1907).     In  this   case  the  Court  be  made   defendant;    for   if   the   old 

said   (p.   60):     "The   provisions  .   .   .  company    is    to    be    made    defendant 

that   such   consolidation   of   one   cor-  it  is  difficult  to  see  how  ser\dce  could 

poration  with  another,  or  with  others,  be  obtained  or  how  provision  could 

shall  not  affect  suits  pending  in  which  be    made    to    depend.     There    being 

such    corporations    may    be    parties,  no  stockholders  or  officers  or  property 

nor  shall  such  change  affect  causes  of  or    effects,    there    is    no  -corporation, 

action    nor   the    rights    of    parties    in  and    the    new    organization,    created 

any  particular,  nor  shall  suits  brought  by  the  death  of  the  old  companies, 

against  such  corporation  by  its  former  is  the  only  organization  against  which 

name  be  abated,  do  not,  in  our  opin-  suits  can  be  brought." 

122 


CHAP.  Vl]  EFFECT   OF   CONSOLIDATION  §   64 

that  coasolidation  under  this  act  was  not  a  surrender  of  the 
existing  charters  of  the  two  companies,  and  did  not  work  the 
extinction  of  the  absorbing  company  nor  tlie  creation  of  a  new 
company.' 

A  consoUdation  of  two  raih-oad  companies  under  a  Mis- 
souri statute  giving  authorit}^  to  consolidate  "  upon  such  terms 
as  may  be  deemed  just  and  proper  "  merges  the  franchise  and 
privileges  of  each  in  the  new  company,  so  that  they  continue 
to  exist  with  respect  to  the  roads  thus  consoUdated.- 

Under  an  Alabama  statute,  it  was  held  that  neither  the  adop- 
tion of  a  new  name,  sanctioned  by  legislative  authority,  nor 
the  legislative  grant  of  new  powers,  changed  the  identity  of 
a  corporation  nor  created  a  new  one,  and  that,  consequently, 
an  act  authorizing  the  consolidation  of  railroad  companies  "  so 
as  to  form  one  coiLsolidated  railway  company"  under  a  new 
name  did  not  create  a  new  corporation.^  It  has  also  been 
held  that,  under  an  Illinois  consolidation  act,  one  corporation 
may  be  consolidated  with  another  under  the  name  of  the 
latter,  which  is  continued  in  existence  with  enlarged  powers, 
franchises  and  property   rights.^ 

A  Virginia  corporation  having  power  by  its  charter  to  "  con- 
solidate with  itself  "  other  corporations  entered  into  a  con- 
solidation agreement  with  a  corporation  chartered  in  other 
States  and  owning  connecting  lines,  whereby  all  the  stock  of 
the  latter  corporation  was  cancelled  and  stock  of  the  former 
issued  in  its  place.  The  Virginia  company  also  took  over 
the  property  of  the  other  corporation  and  operated  its  railroad. 
It  was  held  that  the  case  was  one  of  absorption  or  merger.'' 

§  64.  Effect  of  Valid  Consolidation  upon  Stockholders  of 
Constituent  Corporations.  —As  elsewhere  shown,  when  a  con- 
soUdation is  invalid  for  want  of  the  consent  of  stockholders, 

*  Central  R.,  etc.  Co.  v.  Georgia,  92  *  Chicago,  etc.   R.  Co.  v.  Ashling, 

U.  S.  665  (1875).  160   111.   373   (1894),  (43   N.  E.  Rep. 

2  Green    County    v.    Connes.s,    109       373). 

U.  S.  104  (1883),  (3  Sup.  Ct.  Rep.  69).  «  Lee  v.  Atlantic  Coast  Line  R.Co., 

Compare  Market  St.   R.  Co.  v.   Hell-  150  Fed.  775  (1906).     See  also  Vicks- 

man,    109  Cal.   571    (1895),    (42   Pac.  burg,  etc.  Telephone  Co.  v.  Citizens' 

Rep.  225).  Telephone   Co.,  79    Miss.    341  (1901), 

3  Mej'er  v.  Johnston,  64  Ala.  603  (30  So.  Rep.  725,  89  Am.  St.  Rep. 
(1879).     Compare  cases  cited  in  note  656). 

to  §  62. 

123 


§   64  INTERCORPORATE   RELATIONS  [PART  I 

a  dissenting  stockholder  is  released  from  his  subscription; ' 
may  enjoin  the  consolidation,  and  may  maintain  an  equitable 
action  against  the  consolidated  corporation  for  the  wrongful 
appropriation  of  his  interest  in  the  original  corporation.^ 

When,  however,  the  consolidation  is  valid,  either  because 
all  the  stockholders  approve  or  because  the  approval  of  only 
a  part  of  them  is  necessary,  the  rights  of  stockholders  of  the 
consolidating  corporations  are  generally  determined  by  pro- 
visions in  the  consolidation  act  or  agreement.  It  is  usually 
provided  that  the  consolidated  corporation  shall  issue  its  shares 
in  exchange  for  the  shares  of  stockholders  of  the  constituent 
companies  and,  as  already  noticed,  objecting  stockholders 
sometimes  have  the  right  to  take  the  appraised  value  of  their 
shares  in  money  instead  of  the  new  securities.^  In  the  absence 
of  such  provisions  it  is  the  better  view,  that,  by  force  of  the 
consolidation  proceedings  under  legislative  authority,  the 
stockholders  of  the  constituent  corporations  are  transmuted 
into  stockholders  of  the  consolidated  companies.*  The  holder 
of  stock  in  a  constituent  corporation  upon  so  becoming  a 
stockholder  of  the  consolidated  company  is  entitled  to  the 
same  proportion  of  stock  in  the  new  company  as  is  secured  in 
the  consolidation  agreement  to  his  fellow-stockholders  and 
may  maintain  an  action  against  the  new  company  therefor.^ 

'  See     ante,     §    47:      "Rights    and  ^  Fee   v.    New   Orleans   Gas   Light 

Remedies  of  Dissenting  Subscribers."  Co.,  35  La.  Ann.  413  (1883). 

2  See  ante,  §  46 :  "Rights  and  Rente-  Where,  however,  a  person  had  sub- 
dies  of  Dissenting  Stockholders."  scribed  for  stock  in  a  Pennsylvania 

^  See  ante,   §  57:     "Statutory  Pro-  corporation,  paying  ten  per  cent  upon 

visions  for  Appraisal  of  Stock."  his   subscription,    and   thereafter   the 

*  Fee   V.    New   Orleans   Gas   Light  corporation    was    consolidated    with 

Co.,  35  La.  Ann.  413  (1883);    Ridg-  another  company  upon  an  agreement 

way  Township  v.  Griswold,  1  McCrary  that  each  stockholder  of  the  former 

(U.    S.),    151      (1878);     Copland     v.  company  should   be   entitled   to   one 

Minong  Min.  Co.,  33  Mich.  2  (1875).  share    of   the    consolidated    company 

It    has    been    held,    however,    that    a  for  two  of  the  old  company,  and  such 

stockholder  in  a  constituent  company,  person  then  brought  an  action  against 

not     assenting     to     a    consolidation,  the  consolidated  company  to  compel 

does   not   become   a   member  of   the  the   issuance   of  such  new   shares  to 

consolidated    company.     Gardner    v.  him,    it    was    held    that    the    action 

Hamilton  Mut.  Ins.  Co.,  33  N.Y.  421  should  be  dismissed;    that  the  plain- 

(1865).     Also    Philadelphia,    etc.    R.  tiff    could    not    maintain    an    action 

Co.   V.  Catawissa  R.   Co.,  53  Pa.   St.  against     the    consolidated    company 

20  (1866).  which  could  not  be  maintained  against 

124 


CHAP.  Vl] 


EFFECT   OF   CONSOLIDATION 


64 


The  holder  of  preferred  stock  in  a  constituent  corporation  has 
a  right  of  action  against  the  consolidated  company,  upon  a 
contract  of  the  constituent  corporation  with  its  stockholders 
relating  to  the  payment  of  dividends  upon  its  preferred  stock.* 
When  the  effect  of  consolidation  is  to  create  a  new  corpo- 
ration, the  liability  for  the  corporate  debts  of  stockholders 
of  the  consolidating  corporations  who  become  stockholders 
in  the  coasolidated  company,  is  determined  by  the  laws  in 
force  at  the  time  of  consolidation,  and  exemptions  from  lia- 
l)ility  theretofore  attaching  to  such  stockholders  are  lost.^ 


the  old  company,  and  that  he  was 
not  entitled  to  a  certificate  of  full 
paid  stock  upon  which  he  had  paid  but 
ten  per  cent. 

Babcock  v.  Schuylkill,  etc.  R.  Co., 
133  N.  Y.  420  (1892),  (31  N.  E. 
Rep.   30). 

'  Boardman  v.  Lake  Shore,  etc.  R. 
Co.,  84  N.  Y.  157  (1881).  Compare 
Prouty  V.  Lake  Shore,  etc.  R.  Co.,  52 
N.  Y.  363  (1873). 

Where  a  corporation  with  preferred 
stock  entered  into  a  consolidation 
agreement  with  other  corporations 
wherein  it  was  provided  that  the 
consolidated  company  should  assume 
all  the  obligations  of  its  constituents, 
and  should  deliver  to  the  preferred 
stockholders  bonds  maturing  at  the 
time  of  the  expiration  of  their  cor- 
poration, returning  in  interest  an 
amount  equal  to  the  preferreil  stock 
dividends  —  the  security  of  the  bonds 
being  superior  to  that  of  the  stock 
—  it  was  held  that  a  preferred  stock- 
holder had  no  ground  of  complaint, 
the  bonds  being  the  fair  equivalent 
of  the  stock. 

Beling  v.  American  Tobacco  Co., 
65  Atl.  Rep.  725  (N.  J.  1907).  Com- 
pare Colgate  V.  U.  S.  Leather  Co., 
67  Atl.  Rep.  657  (N.  .1.  1907). 

Where  two  railroad  companies,  in 
their  agreement  for  consolitlation,  in- 
serted an  article  providing  for  the 
com()letion  of  the  route  of  one  of  the 
companies,  and  the  directors  of  the 
consolidated  company  failed  to  com- 


ply with  such  provisions,  it  was  held 
that  if  the  duty  thus  created  was 
owing  to  all  the  stockholders,  one  of 
the  stockholders  could  not  sustain 
an  action  against  the  directors  to 
enforce  a  compliance  therewith;  and 
that  if  the  duty  was  owing  to  a  class 
of  stockholders  having,  in  respect 
to  the  matter,  an  interest  or  right 
distinct  from  another  class,  any 
proceeding  to  obtain  relief  for  a 
refusal  or  neglect  on  the  part  of 
the  directors  to  discharge  the  duty 
must  bring  before  the  court  not 
only  the  directors  of  the  com- 
pany, but  the  two  classes  of  stock- 
holders. 

Port  Clinton  R.  Co.  v.  Cleve- 
land, etc.  R.  Co.,  13  Ohio  St.  545 
(1862).  See  also  Lord  v.  Copper 
Mines   Co.,    1    H.    &   Tw.    85    (1848). 

'  The  act  of  Minnesota  of  March  2, 
1881,  ch.  113,  authorizing  the  con- 
solidation of  several  railroad  com- 
panies created  a  new  corporation, 
upon  which  it  conferred  the  fran- 
chises, exemptions  and  immunities 
of  the  constituent  companies;  but 
that  did  not  include  an  exemption 
of  stockholders  in  the  old  companie.s 
from  the  paj'ment  of  corporate 
debts,  or  their  liabilitj'  to  pay  them. 

Minneapolis,  etc.  R.  Co.  i\  Gardner, 
177  U.  S.  332  (1900),  (20  Sup.  Ct. 
Rep.  6.56),  affirming  Gardner  v.  Min- 
neapolis, etc.  R.  Co.,  73  Minn.  517 
(1898),  (76  N.  W.  Rep.  282). 

125 


§  65  INTERCORPORATE   RELATIONS  [PART  1 


CHAPTER    VTI 


RIGHTS    AND    POWERS    OF    CONSOLIDATED    CORPORATION 

I.    Statutory  Transmission  of  Property,  Franchises,  and  Privileges 

§  65.  General  Rule  —  Legal  Presumption. 

§  66.  Real  Estate  and  Rights  in  Streets. 

§  67.  Choses  in  Action. 

§  68.  Subscriptions. 

§  69.  Enforcement  of  Subscribers'  Obligations  —  Conditional  Subscriptions. 

§  70.  Municipal  Aid. 

§  71.  Constitutional  Limitations  upon  Grants  of  Privileges  and  Immimities. 

§  72.  Exemptions  from  Taxation. 

§  73.  Special  Privileges  and  Immunities  other  than  Tax  Exemptions. 

II.    Powers 

§  74.  Powers  of  Consolidated  Corporation  —  In  General. 

§  75.  Power  to  issue  Mortgage  Bonds. 

§  76.  Right  of  Eminent  Domain. 

§  77.  Miscellaneous  Powers. 

I.  Statutory  Transmission  of  Property,  Franchises,  and  Privileges 

§  65.  General  Rule  —  Legal  Presumption.  —  When  consoli- 
dation proceedings  are  completed  the  consolidated  corpora- 
tion, according  to  the  usual  statutoiy  provision,  becomes  pos- 
sessed of  all  the  rights,  property,  privileges  and  franchises 
theretofore  vested  in  its  constituent  companies.^     As  observed 

'  The  provisions  of  the  New  York  vested  in  such  new  corporation,  with- 

consolidation  statute  (Birdseye's  Rev.  out    further    act    or    deed;     and    all 

Stat.  3d  ed.    p.  2963,   Railroad  Law,  claims,  demands,  property,  rights  of 

§    72),    are    illustrative:     "Upon   the  way  and  every  other  interest,   shall 

consummation  of  said  act  of  consoli-  be  as  effectually  the  property  of  the 

dation  as  aforesaid,   all  and  singular  new  corporation  as  they  were  of  the 

the     rights,     privileges,     exemptions  former  corporations,   parties  to  such 

and    franchises    of    each    of   the    cor-  agreement    and    act ;     and    the    title 

porations,    parties   to  the  same,    and  to  all  real  estate,   taken  by  deed  or 

all  the   property,   real,   personal   and  otherwise,    under    the    laws    of    this 

mixed,    and    all    the    debts    due    on  State,   vested  in  either  of  such  cor- 

whatever  account  to  either  of  them,  porations,   parties  to  said  agreement 

as  well  as  all  stock  and  subscriptions  and  act,  shall  not  be  deemed  to  revert 

and   other    things    in    action    belong-  or  be  in  any  way  impaired  by  reason 

ing  to  either  of  them,  shall  be  taken  of    this    act,    or    anything    done    by 

and  deemed  to  be  transferred  to  and  virtue    thereof,    but    shall    be    vested 

126 


CHAP.  Vll] 


RIGHTS   AXD   POWERS 


§05 


by  Judge  Holmes,  in  John  Hancock,  etc.  Ins.  Co.  v.  Worcester, 
etc.  R.  Co. ;  *  "It  is  usual  for  consolidating  statutes  to  intro- 
duce more  or  less  of  the  element  of  succession,  or  continuity 
of  legal  person  as  to  existing  rights  and  duties  notwithstand- 
ing the  fact  that  in  other  respects  the  old  and  new  corpora- 
tions are  not  the  same.  It  is  for  the  legislature  to  say 
how  far  the  new  corporation  shall  be,  as  it  were,  the  heir, 
executor  or  continuer  of  the  old." 

Where,    however,    the    consolidation   statute   is   silent    the 


in  the  new  corporation  by  virtue  of 
such  act  of  consoUdation." 

Other  statutory  provisions  of  a 
similar  nature  applying  to  railroads, 
except  where  noted,  are: 

Alabama:  Code  1896,  §  1166  (as 
amended  by  Acts  of  1900-01,  p. 
237),  §  1168.  §  1151  applies  to  busi- 
ness corporations. 

Arizona:  Rev.  Stat.  1901,  §  864, 
par.  3. 

Arkansas:  Kirby's  Dig.  1904,  § 
6735. 

Colorado:  Mills'  Anno.  Stat.  1891, 
§  628,  p.  688. 

Connecticut:  Gen.  Stat.  1902,  § 
3677;  Pub.  Acts  1903,  p.  173,  §  78 
(business  corporations). 

Delaware:  Laws  1903,  §  123,  p. 
819.  Gen.  Corp.  Law  1899,  §  55 
applies  to  business  corporations. 

Idaho:   Civ.  Code  1901,   §   2178. 

Kansas:   Gen.   Stat.  1905,  §  6325. 

Kentucky:  Stat.  1903,  ch.  32,  §  556. 
Stat.  1894,  §  556  applies  to  business 
corporations. 

Louisiana :  Rev.  Laws  1904,  pp. 
1485,  1486. 

Maryland :  Pub.  Gen.  Laws  1904, 
p.  553,  §  46. 

Michigan:  Pub.  Acts  1899,  §  29, 
p.  451  ;    Comp.  Laws  1897,  §  30. 

Minnesota :  Rev.  Laws  1905,  § 
2898. 

Missouri:  R.  S.  1899,  §§  1059, 
1060;  Stat.  1889,  §  2786  (manfg. 
companies). 

Montana:  Civ.  Code  1895,  §  911. 
§  527  applies  to  mining  companies. 


Nebraska:  Comp.  Stat.  1907, 
§  2023. 

Nevada:   Stat.  1903,  p.    139,  §  44. 

New  Hampshire :  Pub.  Stat.  & 
Session  Laws  1901,  ch.  156,  §  22,  p. 
503. 

New  Jersey :  Gen.  Corp.  Law,  1896, 
§  106. 

New  Mexico :  Comp.  Laws  1897, 
§§  3847,  3895. 

New  York :  Business  Corp.  Law 
(amended  to  1900),  §   10. 

North  Dakota:  Rev.  Codes  1899, 
§  2954. 

Ohio:  Bates'  Anno.  Stat.  1902, 
§§  3382,  3384. 

Oklahoma:  Stat.  1893,  ch.  17,  §  15, 
par.  1016. 

Pennsylvania:  Bright.  Purd.  Dig. 
1894,  p.  1801,  §§  109,  110,  113; 
p.  1803,  §  116;    p.  1814,  §  182. 

South  Carolina :  Code  1902,  §  2052. 

South  Dakota:  Rev.  Code  1903, 
§  494,  p.  649. 

Tennessee:   Code  1896,   §   1527. 

Utah :  R.  S.  1898,  §  341  (business 
corporations). 

Virginia:   Code  1904,  §  1105e  (40). 

Washington :  Ballinger's  Anno. 
Code  1897,  §  4304. 

Wisconsin:  Stat.  &  Suppl.  1906, 
p.  919,  §  1833. 

Wyoming:   R.  S.  1899,  §  3202. 

England :  Railway  Clauses  Act 
1863  (26  and  27  Vict.  ch.  92,  §§  38- 
44). 

'  John  Hancock,  etc.  Ins.  Co.  t'. 
Worcester,  etc.  R.  Co.,  149  Mass.  220 
(1889),  (21  N.  E.  Rep.  364). 

127 


§65   - 


INTERCORPORATE  RELATIONS 


[part  I 


general  rule,  based  upon  the  presumed  intention  of  the  legisla- 
ture, is  the  same — that  the  consolidated  corporation  succeeds 
to  all  the  privileges  and  franchises  of  each  of  the  constituent 
corporations  with  respect  to  the  property  acquired  from  such 
corporation.*  "  The  presumption  is,  until  the  contrary  ap- 
pears, that  the  united  or  consoUdated  company  has  all  the 
powers  and  privileges,  and  is  subject  to  all  the  restrictions 
and  liabilities,  of  those  out  of  which  it  was  created."  ^ 

Generally,  the  consoUdation  act  confers  upon  the  consoli- 
dated corporation  all  the  powers  and  privileges  of  its  constit- 
uents,' although  it  was  held  under  a  Maine  statute  providing 


*  United  States:  Keokuk,  etc.  R. 
Co.  V.  Missouri,  152  U.  S.  305  (1894), 
(14  Sup.  Ct.  Rep.  592)  ;  Green  County 
V.  Conness,  109  U.  S.  104  (1883),  (3 
Sup.  Ct.  Rep.  69);  Central  R.,  etc. 
Co.  V.  Georgia,  92  U.  S.  665  (1875); 
Tomlinson  v.  Branch,  15  Wall.  460 
(1872);  Lewis  v.  Clarendon,  6  Rep. 
609  (1878);  Ridgway  Township  v. 
Griswold,  1  McCrary,  151  (1878); 
McAlpine  v.  Union  Pac.  R.  Co.  23 
Fed.  168  (1885). 

Georgia :  Montgomery,  etc.  R.  Co. 
V.  Boring,  51  Ga.  582  (1874);  Selma, 
etc.  R.  Co.  V.  Harbin,  40  Ga.  706 
(1870). 

Illinois :  Chicago,  etc.  R.  Co.  v. 
Moffitt,  75  111.  524  (1874) ;  Robertson 
V.  Rockford,  21  111.  451  (1859). 

Indiana :  Louisville,  etc.  R.  Co.  v. 
Boney,  117  Ind.  501  (1888),  (20  N.  E. 
Rep.  432,  3  L.  R.  A.  435) ;  Paine  v. 
Lake  Erie,  etc.  R.  Co.,  31  Ind.  283 
(1869). 

Massachusetts:  Abbott  v.  New 
York,  etc.,  R.  Co.  145  Mass.  453 
(1888),  (15  N.  E.  Rep.  91). 

Mississippi :  Louisville,  etc.  R.  Co. 
V.  Blythe,  69  Miss.  939  (1892),  (11  So. 
Rep.  Ill,  16  L.  R.  A.  251,  30  Am.  St. 
Rep.  599). 

Missouri:  Thompson  v.  Abbott, 
61  Mo.  176  (1875). 

Tennessee:  Miller  v.  Lancaster, 
5  Cold.  514  (1868). 

*  Tennessee     v.     Whit  worth,     117 

128 


U.  S.  147  (1886),  (6  Sup.  Ct.  Rep. 
649),  per  Waite,  C.  J. 

In  Green  County  v.  Conness,  109 
U.  S.  106  (1883),  (3  Sup.  Ct.  Rep.  69), 
the  Supreme  Court  also  said:  "When 
the  companies  are  authorized  to  con- 
solidate their  roads,  it  is  to  be  pre- 
sumed that  the  privileges  of  each 
continue  to  exist  in  respect  to  the 
several  roads  so  consolidated." 

See  also  Keokuk,  etc.  R.  Co.  v. 
Missouri,  152  U.  S.  305  (1894),  (14 
Sup.  Ct.  Rep.  592). 

The  consolidation  of  the  property 
and  franchises  of  different  companies 
by  their  own  act  does  not  enlarge  the 
franchises,  powers  or  privileges  of 
the  original  companies.  The  new 
companj^  takes  the  rights  and  privi- 
leges it  acquired  by  the  consolida- 
tion, subject  to  the  original  condi- 
tions and  limitations. 

Consolidated  Traction  Co.  v.  Eliza- 
beth, 58  N.  J.  L.  619  (1896),  (34  Atl. 
Rep.  146,  32  L.  R.  A.  170) ;  Wilbur  v. 
Trenton  Pass.  R.  Co.,  57  N.  J.  L.  212 
(1894),  (31  Atl.  Rep.  238). 

See  also  Tomlin.son  v.  Branch,  15 
Wall.  (U.  S.)  460  (1872). 

^  Boston,  etc.  R.  Corp.  v.  Midland 
R.  Co.,  1  Gray  (Mass.),  359  (1854): 
"By  these  proceedings,  thus  ratified, 
the  consolidated  corporation  suc- 
ceeded to  and  became  entitled  to 
exercise  all  the  powers  and  privileges 
and  subject  to  the  duties  and  obliga- 


CHAP.  VIl] 


RIGHTS   AND   POWERS 


6G 


that  the  new  corporation  should  "  have  the  powers,  privileges 
and  immunities  of  each  of  the  corporations,"  that  it  acquired 
the  privileges  and  immunities  which  all  the  constituent  com- 
panies had,  and  did  not  acquire  those  special  powers,  privileges 
and  immunities  which  some  had  and  which  some  did  not  have.^ 

§  60.  Real  Estate  and  Rights  in  Streets.  ^  When  consoli- 
dation is  completed  the  real  estate  of  the  consolidating  cor- 
porations vests  in  the  consolidated  corporation,^  generally 
"  without  any  other  deed  or  act  of  transfer,"  ^  and  this  rule 
applies  in  the  case  of  successive  consolidations.  Thus  where 
land  was  convej'ed  in  fee  simple  to  a  corporation  and  after- 
wards that  company  was  consolidated  with  another  and  further 
consolidations  took  place  from  time  to  time,  it  was  held  that 
the  new  companies  formed  by  the  successive  consolidations 
succeeded  to  the  real  estate.^ 

Under  an  act  providing  that  a  consolidated  street  railway 
company  should  have  all  the  franchises  and  be  subject  to  all 
the  duties  of  its  constituents,  the  right  of  a  constituent  cor- 
poration to  occupy  with  its  tracks  the  streets  of  a  city  passed 
to  the  consolidated  company.^     It  has  also  been  held  that  the 


tions,  of  each  of  the  three  corpora- 
tions, as  they  then  stood,  and  as  they 
were  respectively  affected  by  their 
so\'eral  acts  of  incorporation,  and  by 
the  acts  done,  tlie  obligations  incurred 
and   property  held   under  them." 

'  State  V.  Maine  Central  R.  Co.,  66 
Me.  488  (1877)  (affirmed  sub  nom. 
Railroad  Co.  v.  Maine,  96  U.  S.  499 
(1877)),  where  it  was  held:  Where  a 
new  corporation  is  formed  out  of  two 
or  more  previously  existing  corpora- 
tions and  by  the  act  creating  it  is  to 
"have  the  powers,  privileges  and  im- 
munities possessed  by  each  of  the  cor- 
])orations"  whose  imion  constitutes 
such  new  corporation,  the  new  cor- 
poration will  have  the  "privileges, 
powers  and  immunities"  which  they 
all  {i.e.  every  one  of  them  all)  had, 
and  it  will  not  have  those  special 
powers,  privileges  and  immunities 
which  some  had  and  some  did  not  liave. 

^  Cashman  v.   Brownlee,    128  Ind. 


266  (1890),  (27  X.  E.  Rep.  560) ;  Tar- 
pey  V.  Deseret  Salt  Co.,  5  Utah,  494 
(1888),  (17  Pac.  Rep.  631). 

^  A  large  number  of  consolidation 
acts  provide  that  the  effects  of  the 
consolidating  corporations  shall  vest 
in  the  new  company  by  virtue  of  the 
consolidation  proceedings,  "without 
any  other  deed  or  act  of  transfer." 

Where  a  bank  held  a  contract  of 
guaranty  and  was  ab.sorbed  by  an- 
other bank  under  a  con.solidation 
statute  containing  a  provision  similar 
to  that  quoted,  no  assignment  was 
necessary  to  enable  the  latter  bank 
to  enforce  the  guaranty. 

Bank  of  Long  Island  v.  Young,  101 
App.  Div.  (N.  Y.)  88  (1905),  (91  N.  Y. 
Supp.  849). 

*  Caslunan  v.  Brownlee,  128  Ind. 
266  (1890),  (27  N.  E.  Rep.  560). 

*  Africa  v.  Knoxville,  70  Fed.  729 
(1895).  See  also  Pittsburgh,  etc.  R. 
Co.  V.  Reich,  101  111.  157  (1881). 

129 


§  66 


INTERCORPORATE    REI.ATIONS 


[part  1 


franchises  of  several  street  railway  companies,  contained  in 
their  irrepealable  charters,  to  use  the  streets  of  a  city  were 
not  subjected  to  the  liability  of  legislative  repeal  by  their  con- 
soHdation,  although  at  the  time  of  coasolidation  a  reserved 
power  to  amend  or  repeal  charters  was  upon  the  statute  book.* 
A  gas  company  created  by  the  consoUdation  of  several  cor- 
porations under  a  statute  conferring  upon  it  all  their  powers. 


The  charter  of  a  street  railway 
company  authorized  it  to  construct 
and  operate  a  street  railway  upon 
certain  streets  of  a  city  and  granted 
it  the  privilege  of  occupying  certain 
other  streets  at  any  time  within  five 
years.  The  company  built  and  oper- 
ated its  railroad  but  did  not  exercise 
its  option  within  the  prescribed  time 
to  lay  its  tracks  in  the  additional 
streets.  Long  afterwards  another 
street  railway  company  obtained 
the  franchise  to  use  one  of  these 
additional  streets  and  thereafter  the 
first  corporation  absorbed  it.  Held 
that  the  absorbing  company  operated 
the  road  in  the  street  in  question  under 
the  franchise  acquired  by  the  consoli- 
dation and  not  under  the  original 
charter.  Kent  v.  City  of  Binghamp- 
ton,  81  N.  Y.  Supp.  198  (1903),  40 
Misc.  Rep.  1. 

Where  the  original  act  of  incor- 
poration of  a  railroad  company 
limited  the  number  of  tracks  upon 
its  railroad  to  three,  and  such  com- 
pany consolidated  with  other  com- 
panies under  a  general  railroad  con- 
solidation statute  which  contained  no 
limitations  upon  the  powers  of  cor- 
porations organized  thereunder  with 
respect  to  the  number  of  tracks,  it 
was  held  that  the  consolidated  cor- 
poration was  not  restricted  by  the 
provision  of  the  original  act.  "The 
consolidated  corporation  possesses  all 
the  property  and  franchises  of  the 
constituent  corporations  and  in  addi- 
tion it  possesses  the  general  powers 
of  railroad  corporations  which  are  not 
limited  to  the  use  of  three  tracks." 

130 


Colgate  V.  New  York,  etc.  R.  Co. 
(N.  Y.  Sup.  Ct.  1906),  100  N.  Y.  Supp. 
650.  See  also  New  York  Central,  etc. 
R.  Co.  V.  City  of  Yonkers  (N.  Y.  Sup. 
Ct.  1907),  103  N.  Y.  Supp.  252. 

A  street  railway  company  having 
power  to  operate  in  certain  streets  of 
a  city  had  a  contract  with  the  city 
by  which  it  was  bound  to  pay  a  cer- 
tain proportion  of  the  expense  of 
paving  the  streets  on  which  it 
operated,  and  no  more.  The  contract 
provided  that  it  should  enure  "to  any 
company  with  which  it  [the  street 
railway  company]  hereafter  becomes 
merged  or  consolidated."  Subse- 
quently this  company  consolidated 
with  other  corporations  and  the  con- 
solidated company  claimed  the  bene- 
fit of  the  contract  with  respect  to 
streets  not  within  the  territory  of 
the  original  company  —  the  payment 
required  by  the  contract  being  less 
than  that  of  the  general  law.  It 
was  held,  however,  that  the  contract 
only  applied  to  streets  in  the  territory 
of  the  corporation  which  originally 
had  the  contract. 

Kent  V.  City  of  Binghampton,  61 
App.  Div.  (N.  Y.)  323  (1901),  (70  N.  Y. 
Supp.  465). 

1  Citizens  St.  R.  Co.  v.  Memphis,  53 
Fed.  715  (1893).  Judge  Hammond 
placed  his  decision  in  this  case  upon 
the  ground  that  the  consolidation  act 
did  not  evidence  a  legislative  inten- 
tion to  create  a  new  and  distinct  cor- 
poration and  make  the  charters  sub- 
ject to  repeal.  Compare  Railroad  Co. 
V.  Georgia,  98  U.  S.  359  (1878). 


CHAP.  VIl]  RIGHTS   AND    POWERS  §   67 

privileges  and  immunities  has  the  right,  conferred  upon  such 
corporations,  to  lay  pipes  under  streets  and  highways.' 

§  67.  Choses  in  Action.  — Coasolidation  statutes  generally 
provide  that  all  choses  in  action  of  the  constituent  companies 
shall,  upon  consolidation,  pass  to  the  consolidated  corporation. 
Without  specific  designation,  they  would  pass  wth  the  other 
effects  of  the  companies.^  Thus  a  consolidated  company  suc- 
ceeds to  the  right  to  use  patents  under  a  license  granted  to  a 
constituent  corporation.^  An  indemnit}^  bond  given  to  a  con- 
stituent corporation  enures  to  the  benefit  of  the  consolidated 
company  and  the  sureties  thereon  are  liable  for  breaches  taking 
place  both  before  *  and  after  the  consolidation."'  The  vest- 
ing of  choses  in  action  of  a  constituent  corporation  in  the  con- 
solidated company  by  a  consolidation  act  which  substitutes 
it  for  the  original  corporation,  without  prejudice  to  the  other 
party,  passes  the  right  to  the  new  corporation,  without  ex- 
press grant,  to  sue  thereon  in  its  own  name." 

The  general  rule  that  choses  in  action  of  constituent  com- 
panies enure  to  the  benefit  of  the  consolidated  corporation 
is,  however,  inapplicable  to  contracts  which  from  their  nature 
can  be  carried  out  by  the  constituent  corporation  alone.^ 
Thus  where  a  railroad  company  agreed  to  give  its  bonds,  in 
consideration  of  certain  moneys  to  be  paid  in  instalments, 
and  afterwards  by  legislative  authority  becoming  consolidated 
with  other  companies,  bonds  of  the  consoHdated  company  were 

'Consolidated    Gas    Co.    v.    Balti-  G  Eng.  Ry.  Cas.  177  (1840) ;    .3  Exch. 

more   County   Commrs.    99    Md.    403  Rep.  320. 
(1904),  (.57  Atl.  Rep.  29).  «  Pennsylvania,  etc.  H.  Co.  i-.  Har- 

2  Under   the   act   of   Congress   au-  kins,  149  Pa.  St.  121  (1S92),  (24  Atl. 

thorizing    the    consolidation    of    the  Rep.  175) ;   Eastern   I^nion  R.   Co.  i'. 

Kansas    Pacific    Railroad    witli    the  Cochrane,  24  Eng.  L.  «&  Eg.  495  (1853), 

Union    Pacific    Railroad   it   was   held  17   .lur.    1103,  23    L.    .1.    Rep.    (n.  s.) 

that    the    preixisting    agreements    of  Excli.    Gl.     See    also    Miller   r.    Lan- 

the  former  with  the  government  re-  caster,  5  Coldw.  (Tenn.)  514  (18G8). 
mained   unchanged   as  to   compensa-  '  University  of  Vermont  r.  Baxter, 

tion    for    services    performed    either  42  Vt.  99  (1869) ;   Miller  r.  Lanca.'^tcr, 

before    or    after    the    consolidation.  5  Coldw.  (Tenn.)  514  (ISGS). 
The   Pacific   R.    R.   Ca.ses,    IG   Ct.   of  '  New    Jersey    Midland    R.    Co.    v. 

Claims,  3.54  (1880).  Strait,  35  N.  .1.   L.  322  (1872).     See 

'  Lightner  ?'.    Boston,  etc.   R.   Co.,  also  Union  Pac.  R.  Co.  v.  Gochenour, 

1  Lowell  (U.  S.)  338  (18G9).  .50   Kan.   543    (189G),    (43   Pac.    Rep. 

^London,  etc.  R.  Co.  v.  Goodwin,  1135). 

131 


S   68  INTERCORPORATE    RELATIONS  [PART  I 

tendered  and  suit  Ijrought  for  the  money,  it  was  held  that  such 
suit  would  not  lie,  the  consideration  offered  not  being  that 
agreed  upon.  The  Court  said:  "  Neither  the  court  nor  the 
legislature  can  alter  the  bargain  between  these  parties.  The 
defendant  had  the  right  to  stipulate  for  bonds  of  a  particular 
company,  and  it  is  clear  that  he  cannot  be  compelled  to  accept, 
in  lieu  of  the  promised  consideration,  the  obligations  of  any 
other  company.  The  consohdated  companies,  in  the  nature 
of  things,  cannot  be  the  same  as  one  of  their  constituents. 
Such  a  company  has  larger  purposes,  wider  powers  and  heavier 
responsibilities  than  those  inherent  in  either  of  its  component 
parts."  ^ 

§  68.  Subscriptions.  —  Contracts  of  subscription  for  stock  in 
a  constituent  corporation  upon  which  there  is  an  existing  lia- 
bility enure,  with  other  choses  in  action,  to  the  benefit  of  the 
consolidated  corporation,  and  it  may  enforce  the  obligation 
of  the  subscriber,  provided  the  consolidation  proceedings  are 
binding  upon  hira.^ 

Where  authority  to  consolidate  is  contained  in  the  original 
charters  or  is  authorized  by  an  act  in  force  at  the  time  of  the 
subscription,  the  provisions  of  the  statutes  enter  into  and  form 
a  part  of  the  contract  of  subscription,  and,  in  case  of  consoli- 
dation, a  subscriber  is  not  released  from  his  subscription,  and 
cannot  withdraw  from  the  venture.^     A  subscriber  is  also  bound 

1  New    Jersej'    Midland    R.    Co.    v.  view  of  it.     When  the  voters  of  the 

Strait,  35  N.  J.  L.  322  (1872).  County     of     Putnam     sanctioned     a 

^  Wells  V.   Rodgers,   60   Mich.   525  county    subscription    by    their    vote, 

(1886),  (27  N.  W.  Rep.  671);   CoojDer  and  when  the  board  of  supervisors, 

V.  Shropshire  Union  R.,  etc.  Co..   13  in  pursuance  of  that  section,  resolved 

Jur.  443   (1849),  6  Eng.   Railw.  Cas.  to  make  the  subscription,  they  were 

136  (1849).     See  also  Ridgway  Town-  informed    by    the    law    of    the    State 

ship  V.  Griswold,  1   McCrary  (U.  S.),  that    a    consolidation    with    another 

151   (1878).  company  might  be  made;    that  the 

^  In  Nugent  v.  Supervisors,  19  Wall.  stock    they    proposed    to    subscribe 

(U.  S.)  249  (1873),  the  Supreme  Court  might  be  converted  into  stock  of  the 

of  the  United  States  said:     "It  was  consolidated  company,   and  that  the 

therefore,  contemplated  by  the  legis-  liability  they  assumed  might  become 

lature,  as  it  must  have  been  by  all  the  owing  to  that  company.     With  this 

subscribers  to  the  stock  of  the  com-  knowledge  and  in  view  of  such  contin- 

pany,  that  precisely  what  has  occurred  gencies  they  made  the  contract.    The 

might    occur.     Subscribers    must    be  consolidation,   therefore,   wrought  no 

presumed  to  have  known  the  law  of  change  in  the  organization  or  design 

the  State  and  to  have  contracted  in  of  the  company  to  which  they  sub- 

132 


CHAP.  VIl] 


RIGHTS   AND    POWERS 


69 


by  consolidation  proceedings  authorized  by  the  legislature  in 
the  exercise  of  its  resen-ed  power.' 

§  69.  Enforcement  of  Subscriber's  Obligations.  Conditional 
Subscriptions.  — The  consolidated  corporation  may  in  its  own 
name  enforce  the  liability  of  subscribers  to  stock  by  appro- 
priate actions,^  but  it  cannot  maintain  such  actions  until  all 
the  statutory  conditions  precedent  to  consolidation  have  been 
complied  with  and  it  has  acquired  a  distinct  corporate  existence.^ 
Thus,  it  has  been  held  under  the  requirements  of  different 
statutes  that  no  such  action  can  be  maintained  until  the  con- 
solidated company  has  elected  a  new  board  of  director.^,*  or 


scribed  other  than  they  contemplated 
at  the  time  as  possible  and  legitimate. 
It  cannot  be  said  that  any  naotive  for 
their  subscription  has  been  "taken 
away, 'or  that  the  consideration  for  it 
has  failed.  Hence  the  reason  of  the 
general  rule  we  have  conceded  does 
not  exist  in  this  case,  and,  conse- 
quently, the  rule  is  inapplicable.  In 
a  multitude  of  cases  decided  in  Eng- 
land and  in  this  country  it  has  been 
determined  that  a  subscriber  for  the 
stock  of  a  company  is  not  released 
from  his  engagement  to  take  it  and 
pay  for  it  by  any  alteration  of  the 
organization  or  purposes  of  the  com- 
pany which,  at  the  time  the  sub- 
scription was  made,  were  authorized 
either  by  the  general  law  or  by  special 
charter,  and  a  clear  distinction  is  recog- 
nized between  the  effect  of  such  altera- 
tions and  the  effect  of  those  made 
under  legislation  subseciuent  to  the 
contract  of  subscription." 

Sec  also: 

Connecticut :  Bishop  v.  Brainerd,  28 
Conn.  280(1859). 

Delaware:  Delaware  R.  Co.  v. 
Tharp,  1  Houst.  149  (18GG).      , 

Illinois:  Terre  Haute,  etc.  R.  Co. 
V.  Earp,  21  111.  291  (1859);  Sprague 
V.  Illinois  River  R.  Co.,  19  111.  174 
(1857). 

Indiana :  Sparrow  v.  Evansville, 
etc.  R.  Co.,  7  Ind.  309  (18.50);  Bish 
V.  Johnson,  21  Ind.  299  (1SG3). 


Kentucky:  Fry  v.  Lexington,  etc. 
R.  Co.,  2  Mete.  314  (1859). 

MissouH :  Pacific  R.  Co.  v.  Ren- 
shaw,  18  Mo.  210  (1853). 

Ohio :  Mansfield,  etc.  R.  Co.  r. 
Brown,  26  Ohio  St.  223  (1875). 

Pennsylvania :  Hamilton  v.  Clar- 
ion, etc.  R.  Co.,  144  Pa.  St.  34 
(1891),  (23  Atl.  Rep.  53,  13  L.  R.  .\. 
779). 

Compare  Cork,  etc.  R.  Co.  v.  Pat- 
terson, 18  C.  B.  414  (1856),  (37  Eng. 
L.  &  Eq.  398) ;  Kenosha,  etc.  R.  Co. 
V.  Marsh,  17  Wis.  13  (1863). 

'  See  cases  cited  in  preceding  note. 
Also  ante,  §  43 :  "Requisite  Number  of 
Stockholders  — -  (C)  Under  Enactments 
in  Exercise  of  Reserved  Power." 

-  As  subscription  obligations,  with 
other  choses  in  action,  pass  directly  to 
the  consolidated  corporation  by  virtue 
of  the  consolidation  agreement  and 
{proceedings  thereunder,  an  additional 
formal  assignment  is  unnecessary,  but 
such  assignment  is  sometimes  de- 
livered and  is  convenient,  in  case  of 
suit,  in  obviating  the  necessity  for 
proving  the  fact  of  consolidation. 

3  Midland  R.  Co.  v.  Leech,  3  H.  L. 
Cas.  872  (1852);  Mansfield,  etc.  R. 
Co.  V.  Brown,  26  Oliio  St.  223  (1875); 
Rodgers  r.  Wells,  44  Mich.  411  (1880), 
(6  X.  W.  Rep.  800). 

*  Peninsular  R.  Co.  v.  Tharp,  28 
Mich.  506  (1874). 

133 


§   09  INTERCORPORATE    RELATIONS  [PART  I 

filed  its  certificate  of  consolidation  with  the  Secretary  of  State.* 
In  such  an  action  to  enforce  an  obligation  upon  a  contract  made 
with  another  corporation,  it  is  necessary  for  the  consolidated 
corporation  to  show  that  it  has,  and  in  what  manner  it  has, 
succeeded  to  the  rights  of  the  original  company  upon  such 
contract.^  Proof  of  the  existence  of  the  consolidated  com- 
pany as  a  corporation  de  facto  is  not  enough.  "  It  may  be  a 
corporation  de  facto  and  entitled,  as  such,  to  enforce  contracts 
as  against  parties  who  have  dealt  with  it,  without  at  the  same 
time  in  any  manner  having  succeeded  to  the  rights  of  the  .  .  . 
company  with  which  the  contract  of  the  defendant  was  made."  ^ 
Transfer  by  assignment  or  transfer  by  succession  must  be  shown.* 
If  a  subscription  to  the  stocl^  of  a  constituent  corporation 
is  made  upon  condition,  it  passes  to  the  consolidated  company 
subject  thereto,  and  that  corporation  must  perform  the  con- 
dition before  it  can  maintain  any  action  upon  the  subscrip- 
tion. A  consolidated  corporation  may  also,  by  the  perform- 
ance of  conditions,  accept  a  continuing  conditional  offer  to 
subscribe  for  the  stock  of  one  of  its  constituent  companies.'^ 
Thus,  for  example,  a  condition  in  a  subscription  to  the  capital 
stock  of  a  railroad  company  that  its  railroad  should  pass 
through  a  certain  place  might,  upon  its  consolidation,  be  com- 
plied with  by  the  consolidated  company;  and  the  subscription 
Avould  become  absolute  on  the  location  of  the  road  through 
the  place  named.^ 

'  Mansfield,  etc.  R.  Co.  v.  Brown,  the  observance  of  the  statutory  con- 

26  Ohio  St.  223  (1875).  ditions  to  consolidation.     Rodgers  v. 

2  Mansfield,  etc.  R.  Co.  v.  Drinker,  Wells,  44  Mich.  411  (1880),  (6  N.  W. 
30  Mich.  124  (1874).  Rep.  860). 

3  Mansfield,  etc.  R.  Co.  v.  Drinker,  «  Mansfield,  etc.  R.  Co.  v.  Pettis,  26 
30  Mich.  124  (1874).     See  also  Tuttle  Ohio  St.  259  (1875). 

V.  Michigan  Air  Line  Co.,  35  Mich.  249  «  Mansfield,  etc.  R.  Co.  v.  Stout,  26 

(1877);     Mansfield,    etc.    R.    Co.    v.  Ohio  St.  241  (1875). 

Brown,     26    Ohio    St.     223     (1875);  Whce  a  subscription  was  ba-sed  on 

Peninsular  R.  Co.  v.  Tharp,  28  Mich.  a  corporation's  locating  its  road  at  a 

506    (1874);     Brown    v.    Dibble,    65  certain  point,  but  the  road  was  not 

Mich.    520    (1887),    (32    N.    W.    Rep.  built  by  that  company,  but  by  a  new 

656).  company  consolidated  with  one  organ- 

*  An  assignee  of  a  consolidated  cor-  ized  on  foreclosure  of  the  first  com- 

poration  of  a  claim  upon  a  stock  sub-  pany's  property  and  franchise,  it  was 

scription   of   a   constituent    company  held  that  the  subscription  was  lacking 

must,   likewise,   fail  in  liis  action  to  in   consideration,    and    could    not   be 

collect  the  same  if  he  does  not  show  enforced    bj-    the    consolidated    com- 

134 


CHAP.  VIlj 


RIGHTS   AND    POWERS 


§70 


Calls  or  requisitions  for  the  payment  of  subscriptions  in 
instalments,  made  during  the  pendency  of  consolidation  pro- 
ceedings, continue  in  force  after  consolidation  for  the  benefit 
of  the  consolidated  company.  Such  requisitions  apply  not 
only  to  subscriptions  absolute  at  the  date  of  the  call,  but  to 
conditional  subscriptions  as  soon  as  the  conditions  are  per- 
formed.* 

While,  generally,  consolidation  terminates  the  existence  of 
consolidating  corporations  so  that  they  cannot  thereafter 
maintain  actions,^  it  was  held  that  a  constituent  corporation 
might  bring  an  action  after  consolidation  against  a  subscriber 
upon  his  contract  of  subscription,^  which  could  be  maintained, 
unless  the  fact  of  consolidation  were  pleaded  in  abatement.^ 
Upon  principle,  however,  it  would  seem  that  the  dissolution 
of  the  plaintiff  corporation  might  be  suggested  upon  the  record 
at  any  time. 

§  70.  Municipal  Aid.  — Counties  and  towns  through  which 
they  ran  furnished  the  principal  means  by  which  the  early 
railroads  in  the  Western  States  were  constructed.  The  policy 
of  rendering  such  aid  was  in  accordance  with  the  public  senti- 
ment of  the  period.''     Aid  was  usually  rendered  through  sub- 


pany.    Dix  i'.  Shaver,  14  Hun  (X.  Y.), 
392  (1878). 

1  Mansfield,  etc.  R.  Co.  v.  Stout,  2G 
Ohio  St.  241  (1875). 

2  Pennsj'lvania  College  Cases,  13 
Wall.  (U.  S.)  215  (1871):  "Neither  of 
the  original  corporations  is  competent 
to  sue  for  any  cause  of  action  subse- 
quent in  date  to  their  acceptance  of 
the  new  act  of  incorporation." 

^  Hanna  v.  Cincinnati,  etc.  R.  Co., 
20  Ind.  30  (18G3). 

■•  Swartwout  v.  Mich.  Air  Line  R. 
Co.,  24  Mich.  403  (1872). 

*  In  Scotland  County  v.  Thomas, 
94  U.  S.  693  (1876),  Mr.  .Ju.stice  Brad- 
ley f5aid:  "The  project  of  the  railroad 
promised  a  great  public  improvement, 
conducive  to  the  interests  of  Alex- 
andria and  the  counties  through 
which  it  would  pass.  Its  construc- 
tion, however,  would  greatlj'  depend 
upon  the  local  aid  and  encouragement 


it  might  receive.  The  interests  of  its 
projectors  and  of  the  country  it  was 
to  traverse  were  regarded  as  mutual. 
The  power  of  the  adjacent  counties 
and  towns  to  subscribe  to  its  stock,  as 
a  means  of  securing  its  construction, 
was  desired  not  only  by  the  company, 
but  by  the  inhabitants.  Whether  the 
policy  was  a  wise  one  or  not  is  not 
now  the  question.  It  was  in  accord- 
ance with  the  public  sentiment  of 
that  period.  The  power  was  sought 
at  the  hands  of  the  legislature,  and 
was  given.  It  was  relied  on  by  those 
who  subscribed  their  private  funds  to 
the  enterprise.  It  was  involved  in 
the  general  scheme  as  an  integral 
part  of  it,  and  as  much  contributory 
and  necessary  to  its  success  as  the 
prospective  right  to  take  tolls.  Why 
it  should  not  still  attach  to  this  jjor- 
tion  of  the  road,  as  one  of  the  rights 
and    i)rivileges   belonging   to    it,    into 

135 


70 


INTERCORl'ORATE    RELATIONS 


[part  I 


scriptions  to  stock  and  payment  therefor  in  municipal  bonds, 
but  donations  were  not  uncommon  and  stand  upon  the  same 
legal  basis  as  subscriptions.' 

Upon  consolidation  the  subscription  contracts  of  municipal 
corporations  pass  to  the  consolidated  company  in  the  same 
manner  as  other  subscriptions  and  it  succeeds  to  their  rights 
to  receive  municipal  aid.^  The  power  given  by  the  legislature 
to  a  municipal  corporation  to  make  a  donation  in  aid  of  the 
construction  of  a  railroad  is  itself  a  privilege  of  the  railroad 
corporation,  and  passes,  with  other  rights  and  privileges,  upon 
consohdation,  to  the  new  company.^     Where,  however,  before 


whose  hands  soever  it  comes,  by  con- 
solidation or  otherwise,  it  is  difficult 
to  see." 

'  Railroad  Co.  v.  County  of  Otoe,  16 
Wall.  (U.  S.)  675  (1872) :  "It  is  urged, 
however,  against  the  validity  of  the 
act  now  under  consideration,  that  it 
authorized  a  donation  of  the  county 
bonds  to  the  railroad  company,  and 
it  is  insisted  that  if  even  the  legisla- 
ture could  empower  the  county  to 
subscribe  to  the  stock  of  such  a  cor- 
poration, it  could  not  constitutionally 
authorize  a  donation.  Yet  there  is 
no  solid  ground  of  distinction  between 
a  subscription  to  stock  and  an  appro- 
priation of  money  or  credit.  Both 
are  for  the  purpose  of  aiding  in  the 
construction  of  the  road;  both  are 
aimed  at  the  same  object,  securing  a 
public  advantage,  obtaining  a  high- 
way or  an  avenue  "to  the  markets  of 
the  country;  both  may  be  equally 
burdensome  to  the  taxpayers  of  the 
county.  The  stock  subscribed  for 
may  be  worthless,  and  known  to  be 
so."  See  also  New  Buffalo  v.  Iron 
Co.,  105  U.  S.  73  (1881). 

^  United  States :  Livingston  County 
V.  First  Nat.  Bank,  128  U.  S.  102 
(1888),  (9  Sup.  Ct.  Rep.  18);  Bates 
County  ?'.  Winters,  112  U.  S.  325 
(1884),  (5  Sup.  Ct.  Rep.  157);  New 
Buffalo  V.  Iron  Co.,  105  U.  S.  73 
(1881);  Harter  v.  Kernochan,  103 
U.  S.  562  (1880);  Menesha  v.  Hazard, 

136 


102  U.  S.  81  (1880);  Empire  Town- 
ship V.  Darlington,  101  U.  S.  87  (1879) ; 
Henry  County  v.  Nicolay,  95  U.  S.  619 
(1877);  East  Lincoln  v.  Davenport, 
94  U.  S.  801  (1876) ;  Callaway  County 
V.  Foster,  93  U.  S.  567  (1876);  Scot- 
land County  V.  Thomas,  94  U.S.  682 
(1876);  Nugent  v.  Supervisors,  19 
Wall.  (U.  S.),  241  (1873);  Washburn 
V.  Cass  County,  3  Dill.  (U.  S.),  251 
(1875);  Lewis  v.  Clarendon,  6  Rep. 
609  (1878). 

Illinois:  Edwards  v.  People,  88  111. 
340  (1878);  Robertson  v.  Rockford, 
21  111.  451  (1859);  Ni^ntic  Savings 
Bank  v.  Douglass,  5  111.  App.  579 
(1879).  Compare  Town  of  Pana  v. 
Lippincott,  2  111.  App.  466  (1877). 

Indiana:  Scott  v.  Hanshear,  94 
Ind.  1  (1883). 

Kansas:  Atchison,  etc.  R.  Co.  v. 
Phillips  County,  25  Kan.  261  (1881); 
Chicago,  etc.  R.  Co.  v.  Stafford  County, 
36  Kan.  121  (1887),  (12  Pacific  Rep. 
593).  Compare  State  v.  Nemaha 
County  Commrs.,  10  Kan.  569  (1873). 

Missouri :  State  v.  Greene  County, 
54  Mo.  540  (1874);  Smith  v.  Clark 
County,  54  Mo.  58  (1873);  Hannibal, 
etc.  R.  Co.  V.  Marion  County,  36  Mo. 
294  (1865). 

Texas:  Morrell  v.  Smith  County, 
89  Tex.  529  (1896),  (36  S.  W.  Rep. 
56). 

^  Harter  v.  Kernochan,  103  LT.  S. 
574  (1880):    "The  act  .   .   .  fully  au- 


CHAP.  VIl]  RIGHTS   AND    POWERS  §    71 

a  consolidation  was  effected,  a  constitutional  provision  had 
been  adopted  prohibiting  county  subscriptions  without  the 
vote  of  the  people,  it  was  held  that  the  consolidated  corpora- 
tion did  not  acquire  the  right  of  constituent  corporations  to 
receive  such  aid  without  such  vote.^  . 

A  discussion  of  the  right  of  consolidated  companies  to  re- 
ceive municipal  aid  voted  to  their  constituents  is,  principally, 
of  historic  value.  Public  sentiment  has  changed.  Public 
policy  as  indicated  by  constitutional  and  statutory  provisions 
is  adverse  to  municipal  aid  to  railroad  companies,  and  only 
in  exceptional  instances  is  such  aid  granted  at  the  present 
time. 

§  71.  Constitutional  Limitations  upon  Grants  of  Privileges 
and  Immunities.  ^  Coastitutional  provisions  in  many  States 
prohibit  the  grant  of  special  privileges  and  immunities. 

When  consolidation  takes  the  form  of  merger  these  provi- 
sions are  inapplicable,  for  the  privileges  and  exemptions  of 
the  merging  companies  pass  to  an  existing  corporation,  which 
takes  by  transfer  and  not  i)y  grant.^ 

When,  however,  the  effect  of  consolidation  is  to  dissolve 
the  consolidating  companies  and  to  create  in  their  stead  a  new 

thorized    the    consolidation    between  court  by  the  electors  of  a  township  to 

those  two  companies,  and  upon  such  subscribe,  in  its  behalf,  for  stock  in  a 

consolidation  the  new  company  sue-  certain  railroad  company,  that,  upon 

ceeded   to    all    the   rights,    franchises  principles  of  the  law  of  attorney  and 

and  powers  of  the  constituent  com-  constituent,  the  consolidation  of  such 

panies.     The  power  in  the  township  company   with   another   revoked   the 

to    make   a   donation    in    aid   of    the  power. 

construction  of  the  Illinois  South-  In  Wilson  v.  Salamanca,  99  U.  S. 
eastern  railway  was  also  a  privilege  499  (1878),  however,  the  Court  dis- 
of  the  latter  corporation,  and  that  tinguished  the  above  case  from  a  case 
privilege,  upon  the  consolidation,  where  a  subscription  had  been  made 
passed  to  the  new  company."  under  similar  conditions  by  a  town- 
See  also  Smith  v.  Clark  County,  54  ship  trustee  and  clerk,  holding  that 
Mo.  67  (1873),  followed  in  Scotland  they  acted  in  their  official  capacity  as 
County  V.  Thomas,  94  U.  S.  082  township  authorities  and  not  as  mere 
(1876),  and  cases  cited  in  preceding  agents,  and  that  the  township  wa-s 
note.  liable. 

•Wagner    v.    Meety,    09    Mo.    l.'SG  ^  Tennessee     v.     Whitworth,      117 

(1878).  U.   S.    147  (1885),  (6    Sup.    Ct.   Rep. 

In  Harshman  v.  Bates  County,  92  049) ;   Central  R.,  etc.  Co.  v.  Georgia, 

U.  S.  509  (1875),  the  Supreme  Court  92  U.  S.  005  (1875) ;  Southwestern  R., 

of  the  United  States  held,  where  an-  etc.  Co.  v.  Georgia,  92  U.  S.  070,  note 

thority  had  been  given  to  a  county  (1875). 

137 


§    72  INTERCORPORATE   RELATIONS  [PART  I 

and  distinct  corporation  this  new  corporation  takes  every- 
thing by  grant  —  express  or  by  reference  —  and  the  legisla- 
ture is  controlled  by  existing  constitutional  limitations  in 
granting  it  privileges.*  The  new  consolidated  corporation  is 
subject  to  all  constitutional  provisions  in  force  at  the  time  of 
its  creation  in  precisely  the  same  manner  as  other  new  cor- 
porations. Where  corporations  enjoying  irrepealable  privi- 
leges and  exemptions  consolidate  and  a  new  corporation  is 
created  it  takes  such  privileges  subject  to  constitutional  or 
statutory  provisions  reserving  to  the  legislature  power  to  repeal 
the  charter  provisions  granting  them.^ 

Questions  as  to  the  effect  of  constitutional  provisions  upon 
the  special  immunities  of  consolidating  corporations  generally 
arise  in  connection  with  exemptions  from  taxation  and  are 
further  considered  in  the  next  section. 

§  72.  Exemptions  from  Taxation.  —  As  already  indicated, 
the  purpose  of  acts  permitting  the  merger  of  corporations  is, 
generally,  to  vest  in  the  absorbing  company  the  privileges  and 
immunities,  including  exemptions  from  taxation,  of  the  com- 
panies absorbed,  and  such  is  the  legal  presumption.^  The 
merger  does  not,  however,  enlarge  the  rights  acquired  nor 
bestow  new  immunities.^     Thus,  where  one  railroad  corpora- 

'  Yazoo,  etc.  R.  Co.  v.  Adams,  180  San  Antonio  Traction  Co.  v.  Altgelt, 

U.  S.  1  (1901),  (21  Sup.  Ct.  Rep.  240) ;  200  U.  S.  304  (1906)  (26  Sup.  Ct.  Rep. 

Minneapolis,  etc.  R.  Co.   v.   Gardner,  261). 

177  U.  S.  332  (1900),  (20  Sup.  Ct.  Rep.  ^  Railroad  Co.  v.  Georgia,  98  U.  S 

656);    Norfolk,  etc.  R.  Co.  v.  Pendle-  359   (1878).     See  also  cases  cited  in 

ton,  156  U.  S.  673  (1895),  (lo  Sup.  Ct.  note  1.     Compare  Citizens'  Street  R. 

Rep.  413);    St.  Louis,  etc.  R.  Co.  v.  Co.  v.  Memphis,  53  Fed.  715  (1893). 

Berry,  113  U    S.  465  (1885),  (5  Sup.  See    ante,    §    66:     "Real    Estate    and 

Ct.     Rep.     529);      Railroad     Co.     v.  Rights  in  Streets." 

Georgia,  98  U.  S.  359  (1878);  Railroad  ^  Xennessee     v.     A\Tiitworth,     117 

Co.    V.    Maine,    96    U.  S.   499  (1877);  U.  S.   147  (1885),  (6    Sup.    Ct.    Rep. 

Shields  V.  Ohio,  95  U.  S.  319  (1877);  649). 

Keokuk,  etc.  R.  Co.  v.  Scotland  *  Central  R.,  etc.  Co.  v.  Georgia,  92 
County,  41  Fed.  305  (1890).  See  also  U.  S.  675  (1875).  "The  ob\'ious  pur- 
State  V.  Northern  Central  R.  Co.  44  pose  of  the  act  was  to  ve.st  in  the 
Md.  131  (1875).  Central    Company    the    rights,    pri%^- 

After  the  adoption  of  a  new  con-  ileges,     immunities,     property-,     and 

stitution    a    railroad    company    char-  franchises  which  had  belonged  to  the 

tered    prior    thereto    which    consoli-  Macon  and  Western  Company ;    not 

dates   with    other   corporations   takes  to  enlarge  those  rights,  or  to  bestow 

all   pri^•ileges   and   franchises  subject  new    immunities.     If,    therefore,    the 

to  its  provisions.  Macon    and    Western    held   its    fran- 

138 


CHAP.  VIl] 


RIGHTS    AND    POWERS 


§72 


tion  which  enjoyed  an  exemption  from  taxation  for  a  limited 
period  was  merged  in  another  company  having  a  perpetual 
exemption,  it  was  held  that  such  perpetual  exemption  did  not 
apply  to  the  railroad  of  the  absorbed  company,  and  that  it 
became  subject  to  taxation  upon  the  expiration  of  the  period 
limited.* 

Where  a  new  corporation  is  created  as  the  result  of  consoli- 
dation the  question  whether  it  acquires  the  exemptions  from 
taxation  enjoyed  by  its  constituent  companies  depends  upon 
the  constitution  of  the  State  and  the  terms  of  the  consolida- 
tion act.  If  the  constitution  prohibits  the  grant  of  such 
exemptions  they  cannot,  as  shown  in  the  last  section,  be  be- 
stowed on  the  consolidated  company." 

Where  the  constitution  contaiiLS  no  prohibition  of  such 
exemptions,  their  existence  depends  entirely  upon  the  pro- 
visions of  the  consolidation  act.  The  courts  view  such  ex- 
emptions with  disfavor  and  in  construing  consolidation  stat- 
utes hold  that,  in  the  absence  of  an  express  statutory  direction 
or   of   an   equivalent   implication  by    necessary   construction, 


chises  and  property  subject  to  taxa- 
tion, the  Central,  succeeding  to  the 
franchises  and  property',  holds  them 
alike  subject.  It  took  them  just 
as  they  were,  acquiring  no  additional 
or  enlarged  rights  as  against  the 
State." 

See  also  Southwestern  R.,  etc.  Co. 
V.  Georgia,  92  U.  S.  676  (1875),  in 
note  to  above  case.  Also  Keokuk, 
etc.  R.  Co.  V.  Missouri,  152  U.  S.  301 
(1894),  (14  Sup.  Ct.  Rep.  592) ;  State 
V.  Philadelphia,  etc.  R.  Co.,  45  Md. 
361  (1876),  (24  Am.  Rep.  511). 

'  Tomlinson  v.  Branch,  15  Wall. 
(U.  S.)  460  (1872). 

*  In  St.  Louis,  etc.  R.  Co.  r.  Hcrry, 
113  U.  S.  465  (1885),  (5  Sup.  Ct.  Rep. 
520),  it  was  held  :  A  consolidation  of 
two  railway  companies  by  an  agree- 
ment which  pro\'ided  that  all  the 
property  of  each  company  should  be 
taken  and  deemed  to  be  transferred 
to  the  consolidated  company  "as 
such  new  corporation  without  further 
dct  or  deed,"  created  a  new  corpora- 


tion, with  an  existence  dating  from 
the  time  when  the  consolidation  took 
effect,  and  subject  to  constitutional 
proxnsions  respecting  taxation  in  force 
in  the  State  at  that  time. 

In  Keokuk,  etc.  R.  Co.  v.  Scotland 
County,  41  Fed.  305  (1890),  the 
Court  said  that  a  consolidation  of 
two  railroad  companies  under  the 
Missouri  consolidation  act  operated 
as  the  creation  of  a  new  corporation, 
wholly  distinct  from  the  constituent 
corporations  out  of  which  it  was 
formed,  which  new  corporation  de- 
rived its  powers  and  franchises  from 
the  consolidation  act ;  and  since 
Const.  Mo.  1865,  Art.  11,  par.  16, 
prohibiting  legislative  exemption  from 
taxation,  was  adoptetl  before  the 
passage  of  the  act,  the  consolidated 
corporation  did  not  accjuire  the  im- 
munity from  taxation  granted  in  1857 
to  one  of  its  constituent  corporation.s. 

See  also  cases  cited  in  notes  to  pre- 
ceding section. 

139 


§    72  INTERCORPORATE    RELATIONS  [PART  I 

oxemptions  from  taxation  in  the  charters  of  coasoHdating 
corporations  do  not  pass  to  the  new  corporation  succeeding 
by  consolidation  to  their  property  and  ordinary  franchises.^ 

In  the  case  of  Yazoo,  etc.  R.  Co.  v.  Adams  ^  Mr.  Justice 
Brown  said:  "Exemptions  from  taxation  are  not  favored 
by  law,  and  will  not  be  sustained  unless  such  clearly  appears 
to  have  been  the  intent  of  the  legislature.  Public  policy  in 
the  United  States  has  almost  necessarily  exempted  from  the 
scope  of  the  taxing  powers  large  amounts  of  property  used  for 
religious,  educational  and  municipal  purposes;  but  this  list 
ought  not  to  be  extended  except  for  very  substantial  reasons; 
and  while,  as  we  have  held  in  many  cases,  legislatures  may  in 
the  interest  of  the  public,  contract  for  the  exemption  of  other 
property,  such  contracts  should  receive  a  strict  interpretation, 
and  every  reasonable  doubt  be  resolved  in  favor  of  the  taxing 
power.  Indeed,  it  is  not  too  much  to  say  that  courts  are  astute 
to  seize  upon  evidence  tending  to  show  either  that  such  exemp- 
tions were  not  originally  intended,  or  that  they  have  become 
inoperative  by  changes  in  the  original  constitution  of  the 
companies." 

Where,  however,  the  consolidation  act  provides  that  the 
consolidated  corporation  shall  be  "  vested  with  all  the  immu- 
nities" of  the  old  companies,  or  uses  other  language  clearly 
evidencing  a  legislative  intent  to  bestow  such  special  privileges 
upon  the  consolidated  corporation,  it  thereby  succeeds  to  an 
exemption  from  taxation  contained  in  the  charter  of  a  con- 
stituent corporation.^     Such  an  exemption,   however,   applies 

>  Norfolk,  etc.  R.  Co.  v.  Pendleton,  burgh   R.    Co.,    29    Gratt.    (Va.)    773 

156  U.  S.  673  (1895),  (15  Sup.  Ct.  Rep.  (1878). 

413):  "We  have  frequently  held  that.  For  consideration  of  the  question 
in  the  absence  of  express  statutory  of  irrepealable  contracts  vrith  the 
direction,  or  of  an  equivalent  impli-  State  on  the  subject  of  taxation  pass- 
cation  by  necessary  construction,  ing  to  consolidated  corporation  see 
pro\-isions,  in  restriction  of  the  right  State  v.  Commr.  of  Railroad  Taxa- 
of  the  State  to  tax  the  property  or  tion,  37  N.  J.  L.  240  (1874). 
to  regulate  the  affairs  of  its  corpora-  2  Yazoo,  etc.  R.  Co.  v.  Adams,  180 
tions,  do  not  pass  to  new  corporations  U.  S.  22  (1901),  (21  Sup.  Ct.  Rep.  240). 
succeeding,  by  consolidation  or  by  See  also  Railroad  Co.  v.  Georgia,  98 
purchase  under  foreclosure,  to  the  U.  S.  363  (1878) ;  Railroad  Co.  v. 
property  and  ordinary  franchises  of  Maine,  96  U.  S.  308  (1877). 
the  first  grantee."                                                  ^  Atlantic,  etc.  R.  Co.  v.  -Allen,  15 

See    also    Petersbiu-gh    v.    Peters-  Fl.  637  (1876).     In  this  case  the  act 

140 


CHAP.  VIl] 


RIGHTS   AND    POWERS 


§72 


only  to  the  i)roperty  to  which  it  adhered  when  enjoyed  by  the 
original  company.  "  Whatever  property  was  subject  to  taxa- 
tion would,  after  the  consolidation,  remain  so."  ^ 

Improvements,  betterments  and  repairs  made  upon  the 
properties  by  the  consolidated  company  are  subject  to  taxa- 
tion or  exemption  according  to  the  rule  applied  to  the  respec- 
tive properties  upon  which  they  were  made.^ 


pro\'idtHl  that  "all  the  rights,  fran- 
chises and  pri\nleges"  should  pass, 
and  the  Court  said:  "A  right  of  ex- 
emption from  taxation  can  be  passed 
under  the  general  language  'all  the 
rights'  the  same  as  any  other  right. 
We  can  see  no  difference.  .  .  .  The 
term  'all  rights'  embraces  each  right." 

See,  however,  post,  §  160:  "  Ex- 
emptions from  Taxation." 

In  Natchez,  etc.  R.  Co.  v.  Lam- 
bert, 70  Miss.  779  (1893)  the  Court 
said:  "If  the  words  'rights,  privi- 
leges, and  immunities'  ...  do  not 
include  its  immunity  from  taxa- 
tion it  would  be  difficult  to  pass  it 
except  by  an  express  declaration  that 
exemption  from  taxation  should  bo 
among  the  rights,  pri\-ileges  and  im- 
munities to  be  transferred. " 

1  A  railroad  corporation,  formed 
under  an  act  of  the  legislature  bj-  the 
consolidation  of  existing  companies 
and  "vested  with  all  the  rights, 
privileges,  franchises,  and  property 
which  may  have  been  vested  in  cither 
company  prior  to  the  act  of  consoli- 
dation," acquires  no  greater  immunity 
from  taxation  than  they  severally 
enjoyed  as  to  the  portions  of  the  road 
which  belonged  to  them  under  their 
respective  charters.  Whatever  proj)- 
erty  was  subject  to  taxation  would, 
after  the  con.soliflation,  remain  so. 
Chesapeake,  etc.  R.  Co.  v.  Virginia, 
94  U.  S.  718  (1876). 

See  also  Central,  etc.  R.  Co.  v. 
Georgia,  92  U.  S.  665  (1875) ;  Branch 
V.  Charleston,  92  U.  S.  677  (1875); 
Tomlinson  v.  Branch,  15  AVall.  460 
(1872);     Charleston    v.     Branch,     15 


Wall.  (U.  S.)  470  (1872),  note;  Dela- 
ware R.  R.  Tax.,  18  Wall.  206  (1873) ; 
Philadelphia,  etc.  R.  Co.  v.  Maryland, 
10  How.  377  (1850);  State  r.  Wood- 
ruff, 36  N.  J.  L.  94  (1872);  State  v. 
Philadelphia,  etc.  R.  Co.,  45  Md.  361 
(1876),  (24  Am.  Rep.  511). 

2  Branch  v.  Charleston,  92  U.  S.  682 
(1875):  "It  does  not  follow,  there- 
fore, that  this  part  of  the  road,  thouch 
used  for  the  accommodation  of  both 
branches,  .should  be  regarded  as  divis- 
ible into  proportional  parts,  one  sub- 
ject to  taxation  and  the  other  not. 
It  is  to  be  regarded  as  simply  the  road 
and  property  of  the  old  company ;  in 
the  hands  of  the  new  company  it  is 
true,  but  subject  to  all  the  liabilities 
of  its  original  charter.  Hence  we 
held  that  the  entire  line  of  road  be- 
tween Branchville  and  Charleston  is 
subject  to  taxation ;  and  that  prima 
facie  the  railroad  terminus  and  depot 
in  Charleston  and  the  property  ac- 
cessory thereto  belong  to  the  older 
portion  of  the  joint  property.  But 
inasmuch  as  the  charter  right  of 
the  present  company  extended  to 
Charleston,  w-e  further  held,  that  if  it 
could  be  fairly  shown  that  any  of  the 
company's  property  there  was  ac- 
(Hiired  by  the  present  conipany  for 
the  accommodation  of  the  bu-siness 
belonging  to  its  original  roads,  or  for 
the  joint  accommodation  of  the  en- 
tire system  of  roads  imdcr  its  control, 
such  property  would,  pro  tatito  and  in 
f:iir  proportion,  be  exempt  from  taxa- 
tion. This  was  intended  to  meet  the 
case  of  such  jiroperty  as  the  present 
company    might     have    acquired    in 

141 


§   73  INTERCORPORATE   RELATIONS  [PART  I 

A  conditional  exemption  from  taxation  dependent  upon 
certain  returns  being  made  and  certain  acts  performed,  which 
'the  consoUdated  corporation  is  neither  required  nor  able  to 
make  or  perform,  does  not  enure  to  its  benefit.' 

§  73.  Special  Privileges  and  Immunities  other  than  Tax 
Exemptions.  —  Where  a  corporation  having  the  exclusive 
franchise  to  furnish  water  to  a  city  is  consolidated  \vith  another 
corporation  under  a  statute  providing  that  upon  consolida- 
tion, the  separate  existence  of  the  constituent  corporations  shall 
cease,  and  that  the  consolidated  corporation  shall  be  subject 
to  existing  laws,  the  exclusive  franchise  does  not  pass  to  the 
new  company  if  the  statutes  at  the  time  of  the  consolidation 
are  opposed  to  such  exclusive  privileges.^  The  provisions  of 
the  consolidation  acts  may  be  such,  however,  that  an  exclu- 
sive privilege  of  this  character  will  pass  to  the  consolidated 
corporation.^ 

A  consolidated  railroad  corporation  may  acquire  the  limited 
liability  of  one  of  its  constituents  for  damages  for  killing  live 
stock/  A  provision  in  the  charter  of  a  constituent  corporation 
exempting  its  officers,  agents  and  servants  from  military  and 
road  duty  and  from  serving  on  juries,  has  been  held  not  to  be 
a  mere  personal  privilege  conferred  upon  the  classes  of  persons 

Charleston,  either  separately  or  in  limited  taxation  is  to  be  based.  But 
conjunction  with  the  old  company,  that  they  are  not  so  enabled  or  re- 
had  no  consoUdation  taken  place,  and  quired,  will  be  fully  seen.  Nor  is  it 
had  the  line  between  Branchvdlle  and  pretended  or  alleged  that  such  acts 
Charleston,  used  by  both,  remained  have  been  done."  Affirmed  s^ib  nam. 
the  property  of  the  old  company.  Of  Railroad  Co.  v.  Maine,  96  U.  S.  508 
course,  in  carrjnng  out  this  principle,  (1877). 

any  repairs  or  improvements  made  on  -  Shaw  v.  City  of  Co\'ington,    194 

the  old  line  or  the  property  of  the  old  U.  S.  593   (1904),  (24  Sup.  Ct.   Rep. 

company  would  become  a  part  thereof,  754). 

and  be  subject  to  .taxation."  3  New  Orleans  Gas  Co.  v.  Louisiana 

1  State  V.  Maine  Central  R.  Co.  66,  Light,  etc.  Co.,  115  U.  S.  650  (1885), 

Me.    499    (1877)  :    "The   defendant's  (26  Sup.  Ct.  Rep.  52).     In  this  case 

claim  to  immunity  from  taxation  or  it   was   held   that   upon   a   consolida- 

for  a   limited   and   conditional   taxa-  tion  of  gas  light  companies  the  con- 

tion  rests  only  on  the  word  'immuni-  solidated    corporation    obtained     the 

ties'    in    section    4.     But    to    entitle  exclusive   privilege   of   a    constituent 

them  to  immunity  they  must  first  of  company  to  supply  a  city  with  gas. 
all  be  enabled  or  required  to  make  the  ^  Daniels   v.  St.  Louis,  etc.  R.  Co., 

several  returns,  and  do  and  perform  62  Mo.  43  (1876)  (sale). 
the    several    acts    upon    which    such 

142 


CHAP.  VIl]  RIGHTS   AND    POWERS  §   74 

described,  but  a  valuable  right  in  the  company  which  passes 
upon  consolidation  to  the  consolidated  company.^ 

II.    Powers 

§  74.  Powers  of  Consolidated  Corporation.  In  General.  — 
When  consolidation  is  effected  through  a  process  of  merger 
the  absorbing  corporation  continues  in  existence  with  its  origi- 
nal powers  and  with  such  additional  powers,  derived  from 
the  corporations  absorbed,  as  the  consolidation  statute  may 
confer. 

When,  however,  the  original  corporations  are  dissolved  and 
a  new  and  distinct  corporation  is  created,  the  consolidation 
act  is  treated  as  a  grant  of  a  new  charter  to  the  consolidated 
corporation^  which  acquires  and  can  exercise  no  powers  not 
granted  expressly  or  by  necessary  implication  therein.^  It 
will  be  implied  that  the  consolidated  company  takes  and  may 
exercise  the  powers  necessary  for  the  use  of  the  property  and 
franchises,  and  for  the  transaction  of  the  business  acquired. 

The  consolidation  statute  need  not  specifically  enumerate 
the  corporate  powers  conferred,  but  may,  and  usually  does, 
designate  the  poAvers  and  privileges  granted  l)y  reference  to 
the  powers  of  the  constituent  companies.  "  Powers  and 
privileges  may  as  well  be  designated  by  reference  to  the  char- 
ters of  other  companies  as  by  special  enumeration."  *     The 

'  Zimmer    v.    State,    30    Ark.    677  stroyed,  a  new  one  was  created,  and 

(1875).     Compare,  however,  St.  Lonis,  its  powers  were  'grantctl'  to  it,  in  all 

etc.    R.    Co.    V.    Berry,    41    Ark.    509  respects,  in  \'iew  of  the  law,  as  if  the 

(1883).     See  also  Hawkins  v.  Small,  old  companies  had  never  existed,  antl 

7  Baxt.  (Tenn.)  193  (1874).  neither  of  them  had  ever  enjoyed  the 

Where   the   employees   of   a   Ten-  franchises  so  conferretl." 
nes.see  corporation  were  exempt  from  See  also  Charlotte,  etc.   R.  Co.  v. 

road  work  and   the  corporation  was  Gibbes,  27  S.  C.  385  (1887),  (4  S.  E. 

incorporated    in    Alabama    with    the  Rep.  49). 

same  privileges  it  was  held  that  the  ^  Shields    v.    Ohio,    95    U.    S.    323 

employees      were      likewise      exempt  (1877);    Mead   r.   New  York,  etc.   R. 

from  such  duty  in   Alabama.     John-  Co.,  45  Conn.  199  (1877). 
son  V.  State,   88  Ala.   176  (1889),    (7  <  State  v.  Keokuk,  etc.  R.  Co.,  99 

So.  Rep.  2.53).  Mo.   41    (1889),    (12   S.W.    Rep.    290, 

^  In  Shields  v.  Ohio,   95  U.  S.  323  6  L.  R.  A.  222). 
(1877),     Mr.     Ju-stice     Swayne    said:  Also  Shields  r.  Ohio,  95  U.  S.  323 

"When   the   consolidation    was   com-  (1877)  :  "The  language  was  brief  and 

pletcil,  the  old  corporations  were  de-  wa.s    made    operative    by    reference. 

14.3 


§75 


INTERCOKPORATE    RELATIONS 


[part  I 


privileges  so  granted  by  reference,  however,  while  similar  to 
those  of  the  former  companies,  are  not  the  same.  They  are, 
essentially,  privileges  of  the  new  corporation,  to  be  exercised 
according  to  its  constitution  and  for  the  purposes  of  its  crea- 
tion.^ 

The  amount  of  capital  stock  which  the  consolidated  cor- 
poration is  authorized  to  issue  is  generally  fixed  by  the  con- 
solidation act  with  reference  to  the  amounts  issued  by  the 
companies  consohdating ;  and,  in  some  States,  it  is  provided 
that  the  capital  stock  of  the  consolidated  corporation  shall  not 
exceed  the  total  amount  of  the  capital  of  its  constituents.^     ' 

§  75.  Power  to  issue  Mortgage  Bonds.  —  General  consoli- 
dation statutes  often  provide  that  the  consolidated  company 


But  this  did  not  affect  the  legal  re- 
sult. A  deed  inter  partes  may  be 
made  as  effectual  by  referring  to  a 
description  elsewhere  as  by  reciting 
it  in  full  in  the  present  instrument." 

'  Wliere  a  new  corporation  is 
formed  out  of  two  existing  corpora- 
tions, which,  under  the  terms  of  the 
consolidation,  cease  to  exist,  the  law 
creating  the  new  corporation  controls 
in  determining  what  are  its  corporate 
powers  and  franchises.  Crawfords- 
^^lle,  etc.  Turnpike  Co.  v.  Fletcher, 
104  Ind.  97  (1883),  (2  N.  E.  Rep. 
243).  For  references  to  consolida- 
tion statutes  prov-iding  generally  that 
the  consolidated  company  shall  pos- 
sess all  the  powers,  rights,  franchises, 
etc.  of  the  consolidating  corporations, 
see  note  to  §  65,  ante. 

Where  a  railway  company  and  a 
dock  company  amalgamated  under 
an  EngHsh  statute  pro\-iding  that 
the  two  undertakings  should  form  one 
and  be  the  undertaking  of  the  rail- 
way company,  but  that  no  provision 
of  the  statutes  which  related  exclu- 
sively to  one  of  the  undertakings 
should  apply  to  the  other,  and  the 
railway  company  supplied  their  dock 
undertaking  with  water  derived  from 
land  acquired  for  its  railway,  it  was 
held  that  the  railway  company  was 
not    carrying    on    the    business    of    a 

144 


water  companj',  and  that,  there  being 
no  st^,tutory  prohibition,  it  was  not 
acting  ultra  vires.  Att}'.  Gen.  v. 
North-Eastern  Ry.  2  Ch.  675  (1906), 
(95  L.  T.  512,  76  L.  J.  Ch.  5,  70  .1. 
P.  473,  22  T.  L.  R.  695). 

^Connecticut:  Gen'l  Stat.  1902,  § 
3807. 

Idaho:  Session  Laws  1901,  p.  214, 
§2. 

New  York:  Railroad  Law,  §  71, 
Bird.seye's  R.  S.  Sup.  Vol.  4,  1905. 

North  Dakota:  Rev.  Code,  1905, 
§  4273. 

Oklahojna:  Rev.  Stat.  1903,  p. 
360,    §    1082. 

Washington:  Ballinger's  Anno. 
Stat.    1897,    §    4304. 

In  New  Hampshire  the  capital 
stock  of  the  consolidated  company 
may  not  exceed  the  shares  of  the 
constituent  corporations  "actually 
issued  and  paid  for  at  par."  (Pub. 
Stat.  1901,  ch.  156,  §  26,  p.  504.) 

In  Pennsylvania  the  amomit  of  the 
capital  stock  is  not  limited  to  the 
amount  of  the  issues  of  the  con- 
solidating companies  and  is  fixed  in 
the  consolidation  agreement.  (Bright, 
Purd.  Dig.  1903,  vol.  1,  ch.  XI, 
p.  785.)  See  also  as  to  power  to  in- 
crease stock,  Alabama  Code,  §  1150. 
New  Jersey  Railroad  Law,  par.  252-3 
(G.  S.  1895,  p.  2698). 


CHAP.  VIl] 


RIGHTS   AND    POWERS 


§7G 


may,  under  prescribed  conditions,  issue  bonds  and  secure 
them  by  mortgage  of  its  property  and  franciiises,^  and  may 
exchange  the  bonds  so  issued  for  the  bonds  of  its  constituent 
companies.^ 

Under  authority  to  issue  mortgage  bonds,  it  has  been  held 
that  a  consoHdated  corporation  may  do  so  for  the  purpose  of 
taking  up  bonds  previously  issued  by  a  constituent  corpora- 
tion.^ A  consoUdated  company  may  also  purchase  and  retire 
the  bonds  of  its  constituents.* 

Consolidation  acts  sometimes  stipulate  that  no  bonds  or 
other  evidences  of  indebtedness  shall  be  issued  as  a  considera- 
tion for  or  in  connection  with  a  consolidation.* 

§  76.  Right  of  Eminent  Domain.  —  A  consolidated  corpora- 
tion acquires,  among  its  powers  and  privileges,  the  right  to 
condemn  property  under  the  power  of  eminent  domain  granted 
to  a  constituent  corporation.® 


1  Colorado:  Mills' Anno.  Stat.  1891, 
ch.  30,  §  607. 

Connecticut:  Gen.  Stat.  1902,  § 
3807. 

Georgia:   Code  1895,  §  2179. 

New  Jersey:  Laws  1903,  p.  680, 
§  70. 

New  York:  Railroad  Law,  §  72, 
Rirdseye's  R.  S.  1905. 

Ohio:  Bates'  Anno.  Stat.  1906, 
§  3399  .\. 

Pennsylvania:  Bright.  Purd.  Dig. 
1894,  §§  110,  111,  p.  1802. 

Tennessee:  Code  1896,  §  1528,  par. 
5;   Code  1884,  §  1269. 

''New  Jersey:  Laws  1903,  p.  680, 
§70. 

New  York:  Railroad  Law,  §  72, 
Birdseye's  R.  S.  1905. 

Pennsylvania:  Bright.  Purd.  Dig. 
1894,  §§  110,  111,  p.  1802. 

Con.solidation  .statutes  also  some- 
times limit  the  amount  of  bonds  and 
their  rate  of  interest  and  prescribe 
the  method  to  be  followed  in  issuing 
them. 

^  Camden  Safe  Deposit,  etc.  Co.  v. 
Burlington  Carpet  Co.  (N.  J.  1895),  33 
Atl.  Rop.  479. 

*  Shaw  V.  Norfolk  County  R.  Co., 


10  Gray  (Mass.),  411  (1860)  :  "Then 
[upon  consolidation]  the  Boston  and 
New  York  Railroad  Company,  ha\'ing 
become  the  owners  of  the  franchises 
and  property  of  the  Norfolk  County 
Railroad  Company,  subject  to  the 
rights  of  their  creditors,  could  either 
become  purchasers  of  the  outstand- 
ing bonds,  and  hold  them  like  other 
creditors,  or  could  paj'  and  extinguish 
them  for  the  relief  and  discharge  of 
their  own  property,  as  they  should 
deem  it  best  for  their  interest  and 
advantage  to  do." 

5  Connecticut:  Gen'l  Stat.  1902,  § 
3675. 

Idaho:  Session  Laws  1901,  p.  214, 
§2. 

New  York:  R.  R.  Law,  §  71,  Birds- 
eye's  R.  S.  Sup.  vol.  4,  1905. 

North  Dakota:  Revised  Codes  1899, 
§  2954. 

Oklahoma:  Stat.  1903,  p.  360, 
§  99. 

Washiyigton:  Ballinger's  Anno. 
Stat.    1897,    §   4304. 

*  .\bbott  V.  New  York,  etc.  R.  Co., 
145  Mass.  450  (1888),  (15  N.  E.  Rep. 
91).  See  also  South  Carolina  R.  Co. 
V.  Blake,  9  Rich.  (S.  C.)  228  (1856); 

145 


§   77  INTERCORPORATE  RELATIONS  [PART  I 

It  has  been  questioned  whether  it  takes  this  power  as  a 
guast-successor  of  the  constituent  corporation  to  which  it  was 
originally  granted  or  whether  the  transfer  operates  as  a  new 
grant  of  the  power,  upon  the  same  terms,  to  the  consolidated 
company.  In  Abbott  v.  New  York,  etc.  R.  Co.^  the  Supreme 
Judicial  Court  of  Massachusetts  said:  "It  seems  to  us  equally 
clear  that  a  corporation,  by  consent  of  the  legislature,  may 
take  this  power  as  gwasi-successor  of  another  corporation  to 
which  it  was  originally  granted,  and  it  is  not  very  material 
whether  the  legislature  be  regarded  as  authorizing  a  transfer 
of  the  old  power,  or,  more  strictly,  as  delegating  a  new  power 
in  the  same  terms  as  the  old.  The  substance  of  the  transac- 
tion is  seen  in  cases  of  consolidation."  Upon  the  principle, 
however,  that  a  consolidated  corporation  takes  eveiything  by 
creation  and  grant  it  seems  the  better  view  that  the  consoli- 
dation statute  operates  as  a  new  grant  of  this  and  other  powers. 

Inchoate  rights  of  a  constituent  corporation,  under  pending 
condemnation  proceedings,  pass  to  the  consolidated  company 
upon  consolidation.^ 

§  77.  Miscellaneous  Powers.  — It  has  been  held  that  a  cor- 
poration which  by  its  charter  has  power  to  "unite  with  any 

Trester  v.  Missouri,  etc.  R.  Co.,  33  ^  Proceedings  instituted  by  a  rail- 
Neb.  171  (1891),  (49  N.  W.  Rep.  1110) ;  road  company  to  acquire  lands,  by 
Toledo,  etc.  R.  Co.  v.  Dunlap,  47  condemnation,  for  its  road,  in  which 
Mich.  456  (1882),  11  N.  W.  Rep.  271,  commissioners  have  made  their  report 
5  Am.  &  Eng.  R.  Cas.  378) ;  Boston,  and  award  of  damages,  from  which 
etc.  R.  Co.  V.  Midland  R.  Co.,  1  Gray  the  landowner  has  appealed,  do  not 
(Mass.)  359  (1854).  become  void  ab  initio  nor  abate,  by 

In  Re  Trenton  St.  Ry.  Co.  (N.  J.  reason     of     the     consolidation     and 

1900),  47  Atl.  Rep.  819,  it  was  held  merger  of  the  condemning  company 

that  even  a  de  facto  consoUdated  cor-  with  another  railroad  company,  form- 

poration   may   exercise   the    right   of  ing  a  new  corporation ;  but  the  rights 

eminent    domain    if    its    constituents  in  the  land  acquired  by  the  condem- 

have  such  right.  nation  proceedings  survive  and  pass 

The    right    to    condemn    lands    is  to  the  new  corporation,  and  it  may 

sometimes   expressly   conferred   upon  be  lawfully  substituted  as  appellee  in 

the   consoUdated   corporation   in   the  the  appellate  court  and  the  case  then 

consolidation  act.  proceed  to  trial.     Day  v.  New  York, 

Michigan:  P.  A.  1901,  p.  117.  etc.  R.  Co.,  .58  N.  J.  L.  677  (1896),  (34 

New  Jersey:   R.  R.  Law,  par.  341,  Atl.  Rep.  1081). 
§  2.  See  also  California  Central  R.  Co. 

'  Abbott  V.  New  York,  etc.  R.  Co.,  v.    Hooper,    76   Cal.    404    (1888),    (18 

145  Mass.  453  (1888),  (15  N.  E.  Rep.  Pac.  Rep.  599). 
91). 

146 


CHAP.  VIl] 


RIGHTS    AND    POWERS 


t  i 


other  company"  by  consolidating  with  another  corporation 
exhausts  the  power,  and  it  does  not  pass,  with  other  powers 
and  privileges,  to  the  consolidated  corporation.'  The  right  of 
further  consolidation  is,  however,  sometimes  expressl}^  con- 
ferred in  consoUdation  statutes.^ 

A  consolidated  corporation  may  apply  the  amount  received 
from  calls  upon  subscriptions  to  one  constituent  company  in 
payment  of  the  debts  of  another;^  may  compromise  and  settle 
claims  against  any  constituent  company  and  maintain  an  action 
to  enforce  the  settlement ;  *  may  exercise  the  power  of  a  con- 
stituent corporation  to  charge  a  fixed  rate  for  traasportation  ^ 
and,  generally,  may  enjoy  and  exercise  any  rights  and  powers 
conferred  by  the  consolidation  act." 


'  Morrill  V.  Smith  County,  89  Tex. 
529  (1896),  (36  S.  W.  Rep.  56). 

2  Idaho:  Laws  1901,  p.  214. 

North  Dakota:  Rev.  Codes  1899, 
§  2954. 

Washington:  Ballinger's  Aiino. 
Code  &  Stat.   §  4304. 

Wisco7isin:  Stat.  1906,  vol.  3, 
§  1833. 

^  Cooper  V.  Shropshire  Union  R., 
etc.  Co.,  13  Jur.  443  (1849),  (6  Eng. 
Railw.  Cases,  136). 

*  Paine  v.  Lake  Erie,  etc.  R.  Co., 
31  Ind.  283  (1869). 

*  Fisher  v.  New  York  Central,  etc. 
R.  Co.,  46  N.  Y.  644  (1871),  (7  Am. 
Rep.  397). 

•Where  a  consolidation  act  pro- 
vided that  the  new  company  should 
have  the  powers,  rights  and  fran- 
chises conferred  upon  two  or  more 
railroad  corporations  in  ca.se  thej' 
should  bear  such  relation  to  each  other 
as  to  a<lmit  the  pa.ssage  of  cars  over 
their  roads  continuously,  it  was  held 
that  such  corporations  ha\nng  the 
power  to  acquire  and  hold  land,  might 
confer  that  power  upon  the  consoli- 
dated company  if  it  came  within  the 
proviso  stated.  Georgia,  etc.  R.  Co. 
V.  Wilks,  86  Ala.  478  (1888),  (6  So. 
Rep.  34). 

Generally  as  to  the  right  of  con- 
solidated corporations  to  acquire  title 


to  land  see  Matter  of  Prospect  Park, 
etc.  R.  Co.,  67  N.  Y.  371  (1876); 
Georgia  Pac.  R.  Co.  v.  Gaines,  88  Ala. 
377  (1889),  (7  So.  Rep.  382). 

Miscellaneous  statutory  pro\-isions 
relating  to  powers  and  prix-ileges  of 
consolidated  corporations  are  as  fol- 
lows :  Consolidated  company  may 
take,  hold  and  di-spose  of  stocks  and 
bonds  acquired  by  consolidation 
(Ohio.  Bates'  Anno.  Stat.  1906,  § 
3384  A).  Corporation  formed  bj' 
consolidation  of  domestic  and  foreign 
railroads  may  hokl  and  own  necessary 
real  estate  in  adjoining  State  (Mis- 
souri. Anno.  Stat.  1906,  §  1060). 
Land  grants  pass  to  consolidatetl 
company  (Wisconsin.  Laws  1899, 
p.  291).  Consolidated  company  ac- 
quires no  extraordinary  powers  not 
enjoyed  by  each  of  constituents 
(South  Carolina.  R.  S.  1893,  §  1624). 
Consoliilated  company  cannot  change 
location  of  road  which  has  received 
mimicipal  aid  (Illinois,  tl.  S.  1906, 
§  39,  p.  1572).  Consolidated  com- 
panj'  has  no  powers  and  pri\-ilcges 
which  could  not  be  possessed  bj'  cor- 
poration originally  organized  under 
the  act  (.Michigan.  P.  .\.  1899,  p.  451 , 
§  29).  Corporate  existence  of  con.soli- 
dated  company  limited  to  ninety-nine 
years  (Louisiana.  Const.  &  Rev. 
Laws  1904,  p.   1487).     In  addition  to 

147 


§77 


INTERCORPORATE    RELATIONS 


[part  I 


It  has  been  held  that  a  coasolidated  corporation  has  no 
power  to  declare  dividends  upon  its  stock  out  of  the  earnings, 
before  consolidation,  of  a  corporation  absorbed  by  it,  nor  to 
declare  dividends  upon  the  stock  of  the  merging  corporation 
out  of  its  own  earnings.* 

A  corporation  formed  by  the  merger  of  a  banking  corpora- 
tion with  a  trust  company  does  not  succeed  to  the  right  of  the 
former  to  act  as  executor  of  a  will  where  the  testator  died  after 
the  consolidation  took  place.^ 


general  powers,  consolidated  com- 
pany enjoys  rights,  etc.  of  each  of  its 
constituents  {New  York.  Business 
Corp.  Law  (amended  to  1907),  §  10). 

1  Chase  v.  Vanderbilt,  37  N.  Y. 
Super.  Ct.  334  (1874). 

2  In  re  Stikeman's  Will,  96  N.  Y. 
Supp.  460  (1905),  (48  Misc.  Rep. 
156)  :  "The  will  was  made  before  there 
was  any  suggestion  of  merger  between 
the  two  companies,  and  therefore  it 
could  not  have  been  in  contemplation 
of  the  willmaker  at  the  time  of  the 
execution  of  his  testamentary  instru- 
ment. It  is  urged  that  all  that  the 
law  permitted  a  corporation  to  do 
must  be  presumed  to  be  in  the  naind 
of  the  trustmaker,  but  this,  I  think, 
would  be  straining  the  rule  as  to  pre- 
sumption beyond  its  legitimate  pur- 
pose. We  are  to  gather,  if  we  can,  the 
intention  of  the  testator.  We  find 
him  appointing  a  strictly  and  purely 
banking   corporation  as  his  executor 


and  trustee.  This  corporation  has 
gone  out  of  existence,  its  capital 
stock  has  been  retired,  it  has  become 
part  of  the  Title  Guarantee  &  Trust 
Company,  and  all  its  assets  (what- 
ever they  may  have  been)  are  now 
subject  to  all  the  liabilities  and  obli- 
gations of  the  Title  Guarantee  & 
Trust  Company,  whether  such  obli- 
gations have  arisen  under  the  banking 
side  of  their  bu.siness  or  under  the  title 
and  mortgage  insurance  side.  There 
was  no  vested  or  inchoate  right  ob- 
tained by  the  Manufacturers'  Trust 
Company  by  reason  of  its  ha^^ng  been 
named  as  executor  in  the  will.  This 
right  to  administer  became  vested 
and  inchoate  only  upon  the  death  of 
the  testator,  and  at  that  time  the 
corporation  named  was  not  in  exist- 
ence, had  no  capital  stock,  nor  any 
official  existence  as  a  distinct  corpora- 
tion." 


148 


CHAP.  VIIl]     OBLIGATIONS    OF    CONSOLIDATED    CORPORATION  §    78 


CHAPTER   VIII 


OBLIGATIONS    OF    CONSOLIDATED    CORPORATION 

I.   Direct  Obligations 

§  78.   Constitutional  Limitations. 

§  78a.   Consolidatod  Corporation  Liable  upon  its  Own  Obligations. 

§  79.    As   a   General    Rule   Consolidated    Corporation   directly   assumes   all 

Obligations  of  Constituents. 
§  80.    Obligation  to  perform  Public  Duties  of  Constituents. 
§  81.    Liability   of   Consolidated   Company   to    Bondholders   and    Preferred 

Stockholders  of  Constituents.     Other  Special  Contracts. 
§  82.    Liability  for  Torts  of  Constituents. 
§  83.    Rule  of  Liability  inapplicable  to  Consolidation  after  Foreclosure  Sale, 

II.    Liens 

§  84.    Conventional  and  Statutory  Liens. 
§  85.    Equitable  Liens. 

III.    Remedies  of  Creditors  of  Constituent  Corporations 

§  86.  Remedy  of  Creditors  against  Consolidated  Corporation  —  At  Law. 

§  87.  Remedy  of  Creditors  —  In  Equity. 

§  88.  Remedy  against  Constituent  Corporation  if  not  dissolved. 

§  89.  Effect  of  Consolidation  upon  Pending  Suits. 

§  90.  Procedure  regarding  Pending  Suits. 

§  91.  Allegation  antl  Proof  of  Consolidation. 

I.    Direct  Obligations 

§  78.  Constitutional  Limitations.  —  Upon  principles  else- 
where considered,  tlie  obligations  of  a  consolidated  corporation. 
as  a  new  and  distinct  corporation,  are  determined  by  the  con- 
stitutional provisions  and  statutes  in  force  at  the  time  of  it:^ 
creation  and  not  by  those  existing  at  the  time  of  the  creation 
of  its  constituent  companies.^  Thus  the  Supreme  Court  of  the 
United  States,  in  a  leading  case,  hel<l  tiiat  a  constitutional 
provision  that  "no  special  privileges  shall  ever  be  granted 
that  may  not  be  altered,  revoked  or  repealetl  by  the  general 
assembly,"  entered  into  an  act  under  which  railroad  companies 

*  See  ante,  §  71  :  "Constitutional  Limilntions  upon  Grants  of  Privilei/rs  and 
Immunities." 

149 


§    79  INTERCORPORATE    RELATIONS  [PART  I 

had  consolidated  and  rendered  the  consolidated  corporation 
subject  to  the  obligation  —  imposed  by  a  later  statute  —  of 
carrying  passengers  at  a  reduced  rate  of  fare,  which  would 
not   have  been  binding  upon  its  constituent   companies.* 

§  78a.  Consolidated  Corporation  Liable  upon  its  Own  Obli- 
gations. —  When  consolidation  has  been  effected  two  classes 
of  obligations  must  be  met  by  the  consolidated  corporation: 

(1)  Its  own  obligations; 

(2)  The  obligations  of  its  constituents. 

Whatever  may  be  the  form  in  which  consolidation  takes 
place  the  consolidated  corporation  stands  as  a  distinct  cor- 
porate entity  and,  like  any  other  corporation,  is  responsible 
for  its  own  acts  and  omissions.  And  where  the  effect  of  the 
consolidation  is  the  creation  of  a  new  corporation  it  must  pay 
the  franchise  tax  or  incorporation  fees  required  by  a  constitu- 
tional provision  in  the  case  of  the  organization  of  a  corporation, 
notwithstanding  its  constituents  may  have  already  paid  similar 
fees.^ 

§  79.  As  a  General  Rule  Consolidated  Corporation  directly 
assumes  All  Obligations  of  Constituents.  —  Consolidation  statutes 
generally  provide  that  all  rights  of  creditors  and  all  liens  upon 
the  property  of  constituent  corporations  shall  continue  unim- 
paired after  consolidation,  and  that  their  debts,  duties  and 
liabilities  shall  attach  to  the  consolidated  company  and  be 
enforceable  against  it,  to  the  same  extent  and  by  the  same 
process  as  if  they  had  been  contracted  by  it.^ 

*  Shields  r.  Ohio,  95  U.  S.  319  liens  upon  the  property  of,  either  of 
(1877).  See  also  Pick  v.  North-  such  corporations,  parties  to  such 
western  R.  Co.,  6  Biss.  (U.  S.)  177  agreement  and  act,  sliall  be  preserved 
(1874).  unimpaired,   and  tlie   respective   cor- 

Restrictions  as  to  rate  of  fare  in  porations  shall  be  deemed  to  continue 

charters   of   original    conipanies   bind  in  existence  to  preserve  the  same,  and 

consolidated    corporation.     Campbell  all   debts   and   liabilities   incurred   by 

r.  Marietta,  etc.  R.  Co.,  23  Ohio  St.  either     of     such     corporations     shall 

1G8  (1872).  thenceforth  attach  to  such  new  cor- 

2  State    V.    Lesuer,    145    Mo.    322  poration,  and  be  enforced  again.st  it 

(1898),  (46  S.  W.  Rep.  1075).  and  its  property  to  the  same  extent  as 

*  The  provision  in  the  New   York  if  incurred  or  contracted  by  it. " 
railroad   consolidation    act   is   as   fol-  Other    similar    but    less    elaborate 
lows:    Railroad  Law  §  73  (Birdseye's  statutes,  relating  to  railroad  consoli- 
Rev.    Stat.    1901,    p.    2963)  :     "The  dations  (except  as  noted)  are  as  fol- 
rights  of  all  the  creditors  of,  and  all  lows : 

150 


CHAP.  VIIl]     OBLIGATIONS    OF    CONSOLIDATED   CORPORATION 


§79 


A  statute  of  this  nature  applies  to  successive  consolidations 
and  makes  the  final  consolidated  corporation  liable  for  the 
debts  of  the  original  consolidating  companies.' 

In  the  absence  of  special  statutory  provision,  moreover, 
when  a  new  corporation  is  formed  by  the  consolidation,  under 
authority  of  law,  of  several  distinct  corporations  and  ac- 
quires their  rights  and  faculties  it  must,  as  a  necessary  con- 
sequence, be  subject  to  all  the  conditions  and  duties  imposed 
by  the  law  of  their  creation,^  and  is  answerable  for  the  debts 
and   liabilities   of   each    of   such    corporations,^  —  at   least    to 


Alabama:      Code     1896,     §     11G8; 
§  1151  (business  corporations). 
'  Arizona:   R.  S.  1901,  par.  864,  §  .3. 

Arkatisas:  Kirby's  Dig.  1904,  § 
6735. 

California:  Pom.  Civ.  Code,  1901, 
§473. 

Colorado:  Mills'  Anno.  Stat.  1891, 
§  607;  §  628  (corporations  gener- 
ally). 

Connecticut:  Gen.  Stat.  1902,  § 
3677;  Pub.  Acts  1903,  p.  173,  §  78 
(business  corporations). 

Delaware:  Laws  1903,  p.  783,  §  65. 

Illinois:   R.  S.  1901,  p.  1376,  §  41. 

Idaho:  Civ.  Code  1901,  §  2178. 

Kansas:  Gen.  Stat.  1905,  §  6325. 

Kentucky:  Stat.  1903,  ch.  32,  § 
556. 

Louisiana:  Rev.  Laws  1904,  pp. 
1485,  1486. 

Marylajid:  Pub.  Gen.  Laws  1904, 
p.  553,  §  46. 

Michigan:  Comp.  Laws  1897,  § 
6255. 

Minnesota:  Rev.  Laws  1905,  § 
2898. 

Missouri:  Rev.  Stat.  1889,  §  2786 
(manufacturing  companies).  See 
Wells  V.  Missouri  I-klison  El.  Co.,  108 
Mo.  App.  607  (1904),  (84  S.  W.  Rep. 
204). 

Montana:  Code  &  Stat.  §  527 
(mining  companies). 

Nebraska:  Comp.  Stat.  1907,  § 
2023. 

Nevada:   Stat.  1903,  p.  139,  §  44. 


New  Jersey:  Gen.  Corp.  Act  1896, 
§§  106,  107  (business  corporation.s). 

New  Mexico:  Comp.  Laws  1897, 
§  3896. 

N^ew  York :  Business  Corp.  Law 
(amended  to  1901),  §  12. 

Ohio:  Bates'  Anno.  Stat.  1902, 
§  3384. 

Pennsylvania:  Bright.  Purd.  Dig. 
1894,  p.  1804,  §  117;    p.  1801,  §  109. 

South  Carolina :   Code  1902,  §  2052. 

Tennessee:   Code  1896,   §   1526. 

Utah:  R.  S.  1898,  §  341  (corpora- 
tions generally). 

West  Virginia:  Code  1899,  ch.  54, 
§  53  (as  amended  by  Acts  1901,  ch. 
108). 

Wyoming:    R.  S.  1899,  §  3204. 

'  Birmingham  R.,  etc.  Co.  v.  Eii- 
slen,  144  Ala.  343  (1905),  (39  So.  Rep. 
74):  "Under  the  proNasions  of  the 
statute  the  debts  and  obligations  of 
the  constituent  company  follow  it 
into  the  consolidation  and  become 
the  debts  and  obligations  of  the  con- 
solidated company  as  much  as  if  they 
had  been  originally  created  by  it. 
And  this  is  .so  as  to  everj'  successive 
consolidation." 

2  Chicago,  etc.  R.  Co.  v.  Moffitt,  75 
111.  524  (1874). 

^  Langliorne  v.  Richmond,  etc.  R. 
Co.,  91  Va.  374  (189.5),  (22  S.  E.  Rc]). 
159)  :  "The  corporation  which  is 
created  by  the  consolidation  of  other 
corporations,  or  the  sur^'i\^ng  cor- 
poration when  another  or  others  are 

151 


§79 


INTERCORPORATE    RELATIONS 


[part  I 


the  extent  of  the  property  received  from  that  particular  cor- 
poration.' 


merged  into  it,  is  ordinarily  deemed 
the  same  as  each  of  the  corporations 
which  formed  it  for  the  purpose  of 
answering  for  the  UabiUties  of  the 
old  corporation,  and  may  be  sued 
under  its  new  name,  or  imder  the 
name  of  the  surviving  company,  for 
their  debts,  as  if  no  change  had  been 
made  in  the  name,  or  in  the  organi- 
zation of  the  original  corporations." 

Louisville,  etc.  R.  Co.  v.  Boney,  117 
Ind.  501  (1888),  (20  N.  E.  Rep.  432, 
3  L.  R.  A.  435)  :  "The  act  of  con- 
solidation involves  an  implied  assump- 
tion by  the  new  company  of  all  the 
vaUd  debts  and  liabiUties  of  the  con- 
solidating companies." 

Berry  v.  Kansas  City,  etc.  R.  Co., 
52  Kan.  774  (1894),  (36  Pac.  Rep. 
724,  39  Am.  St.  Rep.  381)  :  "The 
debts  of  the  original  companies  follow 
as  an  incident  of  the  consolidation  and 
become,  by  implication  (in  the  ab- 
sence of  express  provision),  the  obli- 
gations of  the  new  corporation." 

See  also : 

United  States :  Pullman  Palace  Car 
Co.  V.  Missouri  Pac.  R.  Co.,  115  U.  S. 
587  (1885),  (6  Sup.  Ct.  Rep.  194); 
Wabash,  etc.  R.  Co.  v.  Ham,  114  U.  S. 
587  (1885),  (5  Sup.  Ct.  Rep.  1081). 

Alabama:  Warren  v.  Mobile,  etc. 
R.  Co.,  49  Ala.  582  (1873). 

Georgia:  Atlantic,  etc.  R.  Co.  v. 
Johnson,  127  Ga.  392  (1907),  (56  S. 
E.  Rep.  482) ;  Hawkins  v.  Central  of 
Georgia  R.  Co.,  119  Ga.  159  (1903), 
(46  S.  E.  Rep.  82) ;  Montgomery,  etc. 
R.  Co.  V.  Boring,  51  Ga.  582  (1874). 

Illinois:  Columbus,  etc.  R.  Co.  v. 
Skidmore,  69  111.  566  (1873) ;  Chicago, 
etc.  R.  Co.  V.  MofRtt,  75  111.  524 
(1874) ;  Western,  etc.  R.  Co.  v.  Smith, 
75  111.  496  (1874) ;  Swing  v.  American 
Glucose  Co..  123  111.  App.  156  (1905). 

Indiana:  Indianapolis,  etc.  R.  Co. 
V.  Jones,  29  Ind.  465  (1868),  (95  Am. 
Dec.  654) ;  Columbus,  etc.  R.  Co.  v. 
Powell,  40  Ind.  37  (1872). 

152 


Michigan:  Shadford  v.  Detroit, 
etc.  R.  Co.,  130  Mich.  300  (1902),  (89 
N.  W.  Rep.  960). 

Missouri:  Thompson  v.  Abbott, 
61  Mo.  176  (1875) ;  Manny  v.  National 
Surety  Co.,  103  Mo.  App.  716  (1904), 
(78  S.  W.  Rep.  69). 

'  Brum  V.  Merchants  Mut.  Ins.  Co., 
16  Fed.  140  (1883);  Harrison  v.  Ar- 
kansas Valley  R.  Co.,  4  McCrary  (U.  S.) 
264  (1882) ;  Harrison  v.  Union  Pac. 
R.  Co.,  13  Fed.  522  (1882) ;  Chicago, 
etc.  R.  Co.  V.  Galey,  141  Ind.  360 
(1895),  (39  N.  E.  Rep.  925) ;  Tomp- 
kins V.  Augusta  Southern  R.  Co.,  102 
Ga.  436  (1897),  (30  S.  E.  Rep.  992) ; 
United  States  Capsule  Co.  v.  Isaacs, 
23  Ind.  App.  533  (1899) ;  Morrison  r. 
American  Snuff  Co.,  79  Miss.  330 
(1891),  (30  So.  Rep.  723,  89  Am.  St. 
Rep.  598). 

The  qualification  stated  in  the 
text,  "at  least  to  the  extent  of  the 
property  received  from  that  particular 
corporation,"  is  based  upon  the  deci- 
sions in  the  above  cases.  But  as 
said  in  a  note  to  Morrison  v.  American 
Snuff  Co.,  89  Am.  St.  Rep.  638  (1901)  : 
"The  quaUfication  seems  to  have  been 
employed  from  an  abundance  of 
caution,  rather  than  because  of  any 
well-settled  rule  limiting  the  liabilitj' 
of  the  consolidated  companj'  for  the 
debts  of  its  constituents  to  the  extent 
of  the  property  received  from  them, 
and  is  not  referred  to  in  the  great 
majority  of  cases." 

The  difficulty  of  practically  apply- 
ing any  such  (juaUfication  is  shown  in 
the  very  recent  decision  of  Atlantic, 
etc..  R.  Co.  V.  Johnson,  127  Ga.  397 
(1907),  (56  S.  E.  Rep.  482)  :  "Some 
of  the  authorities  say  that  when  pro- 
\nsion  has  not  been  made  for  paj-ing 
existing  debts  and  Habilities  of  one 
of  the  constituent  companies  the  con- 
solidated company  is  liable  at  least  to 
the  extent  of  the  a.ssets  of  the  ab- 
sorbed   corporation.   ...     It    would 


CHAP.  VIIl]     OBLIGATIONS   OF   CONSOLIDATED    CORPORATION 


§79 


In  Indianapolis,  etc.  R.  Co.  v.  J  ones, ^  the  Supreme  Court  of 
Indiana  said:  "  For  the  purpose  of  answering  for  the  Uabihties 
of  the  constituent  corporations,  tlie  consolidated  company 
should  be  deemed  to  be  merely  the  same  as  each  of  its  constit- 
uents; their  existence  continued  in  it,  under  the  new  form 
and  name,  their  liabilities  still  existing  as  before  and  capable 
of  enforcement  against  the  new  company  in  the  same  way  as 
if  no  change  had  occurred  in  its  organization  or  name."  ^ 

The  statutory  liability  of  a  consolidated  corporation  for  the 
debts  and  liabilities  of  its  constituents  cannot  be  impaired,  as 
to  outside  creditors,  by  any  stipulations  in  the  consolidation 
agreement.     Parties  to  the  agreement,  however,  holding  claims 


put  a  severe  burden  upon  a  creditor 
of  a  corporation,  whose  demand,  or  the 
extent  of  whose  damages,  might 
amount  to  only  a  few  dollars,  when 
such  corporation  and  another  volun- 
tarily merge  into  one  and  lose  their 
pre'vious  identity,  to  hold  that  he 
cannot  sue  the  original  corporation 
because  it  has  passed  out  of  existence, 
and  that  he  cannot  sue  the  consoli- 
dated corporation  and  recover  against 
it  without  alleging  and  proving  that 
the  consolidated  company  had  re- 
ceived assets  from  the  constituent 
company  (or,  as  contended  here,  net 
assets)  sufficient  to  cover  any  amoiuit 
that  the  jury  might  award  him.  .  .  . 
This  can  hardly  be  law." 

'  Indianapolis,  etc.  R.  Co.  v.  Jones, 
29  Ind.  467  (1868),  (95  Am.  Dec.  654). 

-  In  Daj-  V.  Worcester,  etc.  R.  Co., 
151  Mass.  308  (1890),  (23  N.  E.  Rep. 
824),  the  Supreme  Judicial  Court  of 
Mas.sachusetts  said  :  "When  two  cor- 
porations are  consolidated,  no  doubt 
for  most  purposes  they  cease  to  exist, 
and  the  new  corporation  is  a  distinct 
person  in  the  ej^e  of  the  law,  although 
it  is  their  legal  successor.  But  no  fic- 
tion is  necessary  so  far  as  the  legis- 
lature sees  fit  to  say  that  the  new 
corporation  shall  be  regarded  as  the 
same  with  one  of  the  old  ones  or  even 
alternately  as  the  same  with  each  ;  or, 


more  explicitlj-,  that  although  the 
new  corporation  is  a  new  person  for 
the  acquisition  of  new  rights  or  the 
making  of  new  contracts,  the  okl  cor- 
porations shall  not  be  altogether 
ended,  but  shall  continue  under  the 
new  name  so  far  as  to  preserve  all 
their  existing  obligations  unchanged." 

In  Smith  r.  Los  Angeles,  etc.  R.  Co., 
98  Cal.  210  (1893),  (33  Pac.  Rep.  53), 
the  following  language  is  used  :  "The 
consolidated  corporation  may,  how- 
ever, assume  and  make  itself  liable 
for  the  antecedent  liabilities  of  such 
consolidating  companies,  and  while 
such  agreement  does  not  without 
their  consent  bind  creditors,  yet  suit 
brought  by  a  creditor  upon  the  de- 
mand .so  assumed  against  the  corpora- 
tion which  has  agreed  to  pay  is  of 
itself  sufficient  eviilencc  of  acceptance 
of  the  new  charter  in  place  of  the  oUl. " 

While  the  consolidation  statute  in 
this  ca.se  may  have  justified  the  lan- 
guage u.sed,  it  is  by  no  means  true 
that  a  constituent  corporation  as 
such  is  not  freed  from  its  obligations 
without  the  consent  of  its  creditors. 
Where  the  effect  of  consolidation  is 
the  diffsnlution  of  the  corporations 
consolidating,  creditors  may  be 
obliged  to  look  to  their  successor  — 
the  consolidated  corporation. 

l.->3 


80 


INTERCORPORATE    RELATIONS 


[part  1 


against  the  consolidating  corporations  may  bar  themselves  from 
proceeding  against  the  consolidated  corporation  therefor.' 

§  80.  Obligation  to  perform  Public  Duties  of  Constituents.  — 
The  public  duties  of  corporatioas,  whether  imposed  l)y  express 
statutory  provisions  or  assumed  as  the  consideration  of  the 
grant  of  franchises,  devolve,  upon  consolidation,  upon  the 
consoHdated  company.^  They  become,  essentially,  the  obli- 
gations of  that  company,  and  the  necessity  for  their  continued 
performance  bears  no  relation  to  the  chartered  life  of  the  cor- 
poration to  which  they  were  originally  attached.  Thus  it 
was  held  that  upon  the  consoUdation  of  gas-light  companies 
the  obligation  imposed  by  the  legislature  on  a  consolidating 
company  to  furnish  gas  free  of  charge  to  a  charity  hospital, 


*  Matter  of  Utica  National  Brewing 
Co.,  154  N.  Y.  277  (1897),  (48  N.  E. 
Rep.  521)  :  "In  the  consolidation  of 
corporations,  pursuant  to  the  pro- 
visions of  the  statute,  the  new  cor- 
poration starts  upon  its  existence 
freighted  with  the  liabilities  of  the  old 
companies  and  subject  to  the  terms 
and  conditions  of  the  consolidation 
agreement,  so  far  as  they  are  not  in 
conflict  with  the  law.  While  it  is  not 
competent  to  do  anything  which 
would  impair  the  rights  of  outside 
creditors,  there  is  no  reason  why  the 
parties  to  the  consolidation  agreement 
may  not  bind  themselves  to  something 
deemed  for  the  benefit  of  the  new  cor- 
poration, and  that  is  what  seems  to 
have  been  done  in  this  case.  The 
manifest  intention  of  the  stockholders 
of  the  old  companies,  who  united  in 
making  and  signing  the  consolidation 
agreement,  seems  to  have  been  to 
represent  that  their  corporate  proper- 
ties and  franchises  vested  in  the  new 
company  freed  from  an}^  burden  of 
indebtedness.  As  to  creditors  not 
assenting  to  any  such  arrangement, 
this  was  quite  unavailing;  but  as  to 
themselves  it  should,  and  would, 
operate  to  bar  their  claims,  while  the 
other  creditors  were  seeking  payment 
from  the  assets  of  the  corporation 
since  become  insolvent." 

154 


^  Tomlinson  v.  Branch,  15  Wall. 
(U.  S.)  465  (1872):  "The  keeping 
alive  of  the  rights  and  pri\'ileges  of 
the  old  company,  and  transferring 
them  to  the  new  company  in  con- 
nection with  the  property,  indicates 
the  legislative  intent,  that  such  prop- 
erty was  to  be  holden  in  the  same 
manner  and  subject  to  the  same 
rights  as  before.  The  owners  of  the 
property  were  to  lose  no  rights  by 
the  transfer,  nor  was  the  public  to  lose 
any  rights  thereby.  Of  course,  these 
remarks  do  not  apply  to  those  cor- 
porate rights  and  franchises  of  the  old 
company,  which  appertain  to  its  exist- 
ence and  functions  as  a  corporation. 
These  became  merged  and  extinct. 
But  all  its  rights  and  duties,  its  priA-i- 
leges  and  obligations,  as  related  to  the 
public,  or  to  third  per-sons,  remain, 
and  devolve  upon,  the  new  com- 
pany." 

Where  a  consolidation  of  two  rail- 
road companies  —  one  of  which  had 
a  narrow-gauge  road  —  was  author- 
ized by  the  railroad  commission  upon 
the  express  condition  that  the  narrow- 
gauge  line  should  be  standardized 
and  made  a  part  of  the  main  line,  the 
consolidated  company  was  bound  to 
fulfil  the  condition. 

Mobile,  etc.  R.  Co.  v.  State  (Miss. 
1906),  41  So.  Rep.  259. 


CHAP.  VIIl]        OBLIGATIONS    OF   COXSOLIDATED    CORPORATIOX 


§80 


adhered   to   the   consolidated   company   without   reference   to 
the  duration  of  the  charter  of  the  original  company.^ 

An  attempt  in  a  consolidation  agreement  between  quasi- 
public  corporations  to  prevent  the  devolution  of  })ublic  duties 
upon  the  consolidated  company  and  any  attempt  by  the  con- 
solidated company  to  absolve  itself  from  its  obligations  to  the 
public,  are  against  public  policy.  In  Peoria,  etc.  R.  Co.  v. 
Coal  Valley  Mining  Co.,  the  Supreme  Court  of  Illinois  said:- 
"  When  they  accept  their  charters,  it  is  with  the  imijlied  under- 
standing that  they  will  fairly  perform  these  duties  to  the  public 
as  common  carriers  of  both  persons  and  property,  under  the 
responsibility  which  that  relation  imposes.  And  this  is  a  duty 
they  cannot  escape  by  neglect,  refusal,  or  by  agreement  with 
other  persons  or  corporatioas  that  they  will  disregard  or  refuse 
to  perform  them.  These  are  duties  they  owe  the  public,  and 
it  was  in  consideration  that  they  would  be  performed  that  their 
charters  were  granted.     They  have  no  power  to  absolve  them- 


'  Charity  Hospital  v.  Xew  Orleans 
Gas  Light  Co.,  40  La.  Ann.  388  (1888), 
(2  So.  Rep.  433)  :  "Through  the  same 
channel  which  led  the  defendant  com- 
panj'  to  the  right  of  ownership  of  all 
the  property  and  rights  of  the  former 
New  Orleans  Gas  Light  Company,  it 
must  be  led  and  coerced  to  the  dis- 
charge of  the  obligations  which  have 
been  imposed  on  its  author  by  the 
law  which  had  created  it  and  which 
authorized  the  organization  of  the 
new  company." 

A  corporation  formed  by  the  con- 
solidation of  two  boom  companies 
must  maintain  the  separate  booms  of 
each  company  and  deliver  logs  at 
each  as  required  in  the  original  char- 
ters. Gould  V.  Langdon,  43  Pa.  St. 
365  (18G2). 

Lender  the  federal  income  tax  law 
a  con.solidated  corporation  was  held 
liable  for  a  tax  upon  "interest  cer- 
tificates," in  the  nature  of  di%ndcnd 
scrip  issued  by  a  constituent  company 
before  consolidation  where  the  con- 
solidation act  preserved  all  riglits  of 
creditors  and  made  the  new  corpora- 


tion liable  for  the  debts  and  obliga- 
tions of  the  old  companies.  Bailey  v. 
Railroad  Co.,  22  Wall.  (U.  S.)  604 
(1874). 

As  to  liabilitj-  of  a  consolidated 
company  in  South  Carolina  to  assc.s.s- 
ment  for  expenses  of  railroad  commis- 
sioners see  Charlotte,  etc.  R.  Co.  v. 
Gibbcs,  27  S.  C.  385  (1887),  (4  S.  E. 
Rep.  49). 

-  Peoria,  etc.  R.  Co.  v.  Coal  Valley 
Min.  Co.,  68  111.  489  (1873).  In  this 
case  a  consolidation  agreement  be- 
tween several  railroad  corporations 
contained  a  reservation  to  one  of  the 
comi)anics  of  the  exclusive  right  to 
carry  coal  over  the  uniteil  railroads 
until  the  annual  interest  payment  due 
said  company  had  been  discharged 
from  the  tolls,  and  it  «■«.*;  hvld  that 
such  agreement,  in  restraint  of  com- 
petition, was  contrary  to  public  policy 
and  not  enforceable  in  equity ;  that 
the  consolidated  company  became 
liable  for  the  performance  of  the 
duties  of  the  original  companies  as 
common  carriers  antl  that  no  con- 
tract could  absolve  it  therefrom. 

155 


§   81  INTERCORPORATE    RELATIONS  [PART  I 

selves  from  performing  these  fharter  obligations,  and  any  ef- 
fort to  do  so  ])y  contract  or  otherwise  is  void." 

§  81.  Liability  of  Consolidated  Company  to  Bondholders 
and  Preferred  Stockholders  of  Constituents.  Other  Special 
Contracts.  —  The  rule  that  a  consolidated  corporation  is  liable 
upon  the  obligations  of  its  constituents  applies  to  their  sealed 
instruments  and  special  contracts  as  well  as  to  their  simple 
debts.^ 

Bonds  issued  by  a  constituent  corporation  convertible  into 
stock  at  the  option  of  the  holder  confer  upon  him  a  valuable 
privilege,  of  which  he  cannot  be  deprived  by  consolidation. 
A  holder  of  such  convertible  bonds  is  entitled  to  a  fair  oppor- 
tunity to  make  his  election,  and  cannot  be  relegated  to  the 
rights  conferred  by  the  consolidation  agreement  without  it.^ 
He  may  maintain  an  action  against  the  consolidated  company 
to  recover  damages  for  breach  of  the  contract  contained  in 
the  bond,^  or,  if  consolidation  has  been  effected  on  a  basis  of 
equality  between  the  shares  of  the  consolidated  and  the  original 
company,  he  has  the  right  to  exchange  his  bonds  for  stock  in 
the  consolidated  company.*  A  stockholder,  however,  by  par- 
ticipating as  such  in  a  consolidation  which  renders  impossible 

'  Generally,  that  a  consolidated  claims  and  contracts  .  .  .  against 
company  is  liable  upon  the  contracts  either  corporation  may  be  enforced 
of  its  constituents :  Western  Union  by  suit  or  action  .  .  .  against  the " 
R.  Co.  V.  Smith,  75  111.  496  (1874);  consolidated  corporation.  The  con- 
Eaton,  etc.  R.  Co.  V.  Hunt,  20  Ind.  solidation  was  made  on  the  basis  of 
457  (1863) ;  Columbus,  etc.  R.  Co.  v.  equality  between  the  shares  of  the 
Skidmore,  69  111.  566  (1873) ;  St.  two  corporations.  Held,  that  the 
Louis,  etc.  R.  Co.  v.  Miller,  43  111.  199  holders  of  bonds  of  a  constituent  com- 
(1867).  Also  cases  in  note  to  §  79,  pany  convertible  into  stock  were  en- 
ante.  titled   to   demand   stock  in   the   new 

-  Rosenkrans  v.  Lafayette,  etc.  R.  corporation,   as,   for  the   purposes  of 

Co.,  18  Fed.  51.3  (1883).  the  contract,  the  old  corporation  con- 

^  John  Hancock  Mut.  Life  Ins.  Co.  tinned  under  the  new  name.     Day  i\ 

V.  Worcester,  etc.  R.  Co.,    149  Mass.  Worcester,  etc.  R.  Co.,  151  Mass.  302 

214  (1889),  (21  N.  E.  Rep.  364).  (1890),   (23  N.  E.   Rep.  824);    India 

■•  A    statute    authorizing   the    con-  Mut.   Ins.   Co.   v.  Worcester,   etc.   R. 

solidation  of  two  railroad  companies  Co.  (Mass.  1890),  25  N.  E.  Rep.  975. 

provided   that   the   consolidated   cor-  See  also  John  Hancock  Mut.  Life  Ins. 

poration   should    "be   subject    to    all  Co.    v.    Worcester,    etc.    R.    Co.,    149 

the    duties,    restrictions,    obligations,  Mass.  214  (1889),  (21  N.  E.  Rep.  364). 

debts,  and  liabilities  to  which,  at  the  As  to  the  right  of  holders  of  street 

time  of  the  union,  either  of  said  cor-  railway  bonds  to  convert  them  into 

porations  is  subject,"  and  that  "all  stock  of  consolidated  company  under 

156 


CHAP.  Vni]        OBLIGATIONS   OF   CONSOLIDATED    CORPORATION  §   81 

the  conversion  of  his  bonds,  may  be  held  to  have  elected  not 
to  exchange.* 

A  statute  authorizing  the  consolidation  of  railroad  com- 
panies and  providing  that  all  the  liabilities  of  the  constituent 
companies  "  except  mortgages  "  shall  attach  to  the  consoli- 
dated company,  does  not  prevent  an  action  by  a  mortgage 
bondholder  against  the  consolidated  company.  The  statute 
confines  the  lien  to  the  mortgaged  property,  but  does  not  debar 
the  bondholder  from  enforcing  his  demand  directly  against 
the  consolidated  company  without  availing  himself  of  the 
mortgage  security.^ 

A  consolidated  corporation  is  the  representative  of  all  its 
constituents,  and  is  liable  to  the  stockholders  of  any  one  of 
them  upon  a  contract  of  such  corporation  relating  to  the  pay- 
ment of  dividends  upon  its  preferred  stock. ^ 

While  a  holder  of  cumulative  preferred  stock  in  a  corpora- 
tion upon  which  dividends  have  been  earned,  but  not  declared 
and  paid  because  surplus  earnings  have  been  expended  in  the 
acquisition  of  property,  does  not  stand,  upon  the  consolidation 
of  such  corporation  with  others,  in  the  position  of  a  technical 
creditor,  his  right  is  in  the  nature  of  a  claim  against  the  con- 
stituent company  which  may  be  enforced  against  the  consoli- 
dated corporation.  But  his  right  to  future  dividends  may  be 
terminated  by  the  consolidation.^ 

A  corporation  created  by  the  consolidation  of  several  insur- 
ance companies  is    liable  upon    their  policies   of    insurance.'^ 

Massachusetts  statute  of  1879,  ch.  151,  ^  p^ihemus    v.    Fitchburg    R.    Co., 

see  Parkinson  v.  West  End  St.  R.  Co.,  123  N.  Y.  502  (1890),  (26  N.  E.  Rep. 

173  Mass.  446  (1899),  (.55  N.  E.  Rep.  31),   affirming    50    Hun    (N.  Y.),  397 

891).  (1888).     The  statute  referred  to  was 

'  A  per.son  owning  both  stock  and  New  York  Laws  1869,  ch.  917,  §  5. 
convertible  bonds  in  a  corporation  did  ^  IJoardman  v.  Lake  Shore,  etc.  R. 
not  exercise   his   option   to   have   his  Co.,    84    N.  Y.  157   (1881).     See  also 
bonds  converted  into  stock  when   it  Chase    v.    Vanderbilt,   62    N.  Y.   307 
was  practicable,  and  accjuiesccd  and  (1875).     Compare     Prouty     v.     Lake 
participated    in    a    consolidation    by  Shore  R.  Co.,  52  N.  Y.  363  (1873). 
which  it  became  impossible  to  secure             ^  Colgate    v.    U.    S.     Leather     Co. 
the  conversion,  and  it  was  held  that  67  Atl.  Rep.  657  (N.  J.  Ch.  1907). 
he  was  bound  by  an  election  not  to  '  I'>anklin   Life    Ins.   Co.    v.   Hick- 
make     the     conversion.     Tagart     v.  son,  97  111.  App.  387  (1901),  affirmed 
Northern  Cent.   R.   Co.,   29   Md.   557  197    111.    117   (1902),  (64   N.    E.    Rep. 
(1868).  248). 

157 


§81 


INTERCORPORATE   RELATIONS 


[part  I 


A  surety  company  absorbing  another  corporation  of  the  same 
nature  is  bound  to  fulfil  its  bonds  and  undertakings.* 

Contracts  of  carriage  embraced  in  mileage  or  trip  tickets, 
issued  by  a  constituent  corporation,  must  be  carried  out  by 
the  consolidated  company  as  if  made  by  itself.^  Covenants 
running  with  the  land  acquired  from  its  constituents  bind  a 
consolidated  company.^ 

The  liability  of  a  consolidated  company  upon  the  contracts 
of  its  constituents  is  precisely  the  same  as  that  of  the  original 
company.  Consolidation  does  not  extend  it.  Thus  the  opera- 
tion of  a  contract  to  haul  cars  on  all  lines  owned  or  controlled 
by  a  railroad  company  is  not  extended,  upon  its  consolidation, 
so  as  to  include  other  roads  which  the  consolidated  company 
afterwards  acquires.^ 


Where  one  life  insurance  company 
is  consolidated  with  another,  and  it 
appears  that  the  latter  has  been 
collecting  premiums  upon  a  policy  of 
insurance  which  it  had  no  power  to 
issue,  the  amount  of  such  premiums 
may  be  recovered  from  the  consoli- 
dated company. 

Northwestern  Nat.  Life  Ins.  Co. 
V.  Hare,  26  Ohio  Qr.  Ct.  Rep.  197 
(1904). 

'  Manny  v.  National  Surety  Co.,  103 
Mo.  App.  716  (1904), (78  S.  W.Rep.  69). 

2  Tompkins  v.  Augusta  Southern 
R.  Co.,  102  Ga.  436  (1897),  (30  S.  E. 
Rep.  992). 

3  Mobile,  etc.  R.  Co.  v.  Gilmer,  85 
Ala.  422  (1888),  (5  So.  Rep.  138). 

A  constituent  company  had  agreed, 
in  consideration  of  the  grant  of  a 
right  of  way  through  certain  land, 
to  build  its  road-bed  so  as  to  protect 
the  land  from  overflow,  and  it  was 
held  that  the  consolidated  company 
was  liable  for  damages  caused  bj^  a 
breach  of  the  agreement.  Sappington 
V.  Little  Rock,  etc.  R.  Co.,  37  Ark.  23 
(1881). 

Wliere  a  person  had  contracted  to 
convey  lands  to  a  corporation,  and 
afterward  at  its  instance  had  organ- 
ized another  corporation,  of  which  he 

158 


held  the  stock,  to  which  he  conveyed 
the  lands,  and  the  latter  corporation 
thereupon  consolidated  with  the 
former,  it  was  held  that  notwith- 
standing the  changes  of  title  such 
person  was  entitled  to  the  same 
rights  and  remedies  against  the  con- 
soUdated  company  as  he  would  have 
had  against  tlie  corporation  with 
which  he  had  the  contract. 

Cordova  Coal  Co.  v.  Long,  91  Ala. 
538  (1890),  (S  So.  Rep.  765). 

*  Pullman  Palace  Car  Co.  v.  Mis- 
souri Pacific  R.  Co.,  115  U.  S.  595 
(1885),  (6  Sup.  Ct.  Rep.  194) :  "The 
new  company  assumed,  on  the  con- 
solidation, all  the  obligations  of  the 
old  Missouri  Pacific.  This  requires  it 
to  haul  the  Pullman  cars,  under  the 
contract,  on  all  roads  owned  or  con- 
trolled by  the  old  company  at  the 
time  of  the  consolidation,  but  it  does 
not  extend  the  operation  of  the  con- 
tract to  other  roads  which  the  new 
company  may  afterward  acquire. 
The  power  of  the  old  company  to 
get  the  control  of  other  roatls  ceased 
when  its  corporate  existence  came  to 
an  end,  and  the  new  company  into 
which  its  capital  stock  was  merged 
by  the  consolidation  undertook  only 
to  assume  its  obligations  as  they  then 


CHAP.  VIIl]        OBLIGATIONS    OF   CONSOLIDATED    CORPORATION 


§82 


A  consolidated  railroad  company  is  bound  to  fulfil  a  con- 
tract of  a  constituent  corporation  to  build,  maintain  and 
operate  a  switch  running  to  a  mill  and,  conversely,  it  is  entitled 
to  the  benefit  of  an  exemption  from  fire  damage  contained 
therein.* 

§  82.  Liability  for  Torts  of  Constituents.  —  The  usual  con- 
solidation statute  declares  that  the  consolidated  corporation 
shall  be  answerable  for  the  obligations  of  its  coastituent  com- 
panies and  thereby  includes  obligations  arising  ex  delicto  as 
well  as  ex  contractu.  And,  without  such  statutoiy  provision, 
the  general  rule  is  that  the  consolidated  corporation  is  directly 
liable  for  the  torts  of  its  constituents.  This  liability  is  broad 
and  includes  both  wrongful  acts  and  negligence.^ 


stood.  It  did  not  bind  itself  to  run 
the  cars  of  the  Pulhnan  Company  on 
all  the  roads  it  might  from  time  to 
time  itself  control,  but  only  on  such 
as  were  controlled  by  the  old  Missouri 
Pacific.  Contracts  thereafter  made 
to  get  the  control  of  other  roads 
would  be  the  contracts  of  the  new 
consolidated  company,  and  not  of 
those  on  the  dissolution  of  which  that 
company  came  into  existence.  It 
follows  that  the  present  Missouri 
Pacific  Company  is  not  required,  by 
the  contract  of  the  old  company,  to 
haul  the  Pullman  cars  on  the  road  of 
the  St.  Louis,  Iron  Mountain  and 
Southern  Company  even  if  it  does 
now  control  that  road,  witliin  the 
meaning  of  the  contract." 

In  San  Francisco  v.  Spring  Valley 
Water  Works,  48  Cal.  493  (1874),  a 
corporation  furnished  water  to  a  city 
under  a  contract  providing  that,  if 
more  favorable  terms  were  granted 
to  any  other  corporation,  they  should 
be  granted  to  it.  This  company  was 
absorbed  by  another  corporation,  to 
which  more  favorable  terms  luul  been 
granted.  It  was  held  that  the  latter 
corporation  was  not  bound  to  fur- 
nish water  under  the  contract  of 
the  former,  but  was  entitled  to  the 
more  favorable  terms  given  it  before 
the  absorption. 


That  the  consolidated  corporation 
takes  the  property  and  assumes  the 
liabilities  of  its  constituents  in  the 
exact  condition  in  which  they  exist  at 
the  time  of  the  consolidation,  see 
Franklin  Life  Ins.  Co.  v.  Adams,  90 
111.  App.  658  (1900). 

'  Missouri,  etc.  R.  Co.  v.  Carter,  95 
Tex.  461  (1902),  (68  S.  W.  Rep.  159). 

2  In  Coggin  v.  Central  R.  Co.,  62 
Ga.  685  (1879),  (35  Am.  Rep.  132), 
the  Svipreme  Court  of  Georgia  said : 
"By  consolidating  with  or  absorbing 
the  Macon  &  Western  Railroad  Com- 
pany under  the  con.solidation  act  the 
Central  Railroatl  Company  became 
liable  to  answer  for  a  breach  of  duty 
by  the  former  company  toward  a 
person  who  was  rightfully  upon  one 
of  its  trains,  and  who,  while  being 
carried  thereon,  sustained  a  personal 
injury  by  reason  of  such  breach." 

In  State  v.  Baltimore,  etc.  R.  Co., 
77  Md.  492  (1893),  (20  Atl.  Rep.  865), 
the  Court  said;  "The  new  corpora- 
tion thus  created  was  in  reality  the 
embodiment  under  another  name  of 
tlio  two  formerly  existing,"  and  held 
that  the  combining  companies  could 
not  by  any  contract  between  them- 
selves coticlude  the  rights  of  third  pcr- 
.sons  who  had  been  injured  by  their 
torts. 

A  consolidated  corporation  is  liable 

l.V.) 


82 


INTEIICORPORATE    KELATIOXS 


[part  I 


Where,  however,  the  consoUdation  statute  provided  that 
all  judgments  rendered  against  consolidating  corporations 
either  prior  or  subsequent  to  the  consolidation  should  con- 
stitute liens  upon  the  property  derived  from  them,  and  that 
such  corporations  should  continue  in  existence  for  the  preser- 
vation of  liens  against  them,  it  was  held  that  the  consolida- 
tion did  not  impair  existing  rights  of  action  agaiast  such 
constituents  and,  consequently,  that  the    consolidated    com- 


in  damages  to  a  riparian  owner  whose 
land  is  overflowed  and  injured  in  con- 
sequence of  an  obstruction  of  the 
stream  caused  by  the  wrongful  man- 
ner in  which  a  bridge  was  constructed 
by  a  constituent  company.  Chicago, 
etc.  R.  Co.  V.  Moffitt,  75  111.  524 
(1874);  Penley  v.  Railroad  Co.,  92 
Me.  59  (1898),  (42  Atl.  Rep.  233). 

A  consolidated  railroad  company 
is  liable,  without  notice  or  demand 
for  removal,  for  damages  from  a 
nuisance  erected  by  a  constituent 
company.  Jones  v.  Seaboard  Air 
Line  R.  Co.,  67  S.  C.  181  (1903),  (45 
S.  E.  Rep.  188). 

After  ha\nng  commenced  the  con- 
struction of  an  improvement  on  plain- 
tiff's land,  a  corporation  consolidated 
with  another,  which  completed  tlie 
improvement,  all  title  thereto  being 
transferred  to  the  new  company.  It 
was  held  that  the  consolidated  com- 
pany and  not  the  original  company 
was  liable  for  damages  caused  by  the 
completion  of  the  improvement  by  the 
consolidated  company,  although  the 
original  company  still  retained  a 
corporate  existence.  Day  v  Xew 
Orleaijis,  etc.  R.  Co.,  37  La.  Ann.  131 
(1885). 

Under  a  statute  providing  that  a 
consolidated  corporation  shall  be 
liable  for  all  the  debts  and  liabilities 
of  its  constituents  existing  or  accrued 
prior  to  the  consolidation,  it  has  been 
held  that  it  is  liable  upon  a  judg- 
ment rendered  against  a  constituent 
corporation  after  consolidation  on  a 
cause  of  action  for  negligence  arising 

160 


before  that  time.  Chicago,  etc.  R. 
Co.  V.  Ferguson,  106  111.  App.  35G 
(1902). 

But  in  Cotzhausen  v.  H.  W.  Johns 
Mfg.  Co.,  100  Wis.  473  (1898),  (76 
N.  W.  Rep.  622)  it  was  held  —  ap- 
parently without  due  consideration 
—  that  a  consolidated  corporation 
does  not  by  assuming  all  the  debts, 
obligations  and  contracts  of  its  con- 
stituents make  itself  liable  for  a  tort 
theretofore  committed  by  one  of 
them. 

See  also  : 

Alabama:  Warren  v.  Mobile,  etc. 
R.  Co.,  49  Ala.  582  (1873). 

Arkansas :  St.  Louis,  etc.  R.  Co.  v. 
Marker,  41  Ark.  542  (1883). 

Georgia:  Tompkins  v.  Augusta 
Southern  R.  Co.,  102  Ga.  436  (1897), 
(30  S.  E.  Rep.  992). 

Indiana:  Indianapolis,  etc.  R.  Co. 
V.  .Tones,  29  Ind.  465  (1868),  (95  Am. 
Dec.  654) ;  Cleveland,  etc.  R.  Co.  v. 
Prewitt,  134  Ind.  557  (1893),  (33  X. 
E.  Rep.  367) ;  Jefferson \-ille,  etc.  R. 
Co.  V.  Hendricks,  41  Ind.  48  (1872)  ; 
Louisville,  etc.  R.  Co.  v.  Summers, 
131  Ind.  241  (1892),  (30  X.  E.  Rep. 
87.3). 

Kansas :  Berry  r.  Kansas  Cit}',  etc. 
R.  Co.,  52  Kan.  759  (1893),  (34  Pac. 
Rep.  805,  39  Am.  St.  Rep.  371). 

Michigan:  Batterson  v.  Grand 
Trunk  R.  Co.,  53  Mich.   125   (1884). 

Texas:  Texas,  etc.  R.  Co.  v. 
Murphy  46  Tex.  356  (1876). 

Virginia :  Langhorne  v.  Richmond 
R.  Co.,  91  Va.  369  (1895),  (22  S.  E. 
Rep.  159). 


CHAP.  VIIl]         OBLIGATIONS   OF   CONSOLIDATED   CORPORATION 


§83 


pany  was  only  liable  for  torts  committed  after  the  consoli- 
dation.^ 

§  83.  Rule  of  Liability  inapplicable  to  Consolidation  after 
Foreclosure  Sale.  — The  rule  that  a  consolidated  corporation 
is  liable  for  the  debts  of  its  constituents  is  inapplicable,  with 
reference  to  the  debts  of  the  defunct  company,  in  the  case  of  a 
consolidation  effected  after  the  purchase  of  corporate  property 
and  franchises  at  a  foreclosure  sale.^  The  foreclo.sure  sale  has 
the  effect  of  extinguishing  the  claims  of  general  credifors. 
The  new  company  takes  the  property  subject  only  to  the  liens 
against  it.  A  statute  providing  that  a  consolidated  company 
shall  be  liable  for  the  debts  of  each  corporation  entering  the 
consolidation  is  not  to  be  so  construed  as  to  revive  the  debts 
of  a  constituent  company  which  have  been  shut  off  by  fore- 
closure, and  such  an  act  would  probably  be  unconstitutional, 
if  retroactive  in  terms.^ 


*  Joseph  V.  Southern  R.  Co.,  127 
Fed.  606  (1904).  In  this  case  the 
statute  also  provided  that  the  con- 
solidated company  should  be  sub- 
ject to  all  the  liabilities  of  the  constit- 
uent companies.  The  difficulty  w4th 
the  conclusion  of  the  Court  is  that  it 
gives  no  effect  to  this  provision.  It 
required  no  statute  to  make  the  con- 
solidated corporation  liable  for  torts 
committed  after  the  consolidation. 

^  United  States:  Hoard  v.  Chesa- 
peake, etc.  R.  Co.,  123  U.  S.  222 
(1887),  (8  Sup.  Ct.  Rep.  74);  Chesa- 
peake, etc.  R.  Co.  V.  Miller,  114  U.S. 
184  (1885),  (5  Sup.  Ct.  Rep.  813); 
Hopkins  v.  St.  Paul,  etc.  R.  Co.,  2 
Dill.  (IJ.  S.)  396  (1872). 

Arkansas:  Sappington  v.  Little 
Rock,  etc.  Co.,  37  Ark.  23  (1881). 

Illinois:  People  v.  Louisville,  etc. 
R.  Co.,M20  111.  48  (1889),  (10  N.  E. 
Rep.  657) ;  Brufett  v.  Great  Western 
R.  Co.,  25  111.  310  (1861). 

Michigan:  Cook  v.  Detroit,  etc. 
R.  Co.,  43  Mich.  349  (1880),  (5  N.  W. 
Rep.  390). 

Pennsylvania  :     Pennsylvania 


Transp.  Co.'s  Appeal,  101  Pa.  St.  576 
(1882);  Stewart's  Appeal,  72  Pa.  St. 
291  (1872). 

Texas:  Gulf,  etc.  R.  Co.  v.  Newell, 
73  Tex.  334  (1887),  (11  S.  W.  Rep. 
342,  15  Am.  St.  Rep.  788).  In  con- 
struing the  provi.sions  of  the  Texas 
statute  relating  to  the  sale  of  rail- 
roads and  franchises  in  foreclosure 
proceedings  the  Supreme  Court  of 
Texas,  in  Hou.ston,  etc.  R.  Co.  v. 
Shirley,  54  Tex.  139  (1880),  said: 
"The  plain  intent  of  the  statute  is  to 
transfer  the  road-bed,  track,  franchise 
and  chartered  rights  entire  to  the  pur- 
chaser and  as.sociates,  iipon  their 
adopting  the  form  of  organization 
prescribed  in  the  charter  and  comply- 
ing with  its  other  requirements ;  and 
to  remit  creditors  unsecured  bj'  lien, 
to  their  remedy  against  such  as.sets 
as  pass  to  the  trustees  of  the  sold-out 
company. " 

Wisconsin:  Menasha  v.  Milwaukee, 
etc.  R.  Co.,  52  Wis.  414  (1881),  (9  N. 
W.  Rep.  396). 

'  Hatcher  v.  Toledo,  etc.  R.  Co.,  62 
111.  477  (1872). 


161 


84 


INTERCORPORATE    RELATIONS 


[part  1 


II.    Liens 

§  84.  Conventional  and  Statutory  Liens.  —  The  consolida- 
tion of  corporations  does  not  affect  or  in  any  way  impair  liens 
upon  their  property.'  The  consolidated  corporation  takes 
the  property  of  its  constituents  burdened  with  all  existing]!; 
charges.  Mortgages,^  maritime  liens,^  and  other  liens  —  con- 
ventional and  statutory  —  remain  unaffected  by  consolidation 


1  Hamlin  v.  Jerrard,  72  Me.  80 
(1881)  :  "The  consolidated  company 
assumed  the  debts  of  its  several  parts 
and  recognized  the  prior  liens  upon 
them.  .  .  .  There  can  be  no  loss  of 
identity  of  the  original  companies  in 
the  consolidation,  to  the  prejudice  of 
the  rights  of  prior  creditors  or  to  de- 
struction of  prior  liens."  See  also 
Eaton,  etc.  R.  Co.  v.  Hunt,  20  Ind. 
457  (1863). 

2  A  railway  company  which  had 
mortgaged  its  road,  consolidated  with 
two  other  companies  forming  a  new 
corporation.  The  consolidation  act 
provided  that  the  first  corporation" 
should  not  be  relieved  from  any  lia- 
bility; that  the  several  corporations 
should  become  one ;  and  that  all  the 
liabilities  of  the  several  corporations 
should  appertain  to  the  united  cor- 
porations. Held,  that  mortgage  bonds 
of  the  first  corporation,  bought  by  the 
new  corporation  and  afterward  issued 
for  its  benefit  for  value,  had  not  been 
extinguished,  but  were  a  claim  against 
the  property  covered  by  the  mortgage. 
Shaw  V.  Norfolk  County  R.  Co.,  16 
Gray  (Mass.)  407  (1860).  As  to 
rights  of  holders  of  income  bonds 
see  Rutter  v.  Union  Pacific  R.  Co., 
17  Fed.  480  (1883). 

Where  special  assessments  were 
levied  by  a  mimicipality  against  the 
property  of  a  street  railway  company 
and  this  company  consolidated  with 
others  —  the  consolidated  corapanj' 
assuming  the  obligations  and  burdens 
of  its  constituents  —  it  was  held,  as 
between  the  municipality  and  the 
consolidated  company,  that  the  lien 

162 


of  the  assessments  attached  to  the 
property  of  the  latter  corporation  as 
an  entirety.  But  with  respect  to  the 
holder  of  a  mortgage  upon  the 
property  of  one  of  the  consolidating 
corporations  against  which  there 
were  no  special  assessment.^,  it  was 
further  held  that  the  lien  of  such 
mortgage  could  not  be  impaired  by 
the  consolidation,  and  that  the  assess- 
ments could  not  be  made  a  lien  upon 
the  entire  propertj'  of  the  consoli- 
dated company  taking  priority  to 
such  mortgage  —  that,  in  this  view 
of  the  case,  the  assessment  and 
mortgage  liens  attached  to  the 
specific  properties  upon  which  the^' 
were  placed  and  that  priorities  could 
only  be  preserved  by  treating  the 
properties  as  if  no  consolidation  had 
taken  place.  Lincoln  St.  R.  Co.  v. 
City  of  Lincoln,  61  Neb.  109  (1901), 
(84  N.  W.  Rep.  802) ;  S.  C.  67  Neb. 
469  (1903)  (93  N.  W.  Rep.  766). 

^  Where  two  corporations  united 
their  vessels  and  other  property  used 
in  navigation,  and  formed  a  new  cor- 
poration, and  in  the  contract  of  con- 
solidation made  arrangements  for  the 
payment  of  the  debts  of  one  or  both 
before  any  dividends  should  be  de- 
clared on  the  new  stock,  it  was  held 
that  the  new  corporation  could  not 
avail  itself  of  the  doctrine  applicable 
to  a  purchaser  without  notice,  and 
that  a  lien,  three  years  and  a  half  old, 
woidd  be  enforced  against  one  of  the 
vessels  so  transferred  to  the  new  cor- 
poration. The  Key  City,  14  Wall. 
(U.  S.)  654  (1871).  Compare  The 
Admiral,  18  Law  Rep.  91. 


CHAP.  VIIl]        OBLIGATIONS    OF    CONSOLIDATED    CORPORATION 


§85 


proceedings,  and  the  rights  of  lien  holders  are  neither  increased 
nor  diminished. 

A  consolidated  corporation  takes  as  a  purchaser  with  notice, 
and  cannot  aver  ignorance  of  a  mortgage  executed  by  one  of 
its  coastituents,  although  unrecorded.' 

Upon  the  principle  that  no  change  in  the  identity  of  corpora- 
tioas  through  consolidation  can  prejudice  the  rights  of  lien 
holders,  it  is  held  that  repairs  and  improvements  made  by  a 
consolidated  company  upon  property  —  real  or  personal  — 
mortgaged  by  a  constituent  before  coasolidation,  are  subject 
to  the  mortgage.^  The  necessity  for  this  rule  in  the  case  of 
mortgaged  chattels,  e.g.,  railway  rolling  stock,  is  apparent. 

§  85.  Equitable  Liens.  —  A  consolidated  corporation  takes 
the  property  of  its  constituents  subject  to  equitable,  as  well 
as  other,  liens. 

A  vendor's  hen  upon  real  estate  for  the  unpaid  purchase 
money  is  not  affected  by  the  consolidation  of  the  purchasing 
corporation    with    another.^     An    obligation    to    convey    lands 


*  Where  by  the  consohdation  of  two 
railroad  companies,  anotlier  is  created 
whicli,  by  the  terms  of  the  consohda- 
tion, acquires  all  of  the  property  and 
franchises  and  assumes  all  the  debts 
and  liabilities  of  the  two  of  which  it  is 
formed,  and  which  become  extinct  by 
its  creation,  it  takes  such  property 
subject  to  the  debts  of  the  original 
companies,  and  burdened  with  all 
liens  upon  it  which  were  valid  against 
those  companies,  and  will  not  be  per- 
mitted to  aver  ignorance  of  an 
unrecorded  mortgage  previously  exe- 
cuted by  one  of  the  original  com- 
l>anies.  Mississippi  Valley  Co.  v. 
f'liicago,  etc.  R.  Co.,  58  Miss.  846 
(1881). 

See  also  North  Carolina  R.  Co.  v. 
Drew,  3  Woods  (U.  S.),  691  (1874). 

^  Hamlin  v.  Jerrard,  72  Me.  80 
(1881). 

Improvements  of  a  permanent 
nature  and  repairs  made  by  a  con- 
solidated corporation  upon  property 
acquired  from  a  constituent  corpora- 
tion and  subject  to  a  mortgage  exe- 


cuted by  that  company  are  covered 
b}'^  the  mortgage  and  the  mortgagee 
may  be  entitled  to  specific  perform- 
ance of  a  covenant  for  further  assur- 
ance therein.  Williamson  v.  Xew 
Jersey  Southern  R.  Co.,  25  X.  .1.  Ivj. 
13  (1874). 

^  North  Carolina  R.  Co.  v.  Drew, 
3  Woods  (U.  S.)  G91  (1879).  In  this 
case,  where  a  railroad  subject  to  a 
vendor's  lien  was  acquired  by  a  con- 
solidating company,  the  Court  .said  : 
"This  con.solidation,  by  which  the  two 
companies  joined  their  jimperties  to- 
gether, did  not  discharge  the  lien. 
The  property  of  the  Tallaha-ssee  Com- 
pany was  brought  into  the  common 
concern  with  all  prei-xisting  equities 
attaching  thereto.  The  consolidatetl 
company  having,  a,s  one  of  its  com- 
ponent parties  the  Tallaha-ssee  com- 
pany which  held  subject  to  the  lien, 
cannot  be  regardefl  as  a  bona  fide  pur- 
chaser without  notice."  See  also 
Branch  v.  .Atlantic,  etc.  R.  Co.,  3 
Woods  (U.  S.)  481  (1870). 

1()3 


§85 


INTERCORPORATE    RELATIONS 


[part  I 


comes  within  tlie  terms  of  a  consolidation  agreement  transferring 
property  subject  to  "  all  liens,  charges  and  equities  "  and  is  bind- 
ing upon  the  consolidated  company.  Such  an  obligation  might 
have  been  equally  binding,  without  such  a  provision,  upon  the 
principle  that  the  property  was  charged  with  a  trust  to  fulfil  it 
and  came  into  the  hands  of  the  consolidated  company  with  notice.^ 
While  creditors  of  consolidating  corporations  may  follow 
the  assets  of  their  debtors  into  the  hands  of  the  consolidated 
corporation  they  have,  in  the  absence  of  express  provision,  no 
lien  thereon  as  against  subsequent  mortgagees  or  purchasers. 
Such  a  lien  may,  however,  be  created,  and  whether  it  exists 
in  a  particular  case  will  depend  upon  the  terms  of  the  agree- 
ment of  consolidation  and  of  the  statute  under  which  consoli- 
dation takes  place.^  Where  several  railroad  companies  were 
consolidated  and  the  consolidated  company  agreed  to  "  pro- 
tect" certain  unsecured  equipment  bonds  of  a  constituent  com- 
pany, it  was  held  by  Judge  Gresham,  in  the  Circuit  Court  of 
the  United  States,'  that  the  holders  of  the  equipment  bonds 


*  Union  Pacific  R.  Co.  v.  McAlpine, 
129  U.  S.  314  (1889),  (9  Sup.  Ct.  Rep. 
286)  :  "The  obligation  of  tlie  Kansas 
Pacific  Railwaj'  Company  to  execute 
the  contract  by  a  conveyance  of  the 
25^  acre  tract  to  the  McAlpines  passed 
with  the  property  of  the  defendant, 
the  Union  Pacific  Railway  Company, 
upon  the  consolidation  of  the  two 
companies  under  the  latter  name. 
Whenever  property  charged  with  a 
trust  is  conveyed  to  a  third  party 
with  notice,  he  will  hold  it  subject  to 
that  trust,  which  he  may  be  com- 
pelled to  perform  equally  with  the 
former  owner.  The  vendee  in  that 
case  stands  in  the  place  of  such 
owner.  Without  reference,  therefore, 
to  the  articles  of  union  and  consolida- 
tion, the  Union  PaciPc  Railway  Com- 
pany would,  on  general  principles,  be 
held  to  complete  the  contract  made 
with  the  Kansas  Pacific  Company ; 
and  the  articles  in  specific  terms  recog- 
nize this  obligation." 

See  also  Vilas  v.  Page,  106  N.Y. 
439  (1887),  (13  X.  E.  Rep.  743). 

164 


2  Wabash,  etc.  R.  Co.  v.  Ham,  114 
U.  S.  595  (1885),  (5  Sup.  Ct.  Rep. 
1081)  :  "But  upon  the  consolidation, 
under  express  authority  of  statute,  of 
two  or  more  solvent  corporations,  the 
business  of  the  old  corporations  is  not 
wound  up,  nor  their  property  seques- 
trated or  disturbed,  but  the  very 
object  of  the  consolidation,  and  of 
the  statutes  which  permit  it,  is  to 
continue  the  business  of  the  old  cor- 
porations. Whether  the  old  corpora- 
tions are  dissolved  into  the  new  com- 
pany, or  are  continued  in  existence 
under  a  new  name  and  with  new 
powers,  and  whether,  in  either  case, 
the  consolidated  company  takes  the 
property  of  each  of  the  old  corpora- 
tions charged  with  a  lien  for  the  pay- 
riient  of  the  debts  of  that  corpora- 
tion, depend  upon  the  terms  of  the 
agreement  of  consolidation,  and  of 
the  statute  under  whose  authority 
that  consolidation  is  efTected." 

^  Tysen  v.  "Wabash,  etc.  R.  Co.,  15. 
Fed.  763  (1883),  11  Biss.  (U.  S.)  510. 


CHAP.  VIIl]     OBLIGATIONS    OF    CONSOLIDATED   CORPORATION  §   86 

acquired  an  equitable  lien  upon  the  property  acquired  by  the 
consolidated  company  from  such  constituent,  which  took  pre- 
cedence of  a  mortgage  thereof  executed  by  the  consolidated 
company.  This  decision  was,  however,  reversed  l)y  the  .Su- 
])reme  Court  of  the  United  States,^  which  held  that  the  agree- 
ment to  "protect"  was  merely  a  promise  to  pay  the  bonds 
as  they  matured,  and  that  the  equipment  bondholders  had 
no  lien,  equitable  or  otherwise,  upon  the  property  of  the  con- 
solidated company.  In  a  later  decision,  in  a  case  brought 
by  another  holder  of  these  equipment  bonds  against  the  same 
consolidated  company,  the  Supreme  Court  of  Ohio  -  declined 
to  follow  the  Supreme  Court  of  the  United  States  but  agreed 
vxith  Judge  Gresham,  and  held  that  the  agreement  to  "  pro- 
tect "  created  an  ecjuitable  lien,  uj)on  the  principle  that  "  where 
]3roperty  is  transferretl  upon  condition  that  the  grantee  should 
pay  some  third  person  a  debt,  or  sum  of  money,  the  latter 
acquires  an  equitable  lien  upon  the  property  to  the  extent  of 
tiie  debt  or  sum  which  is  to  be  paid  to  him." 

III.    Remedies  of  Creditors  of  Constituent  Corporations 

§  S6.  Remedy  of  Creditors  against  Consolidated  Corpora- 
tion —  At  Law.  —  A  (juestion  has  been  raised  whether  a  con- 
solidated corporation  can  be  sued  in  an  action  at  law  upon 
liabilities  of  its  cortstituent  companies  or  whether  resort  must 

'  Wabash,  etc.  R.  Co.  v.  Ham,  114  secured  by  mortgage  as  well  as  un- 

U.  S.    596    (1885),    (5  Sup.    Ct.    Rep.  secured    debts;     The    agreement    'to 

1081)  :    "It  was  next  contended  that  protect'  referring  to  the  time  of  pay- 

thc  stipulation   in   the   agreement   of  ment,    and    'the    true    meaning    and 

consolidation     that     the     bonds     and  effect'   of  the  e<iviipment  bonds  hav- 

debts  therein  specified  of  the  former  ing   been    to    create    only    a    personal 

companies   should    'be    protected    by  and    unsecured    debt    of    one    of    the 

the      said      consolidated      company'  former   companies,    the    words    'shall 

created  a  lien  in  their  favor.     But  it  be    protected'    nuist    have    the   same 

is   only   'as  to   the   principal   and  in-  meaning  which  they  (jrdinarily  have 

terest  as  they  shall  respectively  fall  in   promises  of  men   of  business,   'to 

due,'    and    'according    to    the    true  protect'    drafts   or   other    debts,    not 

meaning    and    effect'    of    the    instru-  made   or   contracted    by    themselves, 

ments   or   bonds   which   are   the   e\-i-  that  is  to  say,  a  personal  obligation  to 

deuce  of  the  debts,  that  it  is  stipu-  see  that  they  are  paitl  at  maturity." 
lated  that  the  debts  shall 'be  protected  '  Compton  ?-.  Waba.sh,  etc.  R.  Co., 

by  the  saiil  consolidated  company';  45  Ohio  .St.  592  (1887),  (IG  N.  E.  Rep. 

and     the     stipulation     covers     debts  110). 

165 


86 


INTERCORPORATE    RELATIONS 


[part  I 


be  had  to  equity.  It  is,  however,  now  well  settled  that  con- 
solidation confers  all  the  rights,  property  and  franchises  of  the 
old  companies  upon  the  consolidated  company  and  subjects  it 
to  all  their  liabiUties,  and  that  an  action  at  law  may  be  brought 
against  it  and  a  personal  judgment  obtained  for  the  debts  and 
torts  of  its  constituent  companies.^  The  right  to  bring  such 
action  is  placed  upon  the  ground  that,  for  the  purpose  of  an- 
swering to  their  liabilities,  the  existence  of  the  old  companies 
is  continued  in  the  consolidated  company;^  and  it  is  also  held 


'  Langhomer.  Richmond  R.  Co.,  91 
Va.  369  (1895),  (22  S.  E.  Rep.  159), 
where  the  Court  also  said:  "The 
question  is  not  whether  the  consolida- 
tion compels  a  creditor  to  accept  the 
defendant  corporation  as  a  new 
debtor  against  his  will,  or  a  person 
who  has  been  injured  to  resort  to  a 
stranger  for  satisfaction,  but  whether 
it  empowers  the  creditor  of  the  per- 
son injured  to  resort,  if  he  desires  to 
do  so,  in  the  first  instance,  to  tlie  cor- 
poration which  by  the  terms  of  the 
consolidation  is  made  liable  to  him. 
The  privity,  some  cases  say,  neces- 
sarj'  to  support  this  action  is  created 
by  tlie  statute  autliorizing  the  con- 
solidation and  the  purcliase  and  con- 
veyance under  it.  Other  authorities 
place  the  right  to  bring  such  an 
action  on  the  ground  that  the  effect 
of  the  consolidation  is,  as  to  the 
liabilities  of  the  old  company,  not  to 
dissolve  the  corporation  which  is  the 
immediate  debtor,  but  to  continue  its 
existence  in  the  consolidated  corpora- 
tion. .  .  .  Since  by  authority  of  law 
and  the  act  of  tlie  parties  the  consoli- 
dated corporations  are  moulded  into 
one  with  none  of  their  rights  impaired, 
and  none  of  their  responsibilities 
lessened,  there  is  no  good  reason  why 
the  same  proceedings  may  not  be  had 
against  the  new  corporation  as  might 
have  been  had  against  the  old  to  com- 
pel payment  of  liabilities.  It  avoids 
circuity  of  action.  It  allows  the  party 
witli  whom  the  contract  was  made  or 
to  whom  the  injurj'  was  done  to  pro- 

166 


ceed  directly  against  the  corporation, 
which,  by  virtue  of  the  consohdation 
proceedings,  is  made  liable  to  it." 

See  also  : 

Alabama:  Warren  v.  Mobile,  etc. 
R.  Co.,  49  Ala.  582  (1873). 

Georgia:  Coggin  v.  Central  R.  Co., 
62  Ga.  685  (1879),  (35  Ain.  Rep.  132). 

Illinois:  Arbuckle  v.  Illinois  Mid- 
land R.  Co.,  81  lU.  429  (1876)  ;  Colum- 
bus, etc.  R.  Co.  V.  Skidmore,  69  111. 
566  (1873) ;  St.  Louis,  etc.  R.  Co.  r. 
Miller,  43  III.  199  (1867). 

Indiana:  Louis\'ille,  etc.  R.  Co.  v. 
Bone}-,  117  Ind.  501  (1888),  (20  N.  E. 
Rep.  432,  3  L.  R.  A.  435)  ;  Indianapo- 
hs,  etc.  R.  Co.  V.  Jones,  29  Ind.  465 
(1868),  (95  Am.  Dec.  654). 

Ka7isas:  Berry  v.  Kansas  City,  etc. 
R.  Co.,  52  Kan.  774  (1893),  (36  Pac. 
Rep.  724,  39  Am.  St.  Rep.  371). 

Alaryland:  State  v.  Baltimore,  etc. 
R.  Co.,  77  Md.  489  (1893),.  (26  Atl. 
Rep.  865). 

Texas:  Indianola  R.  Co.  v.  Fryer, 
56  Tex.  609  (1882) ;  Houston,  etc.  R. 
Co.  V.  Shirley,  54  Tex.  125  (1880); 
Missouri  Pac.  R.  Co.  v.  Owens,  1  Tex. 
av.  Cas.  par.  384  (1883). 

Compare,  however,  Whipple  v. 
Union  Pacific  Co.,  28  Kan.  474  (1882), 
where  it  was  held  that  a  consolidated 
corporation  "is  not  Uable  for  the 
debt  of  eitlier  constituent  company 
unless  it  has  in  terms  contracted  to 
become  so." 

2  Indianapolis,  etc.  R.  Co.  v.  Jones, 
21  Ind.  465  (1868);  Langhorne  v. 
Richmond  R.  Co.,  91  Va.  369  (1895), 


CHAP.  VIIl]        OBLIGATIONS    OF   CONSOLIDATED   CORPORATION 


§87 


that  the  statute  fixing  the  HabiUty  and  the  proceedings  there- 
under create  the  privity  between  the  new  company  and  the 
creditors  of  the  old,  necessary  to  support  the  action.' 

The  consoUdated  company  is  bound  by  the  admissions  of  a 
constituent  corporation  regarding  its  obUgatioas  made  before 
coasoUdation,  and  evidence  of  the  same  is  admissible  in  an 
action  brought  thereon  against  the  new  company.^ 

§87.  Remedy  of  Creditors — In  Equity.  — A  corporation 
holds  its  property  as  a  trustee,  first,  to  meet  its  obligations, 
and,  afterwards,  for  the  benefit  of  its  stockholders.  It  cannot 
give  away  its  property  or  enter  a  consolidation,  the  effect  of 
which  is  to  transfer  its  assets  and  terminate  its  existence,  to 
the  prejudice  of  its  creditors.^     A  consolidated  corporation  is 


(22  S.  E.  Rep.  159);  Houston,  etc. 
R.  Co.  V.  Shirley,  5-4  Tex.  125  (18S0). 
See  also  cases  cited  in  preceding 
note. 

1  New  Bedford  R.  Co.  v.  Old 
Colony  R.  Co.,  120  Mass.  397,  400 
(1S76)  (sale)  :  "In  the  absence  of 
express  pro\'ision,  it  cannot  be  in- 
ferred that  it  was  the  intention  of 
the  act  to  impair  claims  of  third 
parties  for  existing  liabilities,  or  to 
shorten  the  time  within  which  the 
remedy  must  be  pursued.  The  ques- 
tion is  not  whether  the  statute  com- 
pels the  creditor  to  accept  the  de- 
fendant corporation  as  a  new  debtor 
against  his  will,  or  an  injured  person 
to  resort  to  a  stranger  for  satisfaction, 
but  whether  it  empowers  the  creditors 
or  an  injured  person  to  resort,  if  he 
chooses,  in  the  first  instance,  to  the 
corporation  which,  by  the  terms  of 
the  statute,  is  made  liable  to  him. 
And  we  are  of  opinion  tliat  it  does, 
and  that  the  privity  nece.s.sary  to 
support  this  action  is  created  by  the 
statute  and  the  purchase  and  con- 
veyance under  it." 

2  Philadelphia,  etc.  R.  Co.  v. 
Howard,  13  How.  (U.  S.)  333  (1851)  : 
"It  is  further  objected  that  tlie  ad- 
mission was  not  made  by  the  de- 
fendants in  this  action  but  by  the 
Wilmington    and   Susciuehannah   cor- 


poration. It  is  true  the  action  in  the 
trial  of  which  the  admission  was 
made,  being  brought  before  the  union 
of  the  corporations,  was  necessarily 
in  the  name  of  the  original  corpora- 
tion ;  but  as,  by  \-irtue  of  the  act  of 
union,  the  Wilmington  and  Susque- 
hannah  Comjjan}',  the  Baltimore  and 
Port  Depo.sit  Company,  and  the  Phila- 
delphia, Wilmington  and  Baltimore 
Companj'  were  merged  in  and  consti- 
tuted one  body,  under  the  name  of  the 
Philatlelphia,  Wilmington  and  Balti- 
more Railroad  Companj',  it  is  \erj' 
clear  that  at  the  time  the  trial  took 
place  in  Cecil  County  Court,  all  acts 
and  admissions  of  the  defendant  in 
that  case,  though  necessarily  in  the 
name  of  the  Wilmington  and  Susque- 
hannah  Company,  were  done  and 
made  by  the  same  corporation  which 
now  defends  this  action." 

^  Montgomery,  etc.  R.  Co.  v. 
Branch,  59  Ala.  153  (1877):  "A 
private  corporation  chartered  to  trans- 
act business  is  a  trustee  of  its  capital, 
property  and  effects  —  first  for  the 
payment  of  its  creditors  and  after- 
ward for  the  benefit  of  its  stockholders. 
...  If  leaving  its  tlebts  unpaid,  its 
cai)ital,  property  and  effects  are  dis- 
tributed among  its  stockholders,  or 
transferred  for  their  benefit  to  third 
persons   who   are    not    buna  fide    [)ur- 

107 


INTERCORPORATE   RELATIONS 


[part  I 


not  a  purchaser  for  value  without  notice,  and  a  court  of  equity 
will  treat  the  assets  of  a  consolidatino;  corporation  as  a  trust 
fund  for  the  benefit  of  its  creditors  and,  upon  its  consolidation 
with  unpaid  debts,  will  pursue  its  assets  and  lay  hold  of  thera 
in  the  hands  of  the  consolidated  corporation  and  apply  them 
for  the  payment  of  such  debts.^ 

While  a  creditor  has  an  action  at  law  against  the  consoli- 
dated corporation  upon  the  obligations  of  coastituent  com- 
panies, such  remedy,  as  already  noted,  is  not  exclusive,  and 
he  may  when  he  deems  it  to  his  advantage  resort  to  equity  and 
subject  the  property  acquired  from  his  debtor  to  the  payment 
of  the  debt.  Where,  however,  the  consoUdated  corporation 
has  sold  the  property  so  acquired  to  a  bona  fide  purchaser  for 
value  a  creditor  cannot  follow  it.^ 

§  88.  Remedy  against  Constituent  Corporation  if  not  Dis- 
solved. —  Consolidation  statutes  sometimes  provide  that  the 


chasers,  without  notice,  —  and  still 
more  if  the  corporation  be  dissolved 
or  become  so  disorganized  that  it  can- 
not be  made  answerable  at  law,  then  a 
court  of  equity  will  pursue  and  lay 
hold  of  such  property  and  effects, 
and  apply  them  for  the  payment  of 
what  it  owes  to  its  creditors." 

'  In  Harrison  v.  Arkansas  Valley  R. 
Co.,  4  McCrary  (U.S.)  264  (1882),  it 
was  held  that  where  several  corpora- 
tions are  united  in  one,  and  the 
property  of  the  old  companies  is 
vested  in  the  new,  the  latter  is  liable 
in  equity  for  the  debts  of  the  former, 
at  least  to  the  extent  of  the  property 
received  from  them,  and  that  if  it  is 
also  liable  at  law,  the  latter  remedy 
is  not  exclusive.  The  Court  said  (p. 
267):  "If  a  creditor  of  the  original 
corporation  sees  fit  to  proceed  in 
ecjuity  to  subject  the  property  of  that 
corporation  in  the  hands  of  the  con- 
solidated company,  he  has  a  clear 
right  to  do  so.  .  .  .  We  are  of  the 
opinion  that,  under  such  circum- 
stances, the  consolidated  corporation 
is  liable  in  equity  for  the  debts  of  the 
original  corporation,   at   least  to  the 

168 


extent  of  the  value  of  the  property 
received  from  it." 

See  also  Curran  v.  Arkansas,  15 
How.  (U.  S.)  304  (1853);  Mont- 
gomery, etc.  R.  Co.  V.  Branch,  59 
Ala.  139  (1877). 

Compare,  however,  Arbuckle  v. 
Illinois  Midland  R.  Co.,  81  111.  429 
(1876),  where  it  was  held  that  when 
a  consolidated  company  becomes,  by 
\Trtue  of  the  consolidation,  liable  for 
the  debts  of  the  companies  composing 
it,  the  creditor's  remedy  is  complete 
and  adequate  at  law,  and  that  a  court 
of  equity  will  not  assume  jurisdiction 
to  enforce  it. 

In  United  New  Jersey  R.,  etc.  Co. 
V.  Happock,  28  N.  J.  Eq.  261  (1877), 
it  was  held  that  corporations  which 
have  become  consolidated  into  a  new 
corporation  assuming  all  their  liabili- 
ties, are  suable  at  law  through  the 
consolidated  corporation ;  and  that 
the  fact  that  ser\nce  of  process  can- 
not be  had  on  them  will  not  justify 
the  resort  to  equity  to  enforce  a 
strictly  legal  demand. 

-  McMahon  v.  Morrison,  16  Ind.  172 
(1861),  (79  .\m.  Dec.  418). 


CHAP.  VIIl]        OBLIGATIONS   OF   CONSOLIDATED   CORPORATION 


88 


consolidating  corporations  shall  not  be  dissolved  but  that  their 
existence  shall  be  continued  for  the  purpose  of  winding  up 
their  affairs.^  The  purpose  of  these  statutes  is  to  preserxe 
the  rights  of  creditors,  unchanged  and  unimpaired.  Under 
such  a  statute  ^  it  is  open  to  a  creditor  to  enforce  his  demand 
either  against  the  corporation  whose  debt  it  was  or  agairust  the 
new  corporation  whose  debt  it  becomes  by  virtue  of  the  con- 
solidation.^ His  remedies  are  concurrent  and  the  recovery 
of  a  judgment  against  the  old  company  does  not  affect  his 
rights  against  the  consoUdated  company.  It  merely  changes 
the  form  of  liability. 

When  consolidating  corporations  are  continued  in  existence 
a  creditor  may  institute  insolvency  proceedings  against  such  a 
corporation,  if  such  a  remedy  is  available  against  corporations 
generally.* 


*  In  Whipple  v.  Union  Pacific  R. 
Co.,  28  Kan.  474  (1882),  where  a  con- 
solidation .statute  provided  tliat  the 
consolidated  corporation  should  not 
be  liable  for  the  debts  of  the  consoli- 
dating corporations,  which  should 
continue  in  existence  for  the  purpose 
of  adjusting  all  demands  against  them, 
but  that  the  consolidation  sliould  not 
prevent  the  enforcement  of  valid  obli- 
gations against  the  property  of  each 
constituent  in  the  hands  of  the  con- 
solidated company,  it  was  held  that  a 
creditor  of  a  constituent  corporation 
could  not  maintain  an  action  against 
the  consolidated  corporation  until  he 
had  sued  the  constituent  corporation 
and  recovered  judgment. 

A  street  railway  company  which 
owed  certain  license  fees  to  a  mu- 
nicipality was  absorbed  by  another 
corporation  which  a.ssumed  all  its 
obligations.  Held  that  the  absorbed 
company  continued  to  exist  as  a 
corporation  so  far  as  its  existing 
creditors  were  concerned,  and  was 
liable  for  license  fees  due  prior  to  the 
merger,  but  that  it  could  not  create 
liabilities  after  that  time  and  was  not 
liable  for  subsequent  license  fees. 
City  of  New  York  v.  Sixth  Ave.  R. 


Co.,  77  App.  Div.  (N.  Y.)  367  (1902), 
(79  N.  Y.  Supp.  319). 

Where  the  statutes  authorizing 
consolidation  proxdded  that  all  judg- 
ments theretofore  or  thereafter  ob- 
tained against  the  constituent  cor- 
porations should  be  a  lien  upon  the 
property  of  the  consolidated  company 
dirived  from  them,  and  that  the  con- 
stituent companies  should  continue  in 
existence  to  preserve  the  liens  against 
them,  it  was  held  that  a  constituent 
corporation  was  liable  for  a  tort  com- 
mitted prior  to  the  consolidation,  not- 
withstanding the  consolidated  cor- 
poration assumed  all  the  liabilities  of 
its  constituents.  Jones  v.  Southern 
R.  Co.,  127  Fed.  606  (1904). 

2iVew  York:  Laws,  1892,  ch.  691, 
§12. 

'  Matter  of  Utica  Nat.  Brewing  Co., 
1.54  N.  Y.  268  (1897),  (48  N.  E.  Rep. 
521).  See  also  Gale  v.  Troy,  etc.  R. 
Co.,  51  Hun  (N.  Y.)  470  (1889),  (4 
N.  Y.  Supp.  295). 

*  Piatt  V.  New  York,  etc.  R.  Co.,  26 
Conn.  514  (1857).  Whether  State  in- 
solvency courts  woulil  have  jurisdic- 
tion over  interstate  consolidated  cor- 
poration, qiicere.      lb. 

As  to  construction  of  Oiiio  statute 

169 


Si) 


INTERCORPORATE    RELATIONS 


[part  I 


§  89.  Effect  of  Consolidation  upon  Pending  Suits.  —  While 
the  effect  of  consolidation  may  be  the  dissolution  of  the  con- 
stituent corporations  and  the  creation  of  a  new  company  in 
their  stead,  it  does  not  destroy  them  in  such  a  sense  as  to  abate 
actions  brought  by  or  against  them  and  pending  at  the  time 
of  the  consolidation,  and  compel  the  plaintiff  to  begin  anew.' 
In  Shackleford  v.  Mississippi  Central  R.  Co?  the  Supreme 
Court  of  Mississippi  said:  "  The  new  company  is  the  old  com- 
pany; it  is  each  of  the  old  companies.  It  is  simply  the  on- 
ward flow  of  a  stream  which  is  formed  by  the  uniting  of  two 
precedent  streams." 

As  affecting  the  rights  of  creditors  of  the  constituent  cor- 
porations, the  consolidated  corporation  should  be  regarded  as 


(R.  S.  §  3384),  provnding  that  consoli- 
dating corporations  sliall  be  deeined 
to  continue  in  existence  for  the  preser- 
vation of  the  rights  of  creditors,  see 
Bull  V.  Baltimore,  etc.  R.  Co.,  39  App. 
Div.  (N.  Y.)  236  (1899),  (57  N.  Y. 
Supp.  111). 

1  United  States:  Edison  El.  Light 
Co.  V.  U.  S.  El.  Lighting  Co.,  52  Fed. 
300  (1892);  Edison  El.  Light  Co. 
V.  Westinghouse,  34  Fed.  232 
(1888). 

Alabama:  In  Birmingham  R.,  etc. 
Co.  V.  Enslen,  144  Ala.  343  (1905), 
(39  So.  Rep.  74)  a  street  railway 
company  caused  the  death  of  a 
passenger  and  subsequently  was  ab- 
sorbed by  another  corporation.  Suit 
was  brought  against  the  consolidated 
corporation  and  during  its  pendency 
the  latter  corporation  consolidated 
with  a  third.  It  was  held  that  the 
pending  suit  was  not  affected  by  the 
last  consolidation,  and  would  proceed 
as  if  it  had  not  taken  place. 

Illinois:  Chicago,  etc.  R.  Co.  v. 
Ashling,  160  111.  373  (1896),  (43  N.  E. 
Rep.  373).  See  also  Franklin  Life 
Ins.  Co.t;.  Hickson,  197  111.  117(1902), 
(64  N.  E.  Rep.  248),  affirming  97  111. 
App.  387  (1901). 

Indiana:  Hanna  r.  Cincinnati,  etc. 
R.  Co.,  20  Ind.  30  (1863). 

170 


Michigan:  Swartwout  v.  Mich. 
Air  Line  R.  Co.,  24  Mich.  389  (1872). 

Mississippi:  Shackleford  v.  Miss. 
Cent.  R.  Co.,  52  Miss.  159  (1876). 

Missouri:  In  Evans  v.  Interstate 
Rapid  Transit  Co.,  106  Mo.  601 
(1891),  (17  S.  W.  Rep.  489),  the  Court 
said :  "Ordinarily  the  effect  of  a  con- 
solidation of  two  or  more  corporations 
into  one  is  a  dissolution  of  all  of  them 
and  the  creation  of  a  new  company. 
But  legal  proceedings  properly  com- 
menced again.st  a  corporation  are  not 
affected  by  the  expiration  of  the  char- 
ter before  the  determination  of  such 
proceeding.  So  where  one  corpora- 
tion is  con.solidated  with  another  while 
a  suit  is  pending  against  it,  the  suit 
does  not  abate." 

Kinion  v.  Kansas  City,  etc.  R.  Co., 
39  Mo.  App.  382  (1899). 

Tennessee:  Railroad  Co.  v.  Evans, 
6  Heisk.  607  (1871). 

Compare  Prouty  v.  Lake  Shore,  etc. 
R.  Co.,  52  N.  Y.  366  (1873). 

That  consolidation  does  not  abate 
condemnation  proceedings,  see  Cali- 
fornia Cent.  R.  Co.  v.  Hooper,  76  Cal. 
404  (1888),  (18  Pac.  Rep.  599)  ;  Day 
V.  New  York,  etc.  R.  Co.,  58  N.  J.  L. 
677  (1896),  (34  Atl.  Rep.  1081). 

'  Shackleford  v.  Miss.  Cent.  R.  Co., 
52  Miss.  159  (1876). 


CHAP.  VIIl]        OBLIGATIONS    OF   CONSOLIDATED   CORPORATION 


§90 


continuing  the  existence  of  the  old  companies  under  a  new 
name/  Consolidation  statutes  generally  provide  that  con- 
solidation shall  not  affect  pending  suits;  ^  but,  without  such 
provision,  a  voluntary  consolidation  would  not  be  considered 
as  equivalent  to  the  death  of  either  of  the  constituent  cor- 
porations so  as  to  abate  pending  actions.^ 

§  90.  Procedure  regarding  Pending  Suits.  —  It  seems  the 
better  view  that  in  a  pending  action,  upon  proof  of  the  fact  of 
consolidation  being  made,  it  may  be  proceeded  with  against 
the  new  company  by  amendment  and  that  new  process  is  not 
necessar}^  to  bring  the  consolidated  company  before  the  court. 
Technically  speaking  and  for  general  purposes  the  consolidated 
company  is  a  new  corporation,  but  touching  the  business  of 
the  old  companies  and  the  rights  of  their  creditors,  it  ought 


'  Kinion  v.  Kansas  City,  etc.  R.  Co., 
39  Mo.  .\pp.  382  (1889). 

2  A'ew  York.  Railroad  Law,  §  73, 
(Birdseye's,  R.  S.  1901,  p.  2963)  : 
"No  action  or  proceedings  in  whicli 
either  of  such  corporations  is  a  party 
shall  abate  or  be  discontinued  by  sucli 
agreement  or  act  of  consolidation,  but 
may  be  conducted  to  final  judgment 
in  the  names  of  sucli  corporations,  or 
such  new  corporation  may  be,  by 
order  of  the  court,  on  motion,  sub- 
stituted as  a  party."  For  other  simi- 
lar provisions,  see  statutes  referred  in 
note  to  §  79,  atitc. 

'  Baltimore,  etc.  R.  Co.  v.  Mussel- 
man,  2  Grant's  Cas.  (Pa.)  352  (1857)  : 
"But  witliout  any  such  pro\'ision  as 
the  above,  in  the  law  autliorizing  the 
consolidation,  a  court  of  justice  would 
not  consider  the  mere  voluntary  union 
of  several  corporations  into  one  as 
equivalent  to  tlie  death  of  cither  of 
them  ;  or  attribute  to  tlie  law-making 
power  an  intention  of  enabling  tlieni 
to  discharge  their  liabilities  in  such  a 
summary-  way." 

In  Kansas,  however,  tlie  exce[>- 
tional  view  is  taken  tliat,  .since  upon 
consolidation  a  constituent  corpora- 
tion is  dissolved  and  ceases  to  exist 
as  a  corporation,  an  action  brought  by 


or  against  it  before  consolidation  can- 
not afterwards  be  prosecuted  by  or 
against  it  in  its  original  name. 

Thus  in  Kansas,  etc.  R.  Co.  v. 
Smith,  40  Kan.  192  (1888),  (19  Pac. 
Rep.  636),  the  court  said:  "On  May 
31,  1886,  when  the  Kan.sas,  Oklalioma 
and  Texas  Railway  Company  consoli- 
dated with  tlie  other  companies,  it 
ceased  to  exist  as  a  corporation.  And 
everything  which  has  since  transpired 
upon  the  basis  of  the  aforesaid  rail- 
way company's  being  a  corporation 
—  intleed  everything  wliich  has  tran.s- 
pired  in  this  case  since  May  31,  1886, 
is  void.  .  .  .  This  case  is  where  tlie 
original  party  has  ceased  to  exist,  has 
become  defunct,  is  dead,  and  there- 
fore not  able  either  to  prosecute  or 
defend." 

Also  Cunkle  v.   Interstate  R.  Co., 

54  Kan.  194  (1894),  (40  Pac.  Rep. 
184) ;    Chicago,  etc.  R.  Co.  v.  Butts, 

55  Kan.  660  (1895).  (41  Pac.  Rep. 
948)  ;  Council  Grove,  etc.  R.  Co.  v. 
Lawrence,  3  Kan.  App.  274  (1895), 
(45  Pac.  Rep.  125). 

See  also  Indianola  R.  Co.  v.  Fryer, 
.56  Tex.  609  (1882),  where  the  court 
said  that  a  judgment  rendered  against 
a  constituent  corporation  after  con- 
solidation was  a  nuUity. 

171 


§91 


INTERCORPORATE    RELATIONS 


[part  I 


properly  to  be  regarded  as  the  successor  of  the  old  companies 
under  a  new  name;  and  to  that  extent  it  ought  not  to  be  re- 
garded as  a  new  corporation.  If  it  is  the  same  corporation 
under  a  different  name,  an  additional  summons  is  unneces- 
sary.* 

On  the  other  hand,  however,  it  was  held  by  the  Supreme 
Court  of  Georgia  that  it  was  error  to  permit  the  plaintiff  to 
take  judgment  against  a  consolidated  company,  without  taking 
proper  steps  to  bring  the  new  corporation,  as  such,  before  the 
court  —  including  the  issue  of  new  process.^ 

A  consolidated  corporation  having  been  substituted  as  defend- 
ant in  place  of  a  constituent  company  has  the  right  to  treat 
the  pleadings  filed  by  the  original  defendant  as  its  own,  and 
to  avail  itself  of  all  exceptions  to  rulings  reserv^ed  by  such 
defendant  prior  to  the  substitution.^ 

§  91.  Allegation  and  Proof  of  Consolidation.  —  In  order  to 
charge  a  consolidated  company  or  to  enable  it  to  recover  in 
an  action  pending  at  the  time  of  consolidation  by  or  against 
a  constituent  company,  the  plaintiff  must  regularly  allege 
the  fact  of  consolidation  and  the  successorship  of   the  new 


>  Kinion  v.  Kansas  City,  etc.  R.  Co., 
39  Mo.  App.  386  (1889)  :  "Under  this 
view  it  was  not  necessary  to  bring  the 
defendant  into  court  by  a  new  sum- 
mons, and  the  simple  and  direct  act 
of  substitution  was  right.  If  John 
Smith  is  sued,  and  during  the  pen- 
dency of  the  suit  he  lias  his  name 
changed  to  John  Jones,  a  claim  that 
he,  as  John  Jones,  must  be  brought 
into  court  by  additional  summons 
would  be  somewhat  novel.  Prac- 
tically that  is  this  case." 

In  Louisville,  etc.  R.  Co.  v.  Sum- 
mers, 131  Ind.  241  (1892),  (30  N.  E. 
Rep.  873),  an  action  against  a  rail- 
road company  for  negligence,  it  was 
shown,  after  a  verdict  for  plaintiff,  that 
the  defendant  and  certain  other  rail- 
road companies  had  consolidated  and 
formed  a  new  company,  which  had 
succeeded  to  all  the  rights  and  liabili- 
ties of  the  consolidating  companies. 
It     was    held    that    the    trial    court 

172 


properly  substituted  the  consolidated 
company  as  defendant. 

2  Selma,  etc.  R.  Co.  v.  Harbin,  40 
Ga.  706  (1870). 

It  has  been  held  that  the  consoli- 
dated company  should  not  be  sub- 
stituted in  filace  of  the  old  company 
when  the  report  of  the  referee  has 
been  made  before  consolidation.  It 
was  also  held  in  the  same  case  that 
the  holder  of  preferred  stock  in  a 
constituent  company,  in  enforcing  his 
claims  thereon,  .stands  in  a  different 
position  from  a  creditor  of  such  com- 
pany. Prouty  V.  Lake  Shore,  etc.  R. 
Co.,  52  N.  ¥.363  (1873). 

The  .substitution  of  the  consoli- 
dated company  in  pending  proceed- 
ings is  often  pro\'ided  for  in  con- 
solidation statutes.  See  statutes 
referred  to  in  note  to  §  79,  ante. 

3  Louisville,  etc.  R.  Co.  v.  LTtz,  133 
Ind.  265  (1892),  (32  N.  E.  Rep.  881). 


CHAP.  VIIl]         OBLIGATIONS    OF   CONSOLIDATED   CORPORATION 


91 


company  to  the  rights  or  liabilities  of  such  constituent  com- 
pany and  must  prove  the  same,  unless  duly  admitted.  The 
court  cannot  take  judicial  notice  of  consolidation.^ 

Statutes  providing  that  an  allegation  of  corporate  capacity 
shall  be  taken  as  true  unless  specifically  denied  do  not  apply 
to  an  allegation  in  a  complaint  that  the  defendant  corporation 
consolidated  with  another  company  before  the  commencement 
of  the  suit.^  An  allegation  in  a  complaint  that  certain  railroad 
companies,  authorized  by  law  to  consolidate,  did  consolidate 
and  become  one  corporation  under  a  certain  name,  is  a  suffi- 
cient averment  of  consolidation  without  setting  forth  in  detail 
the  steps  taken  by  the  constituent  companies  to  bring  about 
%uch  result.^  The  facts  concerning  the  consolidation  should, 
however,  be  set  forth  ^^^th  reasonable  certainty,*  although 
their  absence  from  a  petition  would  not  occasion  a  reversal 
of  judgment.^ 

Consolidation  statutes  sometimes  provide  that  a  copy  of  the 
articles  of  consolidation  on  file  in  the  office  of  the  Secretary 
of  State,  duly  certified  and  authenticated,  shall  be  prima  facie 


'  Southgate  v.  Atlantic,  etc.  R.  Co., 
61  Mo.  90  (1875).  In  Brown  v. 
Dibble,  65  Mich.  520  (1887),  (.32  N. 
W.  Rep.  656)  it  was  held  that  it 
would  not  be  presumed  that  a  foreign 
constituent  corporation  had  power  to 
consolidate. 

2  Koons  V.  Chicago,  etc.  R.  Co.,  23 
Iowa,  493  (1867). 

^  Collins  V.  Chicago,  etc.  R.  Co.,  14 
Wis.  495  (1861),  (80  Am.  Dec.  789)  : 
"Now  although  these  allegations  in 
respect  to  the  consolidation  of  the 
various  companies  are  quite  general 
we  do  not  see  how  they  could  be  made 
more  specific,  without  setting  forth  in 
detail  all  the  steps  taken  by  the  dif- 
ferent companies  to  effect  their  con- 
solidation and  make  it  complete. 
.  .  .  We  therefore  think  the  aver- 
ments of  the  complaint  should  be 
deemed  sufficiently  explicit,  on  de- 
murrer. They  must  be  considered  as 
equivalent  to  alleging  that  everything 
was  done,  and  every  step  taken  by 
the  various  companies  to  render  their 


acts  of  consolidation  complete  and 
effectual."  As  to  pleadings  concern- 
ing consolidation  in  quo  warranto  pro- 
ceedings see  Commonwealth  v.  Atlan- 
tic, etc.  R.  Co.,  53  Pa.  St.  9  (1866). 

*  Hubbard  v.  Chappell,  14  Ind.  601 
(1860) ;  Wright  v.  Bundy,  11  Ind.  398 
(1858);  Marquette,  etc.  R.  Co.  v. 
Langton,  .32  Mich.  251  (1875)  ;  Lang- 
horne  v.  Richmond  R.  Co.,  91  Va.  369 
(1892),  (22  S.  E.  Rep.  159).  In  the 
last  case  the  Court  said  (p.  375)  :  "In 
this  case,  as  the  plaintiff  had  instituted 
his  action  to  recover  damages  from 
the  consolidated  corporation  for  the 
injury  alleged  to  have  been  done  him 
by  the  corporation  consolidated  with 
it,  it  was  necessary  for  him  to  allege 
generally  the  authority  of  the  old 
companies  to  consolidate,  and  the 
fact  that  the}'  had  consolidateil,  and 
under  what  name,  in  order  to  show 
the  liability  of  the  new  or  consolidated 
company  for  the  injury  sued  for." 

'  Indianapolis,  etc.  R.  Co.  v.  .Jones 
29  Ind.  465  (1868), (95  Am.  Dec.  654). 

173 


§   92  INTERCORPORATE    RELATIONS  [PART   I 

evidence  of  consolidation.^  In  the  absence  of  such  a  statutory- 
provision  the  existence  of  a  consolidated  corporation  could, 
undoubtedly,  be  proved  in  the  same  manner  as  the  existence 
of  any  other  corporation  —  by  showing  the  due  execution  and 
record  of  the  consolidation  agreement  in  pursuance  of  statu- 
tory authority,  and  acts  of  user  thereunder.^ 


CHAPTER    IX 


IRREGULAR    AND    INVALID    CONSOLIDATIONS 

§  92.  Attempted  Consolidation  —  Status  of  Resulting  Organization. 

§  93.  Effect  of  Unlawful  Consolidation. 

§  94.  Effect  of  Irregular  Consolidation. 

§  95.  Who  may  attack  Irregular  Consolidation. 

§  96.  Estoppel  to  deny  Regularity  of  Consolidation. 

§  97.  Accounting  after  Attempted  Consolidation. 

§  98.  Fraud  in  Consolidation  Agreement. 

§  92.  Attempted  Consolidation  —  Status  of  Resulting  Organi- 
zation. —  When  a  consolidation  of  corporations  has  been  at- 
tempted but  the  result  of  the  proceedings,  through  some  defect 
or  want  of  power,  has  not  been  a  corporation  de  jure,  the  rights 

>  "A  copy  of  said  agreement  and  ^  In  the  trial  of  an  action  against 

act  of  consolidation,  duly  certified  by  an    alleged    consolidated    corporation 

the  Secretary  of  the  State  under  his  for   the    negligence   of   a   constituent 

official  seal,  shall  be  evidence  in  all  company  a  deed  from  the  latter  cor- 

courts  and  places  of  the  existence  of  poration  to  the  former  conveying  all 

said  new  company  and  that  the  provi-  its  property  and  reciting  the  fact  of 

sions  of  this  act  have  been  fully  ob-  the  consolidation,  and  an  act  of  the 

served    and    complied    with."     Con-  legislature   confirming  the  consolida- 

necticid,    Rev.    Stat.    1888,     §    3445.  tion    but    not    stating    when    it   took 

Other  States  have  somewhat  similar  place,   taken  in   connection  with  the 

statutory  provisions.  admission  incident  to  the  plea  of  the 

A  copy  of  articles  of  consolidation,  general    issue  • — •  that    the    defendant 

duly  certified  undor  the  seal  of  the  existed  as  a  corporation  when  it  was 

Secretary  of  State,  is  ■prima  facie  evi-  filed  —  constitute  competent  evidence 

dence  of  the  existence  of  the  consoli-  of    consolidation    and,    being    in    the 

dated   corporation.     East   St.    Louis,  case,   a  charge  that  there  is  no  evi- 

etc.   R.   Co.   V.   Wabash,   etc.   R.   Co.,  dence  of  consolidation  is  unwarranted. 

24    111.    App.    279    (1887).     See    also  Zealy  v.  Birmingham  R.,  etc.  Co., 

Columbus,   etc.   R.  Co.  v.   Skidmore,  99    Ala,    579    (1892),    (13    So.    Rep. 

69  111.  566  (1873).  118). 

174 


CHAP.  IX]  IRREGULAR   AND   INVALID   CONSOLIDATIONS 


92 


and  obligations  accruing  will  be  determined  by  ascertaining 
whether  a  de  facto  corporation  has  been  formed.  Unless  a 
consolidation  statute,  in  force  at  the  time  of  the  proceedings/ 
authorized  the  proposed  consolidation,  the  result  was  a  nullity 
even  if  there  was  an  attempt  in  good  faith  to  consolidate  fol- 
lowed by  an  assumption  of  corporate  powers.^  An  attempt 
to  do  that  which  the  law  does  not  permit  can  produce  no 
result  that  the  law  will  recognize.  A  body  which  cannot  be- 
come a  corporation  de  jure  cannot  become  a  corporation  de 
facto.     Moreover,   the  mere  user  of   corporate  powers   which 


'  The  subsequent  passage  of  a  con- 
solidation statute,  not  retroactive  in 
terms,  does  not  validate  an  illegal 
consolidation  nor  create  a  de  facto  cor- 
poration. American  Loan,  etc.  Co.  v. 
Minnesota,  etc.  R.  Co.,  157  111.  641 
(1895),  (42  N.  E.  Rep.  153). 

^  Whaley  v.  Bankers'  Union  of 
the  World  (Tex.  Civ.  App.,  1005) 
88  S.  W.  Rep.  201:  "An  attempted 
consolidation,  where  no  statute  au- 
thorizes consolidation,  is  a  nullity; 
and  the  corporate  existence  of  a 
nominally  consolidated  corporation 
formed  in  the  absence  of  legislative 
authority  for  such  consolidation  may 
be  collaterally  attacked,  its  acts  and 
contracts  are  void,  and  it  cannot  be 
held  liable  for  the  debts  of  one  of 
the  corporations  attempting  to  con- 
solidate "  Citing  this  section.  See 
also  Boor  v.  Tolman,  11.3  111.  App.  322 
(1904). 

American  Loan,  etc.  Co.  v.  Minne- 
sota, etc.  R.  Co.,  157  111.  641  (1805), 
(42  N.  E.  Rep.  153):  "In  order  that 
there  should  be  a  de,  facto  corporation 
two  things  are  essential :  First,  there 
must  be  a  law  under  whicVi  the  cor- 
poration might  lawfully  be  created ; 
and  second,  a  i/.srr.  When  the  law 
authorizes  a  corporation,  and  there  is 
an  attempt,  in  good  faith,  to  organize, 
and  corporate  functions  are  thereupon 
exercised,  there  is  a  corporation  dc 
facto,  the  legal  existence  of  which 
cannot  ordinarily  be  questioned  col- 


laterally. .  .  .  Our  attention  is  called 
to  no  case  in  which  it  is  held  that,  in 
the  absence  of  any  general  law  or 
special  charter  or  other  law  authoriz- 
ing incorporation  or  consolidation,  as 
the  case  may  be,  and  also  in  the  ab- 
sence of  subsequent  legislative  ratifi- 
cation, the  juristic  personality  of  a 
corporation  or  consolidated  corpora- 
tion is  complete  and  conclu.sive 
against  all  the  world  except  the 
sovereign  power.  For  the  reasons 
we  have  stated  the  supposed  consoli- 
dated corporation  of  the  States  of 
Wisconsin,  Minnesota  and  Illinois 
called  the  Chicago  Freeport  and  St. 
Paul  Railroad  Company,  is  not,  and 
never  was,  a  corporation  either  de 
facto  or  de  jure.  The  right  of  way 
contracts  and  the  trust  deed  made  to 
the  appellant  were  and  are  invalid, 
and  this  because  there  was  no  cor- 
poration in  existence  with  capacity  to 
either  obtain  a  right  of  way,  or  con- 
tract, or  act  or  be  bound." 

An  attempted  consolidation  of 
mining  and  manufacturing  corpora- 
tions under  a  .statute  authorizing  the 
consolidation  of  railroad  companies  is 
without  warrant  of  law  and  of  no 
effect.  ,\nd  this  conclusion  is  not 
affected  by  the  fact  that  such  cor- 
))orations  may  have  (lower  to  build 
railroads  to  carry  their  own  products 
from  tlieir  lands  to  near  by  lines. 

Commonwealth  v.  Pennsylvania 
etc.  R.  Co.  17  Phila.  (Pa.)  609  (1884). 

173 


§   93  INTERCORPORATE    RELATIONS  [PART    I 

might  have  been  lawfully  acquired,  without  a  bona  fide  at- 
tempt to  acquire  them  by  forming  a  coasolidation,  does 
not  create  a  consolidated  corporation  de  facto  nor  does  an 
attempt  to  organize  without  user  have  that  effect.  All  of 
these  elements  must  unite  to  form  a  de  facto  corpora- 
tion, —  (a)  a  statute  under  which  the  proposed  consoli- 
dation might  have  been  effected,  (b)  a  bona  fide  attempt 
to  consolidate,  and  (c)  a  user  of  the  corporate  powers 
claimed.* 

§  93.  Effect  of  Unlawful  Consolidation.  —  As  already  noticed, 
the  result  of  an  attempted  consolidation  when  no  statute 
authorizes  consolidation  is  a  nullity,  and  the  same  result  fol- 
lows when  the  other  elements  of  a  de  facto  corporation  are 
lacking.  Accordingly,  the  corporate  existence  of  a  nominally 
consolidated  corporation,  formed  in  the  absence  of  legisla- 
tive authority  for  such  a  consolidation,  may  be  collaterally 
attacked,  its  acts  and  contracts  are  void,^  and  it  cannot  be 
held  liable  for  the  debts  of  one  of  the  corporations  attempting 
to  consolidate.^  So  it  was  held,  where  two  corporations  were 
consolidated,  without  legislative  authority,  that  promissory 
notes  executed  by  the  consolidated  organization  for  purposes 
beyond  the  powers   of   the   constituent   companies   were   not 

'  In  Methodist,  etc.  Church  v.  subject  to  the  same  objection  as  that 
Pickett,  19  N.  Y.  482  (1859),  it  was  in  Methodist,  etc.  Church  v.  Pickett, 
said  that  the  following  elements  were  supra:  "It  may  be  safely  stated 
essential  to  the  existence  of  a  de  facto  as  the  rule,  that  when  persons  assume 
corporation:  "(1)  The  existence  of  a  to  act  as  a  body,  and  are  permitted 
charter  or  some  law  under  which  a  by  acquiescence  of  the  public  and  of 
corporation,  with  the  powers  assumed,  the  State  to  act  as  if  they  were  legally 
might  lawfully  be  created;  and  (2)  a  particular  kind  of  corporation,  for 
a  user  by  the  party  to  the  suit  of  the  the  organization,  existence  and  con- 
rights  claimed  to  be  conferred  by  tinuance  of  which  there  is  express 
such  charter  or  law."  This  state-  recognition  by  general  law,  such 
ment  has,  however,  been  criticised  body  of  persons  is  a  corporation  de 
as  omitting  the  element  of  an  attempt  facto,  although  the  particular  per- 
to  organize.  Finnegan  v.  Norrenberg,  sons  thus  exercising  the  franchise  of 
52  Minn.  239  (1893),  (53  N.  W.  Rep.  being  a  corporation  may  have  been 
1150,  38  Am.  St.  Rep.  552,  18  ineligible  and  incapacitated  by  the 
L.  R.  A.  778).     In  Continental  Trust  law  to  do  so." 

Co.  V.  Toledo,   etc.   R.   Co.,   82  Fed.  ^  American  Loan,  etc.  Co.  v.  Min- 

653  (1897),  Judge  Taft,  in  considering  nesota,  etc.  R.  Co.,  157  III.  641  (1895), 

what      attempts      at      consolidation  (42  N.  E.  Rep.  153). 

created  a  corporation  de  facto,  stated  ^  Kavanaugh  v.  Omaha  Life  Assn., 

the  following  conclusion,  which  seems  84  Fed.  295  (1897). 

176 


CHAP.  IX]  IRREGULAH   AND    INVALID    CONSOLIDATIONS  §   94 

binding  upon  them  after  such  organization  had  been  dissolved.' 
Where,  however,  after  a  vaUd  consohdation  of  two  corpora- 
tions had  been  effected,  the  consolichited  corporation  thus 
created  attempted  to  further  absorb,  without  authority,  a  third 
corporation  and,  thereafter,  executed  a  mortgage  upon  all  its 
property,  it  was  held  that  the  illegality  of  the  latter  consolida- 
tion did  not  affect  the  mortgage  Hen  upon  the  property  of  the 
first  two  corporations.^ 

A  judgment  obtained  against  a  consolidated  corporation 
which  is  thereafter  declared  illegal  may  be  enforced  against 
the  constituent  companies,  upon  the  theory  that  they  were  the 
real  defendants  under  the  assumed  name.^  A  constituent 
railroad  corporation,  after  an  illegal  consolidation,  is  liable 
for  injuries  received  by  a  passenger  while  upon  its  railroad, 
caused  l)y  the  negligent  operation  of  the  railroad  by  the  em- 
ployees of  the  consolidated  company.* 

An  attempted  consolidation,  without  authority,  does  not 
terminate  the  existence  of  a  corporation,  and  non-user  of  its 
franchises  during  the  existence  of  the  illegal  organization  does 
not  forfeit  them.^ 

§  94.  Effect  of  Irregular  Consolidation.  —  If,  upon  the  prin- 
ciples indicated,  the  result  of  an  attempted  consolidation  is  a 

'  Where  two  separate  corporations  association     has    been    adjudged    to 

were  created  to  build  railroads,  they  have  had  no  legal  capacity  to  exist 

had   no   right   to   unite   and   conduct  as  a   corporation,    it  follows,   as  was 

their  business  under  one  management ;  also    adjudged,    that    the    individual 

nor  had  thoy  a  right  to  establish  a  entity    of    the    defendant    was    not 

steamboat  line  to  run  in  connection  merged    in    it.     Therefore,     the    de- 

with  the  railroads.     Notes  given  for  fendant    remained    as    an    actor    and 

the   purchase  of  the  steamboat  can-  participator  in  the  association  which 

not  be  recovered  upon.     So  held  in  did    operate    the    railway,    and    thus 

Pearce   v.    Madison,    etc.    R.    Co.,    21  one   of   the    parties   by   whose   negli- 

How.  (U.  S.)  441  (1858).  gence  was  injured.     As  such  it  was 

^  Racine,   etc.    R.    Co.    v.    Farmers  severally  liable  as  one  of  the  wrong- 
Loan,  etc.  Co.,  49  111.  331  (18(58),  (95  doers." 
Am.  Dec.  595).  *  State  i\  Crawfordsville,  etc.  Turn- 

3  Ketcham  v.  Madison,  etc.  R.  Co.,  pike  Co.,  102  Ind.  283  (1885),  (N.  E. 

20  Ind.  260  (1863).  Rep.  395). 

*  Latham   v.   Boston,   etc.    R.   Co.,  An  attempted  consolidation  with- 

38  Hun  (N.  Y.),   267   (1885):    "The  out    legislative    authority    does    not 

defendant  was  one  of  the  constituent  work  the  dissolution  of  a  corporation, 
companies  out  of  which  the  as.socia-  To[)eka    Paper    Co.    v.    Oklahoma 

tion  was  formed  which  was  entitled  Pub.  Co.,  7  Okla.  220  (1898),  (54  Pac. 

to     be     a     new     company.     As     this  Rep.  455). 

177 


§95 


INTERCORPORATE    RELATIONS 


[part  1 


corporation  de  facto,  the  general  rule  that  the  existence  of 
such  a  corporation  cannot  be  made  the  subject  of  collateral 
attack  is  applicable.*  As  said  by  the  Supreme  Court  of  the 
United  States  in  the  Pacific  Railroad  Removal  Cases -."^  "The 
organization  of  the  company  under  the  consolidation  proceed- 
ings makes  it,  at  least,  a  corporation  de  facto  and  the  legality 
of  its  constitution  will  not  be  inquired  into  collaterally." 

Thus,  after  consolidation  has  taken  place,  it  is  no  defence  to 
an  action  brought  upon  an  obligation  given  to  the  consolidated 
company  that  prescribed  formalities  were  omitted  in  the  con- 
solidation proceedings.^  Upon  similar  principles,  it  has  been 
held  that  the  existence  of  a  de  facto  consolidated  corporation 
cannot  be  attacked  in  an  action  of  ejectment  in  order  to  dis- 
prove title  in  a  plaintiff  who  claims  through  such  corpora- 
tion.^ 

§  95.  Who  may  attack  Irregular  Consolidation.  — The  State 
may  directly  attack  the  regularity  of  the  organization  of  a 


'  Pacific  Railroad  Removal  Cases, 
115  U..  S.  15  (1885),  (5  Sup.  Ct.  Rep. 
1113);  Continental  Trust  Co.  v. 
Toledo,  etc.  R.  Co.,  82  Fed.  642 
(1897);  Farmers  Loan,  etc.  Co.  v. 
Toledo,  etc.  R.  Co.,  67  Fed.  49  (1895). 
Also,  Washburn  v.  Cass  County,  3 
Dill.  (U.  S.)  251  (1875);  Leaven- 
worth County  V.  Chicago,  etc.  R.  Co., 
25  Fed.  219  (1885). 

In  City  of  Belleville  v.  Indianapolis, 
etc.  R.  Co.,  49  111.  App.  301  (1892) 
it  was  held  that  where  it  appeared 
that  from  the  time  a  certificate  of 
consolidation  had  been  filed  with 
the  Secretary  of  State  the  corpora- 
tion purporting  to  have  been  created 
had  acted  as  a  consolidated  corpora- 
tion, the  effect  of  the  consolidation  if 
regular  was  to  create  a  new  corpora- 
tion de  jure,  and  if  irregular,  a  cor- 
poration de  facto. 

2  Pacific  Railroad  Removal  Cases, 
115  U.  S.  15  (1885),  (5  Sup.  Ct.  Rep. 
1113). 

*  Where  a  party  executed  and 
delivered  his  promissory  note  to  a 
consolidated  organization  which  was 

178 


afterwards  assigned  by  it,  it  was  held 
in  an  action  upon  such  note  by  the 
assignee  against  the  maker,  that  the 
defendant,  by  executing  his  note  to 
the  corporation,  thereby  admitted 
its  corporate  existence,  and,  in  order 
to  avoid  a  payment  for  want  of  a 
party  with  whom  to  contract,  he 
must  prove  that  no  such  body  existed 
in  fact;  and  that  under  a  plea  of  nul 
tiel  corporation  where  an  organization 
in  fact,  and  a  user  is  shown,  the 
existence  of  the  corporate  body  is 
proved.  Mitchell  v.  Deeds,  49  111. 
416  (1867),  (95  Am.  Dec.  621). 

See  also  Continental  Trust  Co.  r. 
Toledo,  etc.  R.  Co.,  82  Fed.  642 
(1897);  Branch  v.  Jesup,  106  U.  S. 
468  (1882),  (1  Sup.  Ct.  Rep.  495). 

*  Where  title  is  traced  through  a 
consolidated  corporation  which  is  not 
a  party  to  the  record  and  with  which 
the  defendant  has  no  privity,  proof 
of  its  existence  as  a  corporation  de 
facto  by  the  articles  of  incorporation 
duly  made  is  sufficient  prima  facie. 
Tarpey  v.  Deseret  Salt  Co.,  5  Utak 
494  (1888),  (17  Pac.  Rep.  631). 


CHAP.  IX]  IRREGULAR   AND    INVALID   CONSOLIDATIONS 


§95 


de  facto  consolidated  corporation  in  quo  warranto  proceed- 
ings.^ 

A  subscriber  to  the  stock  of  a  constituent  corporation,  when 
sued  by  the  consolidated  corporation  upon  his  subscription 
contract,  may  show  the  omission  of  some  statutoiy  condition 
precedent  in  the  consolidation  proceedings.^  This  is  an  excep- 
tion to  the  rule  against  the  collateral  attack  of  de  facto  cor- 
porate existence  and  is  justified  by  the  relation  of  the  parties. 

The  decision  of  the  Supreme  Court  of  Michigan,  in  Brown 
V.  Dibble,^  which,  if  well  founded,  practically  nullifies  the  rule, 
cannot,  however,  be  sustained  upon  the  same  ground.  In  that 
case  it  was  held  that  when  a  consolidated  corporation  seeks 
to  enforce  rights  against  third  persons,  as  the  successor  of  its 
constituents,  the  question  can  be  raised  whether  it  has,  in  fact, 
been  duly  organized  and  has  succeeded  to  the  rights  claimed. 

The  rule,  however,  that  the  existence  of  a  consolidated  cor- 
poration cannot  be  collaterally  attacked  is  inapplicable  when 
the  consolidation  is  fraudulent.^ 


'  state  V.  Vanderbilt,  37  Ohio  St. 
590  (1882);  Commonwealth  v.  At- 
lantic, etc.  R.  Co.,  53  Pa.  St.  9  (18GG). 

2  Thus,  where  the  consolitlation 
act  provided  for  the  con.solidation  of 
corporations  upon  the  ap()ro\'al  of 
the  agreement  of  consolidation  by 
the  constituent  corporations,  and 
required  the  election  of  a  board  of 
directors  of  the  consolidated  corpora- 
tion as  a  condition  to  its  succes.sion 
to  the  rights  and  privileges  of  the 
constituent  corporations,  it  was  held 
that  it  might  be  shown  by  a  sub- 
scriber, in  action  to  enforce  his  .sub- 
scription, that  the  consolidated  cor- 
jjoration  had  not  succeeded  to  such 
rights  on  account  of  its  failure  to 
('oini)ly  with  such  condition.  Mans- 
field, etc.  R.  Co.  V.  Drinker,  30  Mich. 
124  (1874). 

See  also  Mansfield,  etc.  R.  Co.  v. 
Stout,  26  Oliio  St.  241  (1875);  Tuttlc 
r.  Michigan  Air  Line,  etc.  Co.,  35 
Mich.  249  (1877);  Mansfield,  etc. 
R.  Co.  V.  Brown,  26  Ohio  St.  223 
(1875).     fhe    contrary    is,    however. 


held  in  Kansas.  See  Chicago,  etc. 
R.  Co.  V.  Stafford  County,  36  Kan. 
128  (1887),  (12  Pac.  Rej).  593), 
(mandamus  to  enforce  subscription), 
where  tlie  Court  said:  "As  the  ])l:tin- 
tiff  is  a  de  facto  corporation,  under 
the  decisions  of  this  court  its  exist- 
ence as  such  corporation  can  only 
be  attacked  in  a  direct  proceeding 
brought  for  that  purpose.  Such 
matter  cannot  be  inquired  into  col- 
laterally." 

3  Brown  v.  Dibble,  65  Mich.  523 
(1887),  (32  N.  W.  Rep.  656) :  "Unless 
the  consolidation  is  shown  to  be  the 
legally  created  successor  of  the  old 
Michigan  Company  it  has  no  con- 
cern with  its  individual  contracts  with 
third  per-sons;  and  if  so  identified 
it  can  only  have  ...  a  right  to 
recover  by  proof  that  all  conditions 
of  recovery  have  been  complied  with." 

<  Jones  ('.  Missouri-Edison  El. 
Co.,  144  Fed.  775(1906):  "Coimsel 
for  the  defendants  argue  .  .  .  that 
the  existence  of  the  consoliilated 
corporation  may  not  be  collaterally 

179 


§96 


INTERCORPORATE   RELATIONS 


[part  I 


§  96.  Estoppel  to  deny  Regularity  of  Consolidation.  —  While 
subscribers  to  the  stock  of  constituent  corporations  may  ques- 
tion the  regularity  of  the  consolidation,  when  sued  by  the 
consolidated  company  upon  their  subscriptions,  a  different 
principle  may  be  applicable  when  creditors  of  that  company 
seek  to  reach  such  subscriptions  for  the  payment  of  its  debts. 
In  such  a  case  subscribers  who  have  acquiesced  in  the  consoli- 
dation are  estopped  to  question  its  validity.* 

A  de  facto  consolidated  corporation  is  estopped  from  deny- 
ing its  corporate  existence  in  order  to  avoid  its  obligations.^ 


assailed  and  annulled  by  a  private 
party  and  that  it  may  be  successfully 
questioned  by  the  State  only,  and  he 
cites  in  support  of  this  contention : 
.  .  .  But  not  one  of  these  decisions 
holds  that  the  perpetrator  of  a  fraud 
or  the  abuser  of  a  trust  or  their  privies 
may  shield  themselves  behind  the 
inactivity  of  the  State,  quiet  the  con- 
science and  escape  the  grasp  of  a 
court  of  chancery  more  successfully 
by  appropriating  the  property  of  a 
cestui  que  trust  by  means  of  a  consoli- 
dation of  corporations  than  he  may 
by  a  decree  of  foreclosure  and  sale 
(.Jackson  v.  Ludeling,  21  Wall.  616 
(1874),  by  a  transfer  of  all  the  prop- 
erty of  a  corporation  and  its  disso- 
lution (Ervin  v.  Oregon  R.  &  Nav. 
Co.,  20  Fed.  577  (1884),  by  a  lease 
(Meeker  v.  Winthrop  Iron  Co.  17 
Fed.  48  (1883)),  or  by  any  other  legal 
device  he  may  happen  to  adopt. 
The  cases  he  cited  have  to  do  with 
transactions  free  from  fraud,  and 
while  possibly  pertinent  to  the  charge 
in  the  bill  that  the  consolidation  was 
not  authorized  by  law,  they  have  no 
relevancy  to  the  cause  of  action  for 
fraud  and  breach  of  trust  in  the  con- 
ception and  execution  of  the  con- 
solidation. .  .  .  The  rule  that  the 
existence  of  a  corporation  may  not  be 
collaterally  assailed  by  a  private  indi- 
vidual constitutes  no  bar  to  a  suit  by 
a  minority  stockholder  to  avoid  for 
fraud  or  breach  of  trust  a  contract 
and  act  of  consolidation  of  corpora- 

180 


tions  and  to  restore  the  property  to 
its  former  owner." 

'  Hamiltcoi  v.  Clarion,  etc.  R.  Co., 
144  Pa.  St.  34  (1891),  (23  Atl.  Rep. 
53). 

2  United  States:  Farmers  Loan, 
etc.  Co.  V.  Toledo,  etc.  R.  Co.,  67 
Fed.  49  (1895). 

Illinois:  Racine,  etc.  R.  Co.  v. 
Farmers  Loan,  etc.  Co.,  49  111.  347 
(1868),  (95  Am.  Dec.  595):  "Where 
a  company  has  issued  its  bonds  and 
mortgage  under  the  circumstances 
above  detailed,  the  courts  of  every 
civilized  country  must  hold  an  es- 
toppel from  denying  its  corporate 
existence,  for  such  a  defence  is  re- 
pugnant to  every  sentiment  of  justice 
and  good  faith.  That  this  doctrine 
of  equitable  estoppel,  or  estoppel  in 
pais,  by  which  a  person  who  has 
represented  to  another  the  existence 
of  a  certain  state  of  facts,  and  thereby 
induced  him  to  act  on  the  faith  of 
their  existence,  is  concluded  from 
averring  against  such  person  and  to 
his  injury  that  such  representations 
were  false,  is  as  applicable  to  cor- 
porations as  to  natural  persons,  will 
hardly  be  denied." 

A  corporation  which  has,  in  effect, 
consolidated  with  another,  is  estopped 
to  assert  that  the  proceedings  for  con- 
solidation were  irregular,  in  an  action 
against  it  to  recover  the  amount  of  a 
judgment  against  the  other  corpora- 
tion binding  upon  it  if  there  was  a 
consolidation.      Chicago,   etc.   R.   Co. 


CHAP.  IX]  IRREGULAR   AND   INVALID   CONSOLIDATIONS 


§96 


In  Farmers  Loan,  etc.  Co.  v.  Toledo,  etc.  R.  Co.^  Judge  Taft 
said:  "  It  is  too  well  established  to  need  discussion  that  both 
a  de  facto  corporation  and  the  persons  exercising  the  rights 
of  stockholders  in  such  a  corporation  are  estopped  to  assert 
its  unauthorized  existence  as  a  corporation  to  avoid  a  debt 
incurred  by  it  in  the  actual  exercise  of  corporate  franchises 
and  the  doing  of  corporate  business." 

Creditors  of  a  de  facto  consolidated  corporation  who  have 
dealt  with  it  as  a  corporation  and  whose  claims  have  arisen 
after  the  issuance  of  mortgage  bonds,  are  estopped  from  at- 
tacking the  regularity  of  its  organization  for  the  purpose  of 
invalidating  the  bonds.  ^  As  creditors  they  have  no  better 
standing  than  the  bondholders. 

Upon  similar  principles  it  would  seem  that  creditors  of  an 
illegal  consolidated  corporation  could  not  attack  its  validity  in 
order  to  defeat  the  holders  of  prior  securities.  If  the  corpora- 
tion is  a  nullity  its  bonds  and  unsecured  debts  are  equally 
invalid.^ 


V.  Ashling,  160  111.  373  (1890),  (43 
N.  E.  Rep.  373). 

Michigan:  In  Shadford  v.  Detroit 
etc.  R.  Co.,  130  Mich.  300  (1902), 
(89  N.  W.  Rep.  960)  it  was  held 
that  a  corporation  created  by  the 
actual  consolidation  of  several  corpo- 
rations, and  which  received  and  held 
their  properties,  could  not  deny  its 
liability  upon  the  obligations  of  a 
constituent  corporation  upon  the 
ground  that  the  consolidation  was 
unlawful.  See  also  Howell  v.  Lansing, 
etc.  R.  Co.,  146  Mich.  450  (1906) 
(109  N.  W.  Rep.  846).  The  diffi- 
culty with  this  decision  is  that  the 
corporation  in  question  seems  not  to 
have  been  even  a  de  facto  consolidated 
corporation.  There  was  not  only  a 
want  of  statutory  authority  to  consoli- 
date but  the  whole  transaction  was 
ratlior  in  the  form  of  a  sale  than  of  a 
consolitlation. 

Ncio  Jersey:  Williamson  v.  New 
Jersey  Southern  R.  Co.,  26  N.  J.  Eq. 
398  (1875). 

Ohio:     Adelbert     University       v. 


Toledo,  etc.  R.  Co.,  3  Ohio  X.  P.  15 
(1894). 

'  Farmers  Loan,  etc.  Co.  v.  Toledo, 
etc.  R.  Co.,  67  Fed.  49  (1895). 

^  Louisville  Tru.st  Co.  v.  Louisville, 
etc.  R.  Co.,  84  Fed.  539  (1898),  re- 
versed on  other  grounds,  174  U.  S. 
674  (1899),  (19  Sup.  Ct.  Rep.  827), 
distinguishing  American  Loan,  etc. 
Co.  V.  Minnesota,  etc.  R.  Co.,  157  111. 
641  (1895),  (42  N.  E.  Rep.  153). 

Also  Continental  Trust  Co.  v. 
Toledo,  etc.  R.  Co.,  82  Fed.  648 
(1897). 

^  Continental  Trust  Co.  v.  Toledo, 
etc.  R.  Co.,  82  Fed.  648  (1897)  (per 
Taft  J.):  "Let  us  consider  first  the 
averment  that  the  Toledo,  St.  Louis 
&  Kansas  City  Railroad  Company  is 
neither  a  corporation  dc  jure  nor  a 
corporation  de  facto.  Can  such  a 
defence  be  urged  by  one  purporting 
to  be  creditor  of  the  pretended  cor- 
poration? If  the  bonds  are  null  and 
void  because  the  corporation  issviing 
them  was  a  nullity,  clearly  the  ilebts 
of  the  petitioners  and  the  complain- 

181 


§96 


INTERCORPORATE    RELATIONS 


[part  I 


Principles  of  estoppel  may  also  prevent  the  stockholders  ' 
and  bondholders  ^  of  the  consolidated  corporation,  and  the 
constituent  corporations  ^  and  their  stockholders  ^  from  raising 
any  questions  as  to  the  regularity  of  the  consolidation. 


ant  are  in  no  better  condition  and 
the  court  has  nothing  upon  which 
to  exercise  its  jurisdiction."  See 
also  Louisville  Trust  Co.  v.  Louisville, 
etc.  R.  Co.,  84  Fed.  539  (1898). 

1  It  has  been  held  that  a  subscriber 
for  stock  in  a  consolidated  company 
cannot  attack  the  validity  of  its  or- 
ganization on  the  ground  that  it  em- 
braces parallel  roads.  Leavenworth 
County  V.  Barnes,  94  U.  S.  70  (1876) ; 
Lewis  V.  City  of  Clarendon,  5  Dill. 
(U.  S.)  329  (1878),  (6  Rep.  609). 

Subscribers  for  stock  in  consoli- 
dating  companies,  can,  however, 
enjoin  a  consolidation  of  parallel 
roads  when  prohibited  by  statute  or 
constitutional  provision.  See  ante, 
§  40:  "Enforcement  of  Provisions 
against  Consolidation." 

2  Wallace  v.  Loomis,  97  U.  S.  155 
(1877):  "In  view  of  these  facts,  we 
think  that  the  appellant  is  estopped 
from  denying  the  corporate  existence 
of  the  company  whose  bonds  he  thus 
holds,  and  by  virtue  of  which  he 
acquires  a  locus  standi  in  the  suit. 
Irregularities  and  even  fraud  com- 
mitted in  making  the  purchase 
authorized  by  the  act,  and  failure  to 
perform  strictly  all  the  requisites 
for  changing  the  company's  name, 
cannot  avail  the  appellant,  occupying 
the  position  he  does  in  this  suit,  to 
deny  the  corporate  existence  of  the 
Alabama  and  Chattanooga  Railroad 
Company.  He  waived  all  such  ob- 
jections when  he  took  the  bonds, 
and  came  into  court  only  as  a  holder 
and  owner  thereof.  The  irregu- 
larities on  which  he  relies  might, 
perhaps,  have  been  sufficient  cause 
for  a  proceeding  on  the  part  of  the 
State  to  deprive  the  company  of  its 
franchises,  or  on  the  part  of  third 
persons  who   may  have  been  injuri- 

182 


ously  affected  by  the  transactions. 
But  neither  the  State  nor  any  other 
persons  have  complained;  and  it  is 
not  competent  for  the  appellant  to 
raise  the  question  in  this  collateral 
way,  for  the  purpose  of  gaining  some 
supposed  advantage  over  other 
creditors  of  the  same  company,  who 
have  relied  on  its  corporate  existence 
in  the  same  manner  that  he  has 
done." 

^  A  corporation  which  has  volun- 
tarily become  consolidated  with 
another,  has  participated  in  all  the 
necessary  proceedings  in  such  con- 
solidation, and  has  permitted  the 
de  facto  corporation  so  formed  to 
control  its  business  and  property 
and  third  parties  to  acquire  rights 
and  interests  based  on  the  existence 
of  such  de  facto  corporation,  cannot 
sue  to  have  such  consolidation  de- 
clared invalid  by  reason  of  irregu- 
larities in  its  formation.  Bradford 
V.  Frankfort,  etc.  R.  Co.,  142  Ind. 
383  (1895),  (40  N.  E.  Rep.  471). 

See  also  Carey  v.  Cincinnati,  etc. 
R.  Co.,  5  Iowa,  357  (1857);  Dimpfel 
V.  Ohio,  etc.  R.  Co.,  9  Hiss.  (U.  S.)  127 
(1879). 

*  Bell  V.  Pennsylvania,  etc.  R.  Co. 
(N.  J.  1887),  10  Atl.  Rep.  741 ;  Lewis 
V.  City  of  Clarendon,  5  Dill.  (U.  S.)  329 
(1878),  (6  Rep.  609). 

In  the  latter  case  the  Court  said: 
"By  subscribing  for  stock  and  issu- 
ing its  bonds  under  the  circumstances 
to  the  consolidated  company  the  city 
is  estopped  in  a  suit  upon  such  bonds 
from  showing  that  the  latter  com- 
pany is  not  a  corporation  de  jure." 

Where  the  validity  of  a  consoli- 
dation has  not  been  attacked  b}'  the 
State  or  a  dissenting  stockholder,  a 
mimicipal  corporation  cannot  question 
it  bv  wav  of  a  defence  to  an  action  on 


CHAP.  IX]  IRREGULAR   AND    INVALID   CONSOLIDATIONS  §   98 

§  97.  Accounting  after  Attempted  Consolidation.  ^  Wliile  an 
attempted  consolidation,  witliout  statutory  authority,  is  ultra 
vires  and  no  action  will  lie  upon  the  agreement  of  consolida- 
tion, one  corporation  which  has  received  under  the  agreement 
property  of  another  can  be  compelled  to  make  restitution 
thereof  or  to  account  for  its  value. ^  Thus,  where  a  bill  in 
equity  brought  to  restrain  an  vltra  vires  consolidation  was 
dismissed  because  of  the  voluntary  rescission  of  the  articles 
of  consolidation,  a  cross  bill  praying  for  an  accounting  was 
permitted  to  stand,  and  the  suit  remained  for  the  purpose  of 
such  accounting.  In  this  case  the  Supreme  Court  of  Missis- 
sippi said:  "  The  decided  weight  of  authority  in  England  and 
America  is  that  no  action  lies  upon  the  invalid  contract,  that 
no  decree  can  be  made  by  a  court  of  equity  for  its  specific  per- 
formance, nor  can  a  recovery  be  had  at  law  for  its  breach; 
but  that,  by  proceeding  in  the  proper  court,  the  plaintiff  may 
recover  to  the  extent  of  the  benefit  received  by  the  defendant 
from  the  execution  of  the  agreement  by  the  plaintiff."  " 

§  98.  Fraud  in  Consolidation  Agreement.  —  Courts  of  equit}' 
will  annul  any  scheme  by  which  the  stockholders  of  one  cor- 
poration, after  agreeing  to  consolidate  their  corporation  with 
another,  fraudulently  seek  to  gain  an  advantage  over  the  share- 
holders of  the  latter  company.  Thus,  where  one  corpora- 
tion after  agreeing  to  a  consolidation  declared  a  scrip  dividend 
and  issued  certificates  of  indebtedness  therefor  without  the 
knowledge  of  the  other  corporation,  which  then  went  into  the 
consolidation,  it  was  held,  in  a  suit  in  equity  brought  by  the 
stockholders  of  the  latter  company,  that  the  scrip  was  fraudu- 
lent and  void  and  should  be  delivered  up  to  be  cancelled.^ 

bonds  issued  to  a  constituent  corpora-  ject  of  ultra  vires  contracts  and  of  the 

tion.     Washburn   v.   Cass   County,    3  rights  and  duties  of  the  parties  thereto 

Dill.  (U.  S.)  251  (1875).  see  post,  ch.  22. 

It   has  been   held,    however,    that  *  Greenville  Compress  Co.  v.  Plant- 

the  holder  of  bonds  issued  by  a  county  ers  Compress,   etc.   Co.,  70  Miss.  676 

to  a  railroad  company,  two  days  after  (1893),  (13  So.  Rep.  879,  35  Am.  St. 

an      attempted      consolidation      with  Rep.  681). 

another  company,  was  not  estopped,  '  Bailey  v.  Citizens  Gas  Light  Co., 

as  against  the  county,  from  asserting  27  N.  J.  Eq.  196  (1876). 

the  invalidity  of  such  consolidation.  Equity,  however,  cannot  dissolve  a 

Morrill  v.  Smith  County,  89  Tex.  529  consolidated     corporation     upon     the 

(1896),  (36  S.  W.  Rep.  56).  ground,  alleged  by  a  .stockhpldcr  in  a 

'  For  full  consideration  of  the  sub-  con.stituent     corpr>ration,      that     the 

183 


§98 


INTERCORPORATE   RELATIONS 


[part  I 


The  consolidation  of  a  corporation,  effected  by  the  majority 
stock  interests  through  directors  chosen  by  them  against  the 
protests  of  the  minority,  with  another  corporation  likewise 
controlled  by  such  majority  interests,  by  the  terms  of  which 
the  preferred  stock  held  by  the  minority  is  deprived  of  the 
greater  part  of  its  value,  to  the  benefit  of  the  stockholders  of 
the  second  corporation,  is  a  fraud  upon  the  minority.  It  con- 
stitutes an  abuse  of  the  trust  relation  borne  by  the  holders  of 
the  majority  of  the  stock  to  the  minority,  and  a  breach  of  duty 
upon  the  part  of  the  directors.  The  consolidation  effected 
through  such  fraudulent  scheme  is  voidable  in  equity  at  the 
suit  of  the  minority  stockholders  and  the  courts  may  grant 
other  effective  relief.^ 


consolidation  was  for  a  fraudulent 
purpose,     and    not    legally    effected. 

Terhune  v.  Midland  R.  Co.,  38  N.  J. 
Eq.  423  (1884). 

*  Jones  V.  Missouri-Edison  El.  Co. 
144  Fed.  765  (1906).  In  this  case  the 
United  States  Circuit  Court  of  Appeals 
for  the  Eighth  Circuit  said  (p.  771): 
"A  combination  of  the  holders  of 
a  majority  or  of  three-fifths  of  the 
stock  of  a  corporation  to  elect  direct- 
ors, to  dictate  their  acts  and  the 
acts  of  the  corporation  for  the  pur- 
pose of  carrying  out  a  predetermined 
plan  places  the  holders  of  such  stock 
in  the  shoes  of  the  corporation  and 
constitutes  them  actual,  if  not  tech- 
nical, trustees  for  the  holders  of  the 
minority  of  the  stock.  The  devo- 
lution of  power  imposes  correlative 
duty.  The  members  of  such  a  com- 
bination become  in  practical  effect 
the  corporation  itself  because  they 
draw  to  themselves  and  use  the  power 
of  the  corporation.  In  a  sale  of  its 
property,  in  a  consolidation  of  the 
corporation  with  another,  in  every 
act  and  contract  of  the  corporation 
which  they  cause  they  make  them- 
selves the  trustees  and  agents  of  the 
holders  of  the  minority  of  the  stock 
because  it  is  only  through  them  that 
the  latter  may  act  or  contract  regard- 
ing  the    corporate    property    or   pre- 

184     . 


serve  or  protect  their  interests  in  it. 
Such  a  majority  of  the  holders  of 
stock  owe  to  the  minority  the  duty 
to  exercise  good  faith,  care,  and  dili- 
gence to  make  the  property  of  the 
corporation  in  their  charge  produce 
the  largest  possible  amount,  to  pro- 
tect the  interests  of  the  holders  of  the 
minority  of  the  stock  and  to  secure 
and  deliver  to  them  their  just  pro- 
portion of  the  income  and  of  the  pro- 
ceeds of  the  property.  Any  sale  of 
the  corporate  property  to  themselves, 
any  disposition  by  them  of  the  cor- 
poration or  of  its  property  to  deprive 
the  minority  holders  of  their  just 
share  of  it  or  to  get  gain  for  them- 
selves at  the  expense  of  the  holders  of 
the  minority  of  the  stock,  becomes  a 
breach  of  duty  and  of  trust  which 
invokes  plenary  relief  from  a  court  of 
chancery." 

A  very  different  view  of  the  obli- 
gations of  majority  stockholders  to 
the  minority  in  case  of  a  consolidation 
is  expressed  in  Colgate  v.  United 
States  Leather  Co.,  67  Atl.  Rep.  663 
(N.  J.  Ch.  1907):  "The  general  rule 
under  our  decisions  is  that  the  indi- 
vidual stockholders  are  not  trustees 
for  each  other,  but  each  may,  as  a 
member  of  the  general  corporate  body 
exercise  his  individual  right  and  vote 
equallj'  with  the  stockholders  on  the 


CHAP.  IX]  IRREGULAR    AND    INVALID   CONSOLIDATIONS 


§98 


A  secret  agreement  between  the  promoters  of  a  consolida- 
tion that  the  money  advanced  for  the  purchase  of  certain 
stock,  necessary  to  effect  the  consoUdation,  should  be  a  debt  of 
the  consolidated  company,  and  be  repaid  by  an  issue  of  its 
bonds,  is  not  binding  upon  the  consolidated  company  and  the 
proceeds  of  bonds  so  applied  may  be  recovered.^ 

An  arrangement  for  consolidation  between  two  corporations 
having  directors  in  common  is  not  necessarily  void;  but  the 
burden  is  upon  such  directors  of  showing  that  it  is  fair  to  all 
stockholders.  If  it  is  in  any  respect  unfair  to  minority  interests 
it  may  be  set  aside  in  equity.' 


ratification  of  a  contract  in  which  he 
is  interested,  and  ratification  or  adop- 
tion of  the  contract  is  vaHd,  even  if 
carried  by  his  vote.  .  .  .  Tliis  right 
of  the  majority  (statutory  or  other) 
either  to  originally  direct  or  to  affirm 
contracts  or  other  proceedings  in 
which  the  directors  or  the  majority 
stockholders  are  interested  is  not, 
however,  absolute  but  is  subject  to 
the  necessary  qualification  that  the 
majority,  although  they  may  deal 
with  the  assets  of  the  company,  can- 
not so  deal  with  them  as  to  divide 
those  assets,  more  or  less,  between 
themselves,  to  the  exclusion  of  the 
minority.  .  .  .  By  this  rule  full 
practical  protection,  and  all  the  pro- 
tection they  are  entitled  to,  is  given 
to  the  minority  stockholders  without 
resort  to  any  principle  of  supposeil 
trust  relationship  of  one  individual 
stockholder,  or  any  combination  of 
such  individual  stockholders,  who 
constitute  a  majority,  towards  tliose 
who  do  not  act  with  them  and  con- 
stitute a  minority.  To  make  tlie 
majority  of  the  stockholders  either 
directly  or  through  their  directors 
trustees  of  the  minority,  and  obliged 
because  they  arc  in  the  majority  to 


conduct  the  business  or  afTairs  of  the 
company,  a.s  in  any  resj^ect  the  spe- 
cial trustees  of  the  minoritj'  seems  to 
me  to  be  a  misconception  of  trust 
relations." 

For  case  of  alleged  fraudulent 
and  ultra  vires  consolidation  effected 
by  majority  stockholders  in  violation 
of  right  of  minority,  see  Stevens  v. 
Missouri,  etc.  R.  Co.,  106  Fed.  771 
(1901). 

'  Trenton  Pass.  R.  Co.  v.  Wilson, 
55  N.  J.  Eq.  273  (1897),  (37  Atl.  Rep. 
476). 

2  Dady  v.  Georgia,  etc.  R.  Co.,  112 
Fed.  838  (1900).  See  also  post,  §  114, 
"  Voidable  Sales." 

An  agreement  for  the  consolida- 
tions of  two  corporations  has,  how- 
ever, been  held  neither  void  nor 
voitlable  at  the  option  of  a  minority 
stockholder  because  the  directors 
executing  it  were  the  common  di- 
rectors of  both  corporations.  This 
tlecision  was  placed  u])on  the  ground 
that  consolidation  required  the  act 
of  the  stockliolders,  to  which  the 
directors'  agreement  was  merely 
preliminary. 

Colgate  V.  U.  S.  Leather  Co.  (N.  J. 
Ch.  1907),  67  Atl.  Rep.  057. 


18; 


§    100  INTERCORPORATE   RELATIONS  [PART   I 


CHAPTER    X 


INTERSTATE    CONSOLIDATIONS 

§    99.    Consolidation  of  Corporations  of  Different  States  —  How  authorized. 

§  100.    Construction  of  Interstate  Consolidation  Statutes. 

§  101.    Status  of  Interstate  Consolidated  Corporation. 

§  102.  Effect  of  Interstate  Consolidation  upon  Status  of  Constituent  Corpora- 
tions. 

§  103.    Management  of  Interstate  Consolidated  Corporation. 

§  104.    Rights  and  Powers  of  Interstate  Consolidated  Corporation. 

§  105.    Duties  of  Interstate  Consolidated  Corporation  —  Taxation. 

§  106.    Citizenship  of  Interstate  Consolidated  Corporation. 

§  107.  Foreclosure  of  Mortgages  after  Interstate  Consolidation.  Jurisdic- 
tion. 

§  99.  Consolidation  of  Corporations  of  Different  States  — 
How  authorized.  —  Consolidation  statutes  generally  provide 
for  the  consolidation  of  domestic  railroad  and  other  carrier 
corporations  with  those  of  an  adjoining  State  where  the  works 
of  the  several  corporations,  when  united,  will  form  a  continu- 
ous or  connected  line.  The  connection  between  the  railroads 
may  in  some  States  be  by  a  bridge,  in  others  by  a  ferry  and  in 
.another  by  a  tunnel.*  One  State,  at  least,  has  no  general  act 
permitting  the  consolidation  of  domestic  railroad  companies 
but  authorizes  the  consohdation  of  any  railroad  company  in- 
corporated under  its  laws  with  any  other  corporation  whose 
line  of  railroad  "  is  situated  wholly  outside  this  State."  ^  As 
already  shown,  State  legislation  authorizing  the  consolidation 
of  such  corporations  is  not  a  regulation  of  interstate  commerce.^ 

The  consolidation  of  domestic  and  foreign  business  corpora- 
tions is  not,  as  a  rule,  permitted  by  consolidation  statutes 
applicable  to  that  class  of  corporations. 

§  100.  Construction  of  Interstate  Consolidation  Statutes.  — 
Express  legislative  authority  from  each  of  the  States  creating 
the   several   corporations   proposing   to    consolidate   must   be 

^  See  ante,  §  22:    "What  Railroads  ^  See   ante,  ^    19a:     "Authorization 

may     consolidate  —  Statutory     Provi-  of    Consolidation    of    Interstate    Rail- 

sions."  roads     not     regulation     of     Interstate 

^Connecticut:     Gen.     Stat.     1902,  Commerce." 
§  3674. 

186 


CHAP.  X]  INTERSTATE   CONSOLIDATIONS  §    101 

granted  before  a  valid  consolidation  can  take  place.  Any 
ambiguity  in  the  terms  of  the  grant  will  operate  against  the 
corporation  and  in  favor  of  the  public. 

A  legislative  grant  of  authority  to  consolidate  does  not 
authorize  consolidation  with  a  foreign  corporation  unless  such 
power  is  clearly  expressed.*  It  has,  however,  been  held  that 
an  act  authorizing  a  domestic  railroad  corporation  to  consoli- 
date with  corporations  operating  roads  in  an  adjoining  State, 
authorizes  a  consolidation  with  a  company  operating,  in  an 
adjoining  State,  a  road  which  extends  into  a  third  State. -^ 
Power  to  purchase  stock  in  "  any  other  connecting  railroad  " 
authorizes  the  purchase  of  the  stock  of  a  foreign  connecting 
railroad,^  and  legislative  consent  to  a  purchase  by  "  any  rail- 
road company  "  includes  foreign  as  well  as  domestic  railroad 
corporations.^ 

§  101.  Status  of  Interstate  Consolidated  Corporation. — A 
State  may  grant  to  a  corporation  of  another  State  power  to 
lease  or  purchase  a  railroad  within  its  territory,  and  to  main- 
tain and  operate  it,  without  making  such  corporation  a  do- 
mestic corporation  or  a  citizen  of  such  State."* 

'  American  Loan,  etc.  Co.  v.   Min-  R.  Co.,  G5  N.  H.  393  (1888),  (23  Atl. 

nesota,    etc.    R.    Co.,     157    111.    641  Rep.  529):    "Express  consent  is  given 

(1895),    (42    N.    E.    Rep.    153).     See  to  a  purchase  bj'    'any  railroad  com- 

also  Loughlin  v.  United  States  School  pany.'      Taken  without  qualification. 

Furniture  Co.,  118  111.  App.  36  (1905);  this  clause  includes  foreign  as  well  as 

Continental  Trust  Co.  v.  Toledo,  etc.  domestic  railroad  corporations.     The 

R.    Co.,     82     Fed.     642     (1897).     In  words  'any  railroad'   might    be    used 

Black  V.  Delaware,  etc.  Canal  Co.,  24  in   a   connection    and    for   a    purpose 

N.  J.  Eq.  456  (1873),  it  was  held,  in  which  would  show  a  restricted  sense 

the   analogous   case  of   a   lease,    that  not     including     foreign     companies, 

power  to  lease  to  "any  other  corpora-  Here  is  no  evidence  of  a  purpose  to 

tion  or  otherwise"  diil  not  authorize  e.xclude  them." 
a  lease  to  a  foreign  corporation.  *  I.    It  is  competent  for  a  railroad 

^  Adelbert  College  v.  Toledo,  etc.  company,  when  authorized  by  the 
R.  Co.,  3  Ohio  N.  P.  15  (1894).  See  State  creating  it,  to  accept  a  grant  of 
also  Racine,  etc.  R.  Co.  v.  Farmers  authority  from  another  State  to  ex- 
Loan,  etc.  Co.,  49  111.  331  (1868),  tend  its  railroad  into  such  State,  and 
(95  Am.  Dec.  595).  to  receive  a  grant  of  powers  to  own 

^  Pittsburgh,  etc.  R.  Co.  v.  Keokuk,  or    control,    bj^    lease    or    purcha.se, 

etc.  Bridge  Co.,  131  U.  S.  371  (1889),  railroadsof  other  corporations  therein, 

(9  Sup.  Ct.  Rep.  770) ;   Day  v.  Ogdens-  and  it  may  subject  itself  to  such  rules 

burgh,    etc.    R.    Co.,    107    N.    Y.    129  and  regulations  as  may  be  prescribed 

(1887),  (13  N.  E.  Rep.  765).  by   the   second   State.     Such    legisla- 

*  Boston,  etc.  R.  Co.  v.  Boston,  etc.  tion    is    not    regarded    as    within    the 

187 


§  101 


INTERCORPORATE   RELATIONS 


[part  I 


When  corporations  of  different  States  desire  to  consolidate, 
and  to  acquire  the  rights  and  privileges  of  that  relation,  the 
consolidated  corporation  created  by  the  necessaiy  cooperative 
legislation  is  essentially  different  from  a  corporation  created 
by  the  consolidation  of  domestic  corporations,  A  corpora- 
tion formed  by  the  consolidation  of  corporations  of  different 
States,  although  it  has  the  same  shareholders,  is  designed  to 
accomplish  the  same  purpose,  and  has  the  same  powers,  in 
each  State,  is  a  separate  and  distinct  corporation  in  each 
State  and  exists  in  each  State  as  a  domestic  corporation.*     In 


constitutional  inhibition  against  com- 
pacts between  States.  St.  Louis, 
etc.  R.  Co.  V.  James,  161  U.  S.  562 
(1896),  (16  Sup.  Ct.  Rep.  621);  Rail- 
road Co.  V.  Harris,  12  Wall.  (U.  S.) 
82  (1870);  Copeland  v.  Memphis,  etc. 
R.  Co.,  3  Woods  (U.  S.)  651  (1878). 

II.  The  conclusive  presumption 
for  jurisdictional  purposes,  appli- 
cable to  all  corporations,  that  a  cor- 
poration is  composed  of  citizens  of 
the  State  which  created  it,  accom- 
panies the  corporation  when  transact- 
ing business  in  another  State,  and  it 
may  sue  and  be  sued  in  the  federal 
courts  of  such  other  State  as  a  citizen 
of  the  State  of  its  original  creation. 
St.  Louis,  etc.  R.  Co.  v.  James,  161 
U.  S.  562  (1896),  (16  Sup.  Ct.  Rep. 
621) ;  Shaw  v.  Quincy  Mining  Co.,  145 
U.  S.  444  (1892),  (12  Sup.  Ct.  Rep. 
935) ;  Interstate  Commerce  Com.  v. 
Texas,  etc.  R.  Co.,  57  Fed.  948  (1893) ; 
Myers  v.  Murray,  etc.  Co.,  43  Fed.  695 
(1890)  ;  Miller  v.  Wheeler,  etc.  Co., 
46  Fed.  882  (1891) ;  Copeland  v.  Mem- 
phis, etc.  R.  Co.,  3  Woods  (U.  S.) 
657  (1878).  This  doctrine  of  indispu- 
table citizenship  does  not,  however, 
extend  so  far  as  to  make  such  a  cor- 
poration a  citizen  of  the  second  State 
even  though  it  be  there  endowed 
with  all  the  powers  and  privileges 
usually  granted  to  domestic  corpora- 
tions. St.  Louis,  etc.  R.  Co.  v.  James, 
161  U.  S.  562  (1896),  (16  Sup.  Ct. 
Rep.    621).      Compare     Southern    R. 

188 


Co.,  Allison  190  U.  S.  326  (1902),  (23 
Sup.  Ct.  Rep.  713) ;  Patch  v.  Wabash 
R.  Co.,  207  U.  S.  277  (1907),  (28  Sup. 
Ct.  Rep.  80). 

III.  The  second  State  may  create 
a  corporation  of  the  same  name  as 
the  corporation  of  the  other  State, 
and  may  declare  that  the  same  legal 
entity  shall  be  a  corporation  of  that 
State  and  shall  be  entitled  to  exercise 
within  its  borders,  by  the  same 
officers,  all  its  corporate  functions. 
The  decided  weight  of  authority 
supports  the  view  that  the  result  of 
such  legislation  is  not  the  creation  of 
a  single  corporation,  but  two  corpora- 
tions of  the  same  name  having  a  dif- 
ferent paternity  and  being  citizens,  re- 
spectively, of  the  States  creating  them. 
Ohio,  etc.  R.  Co.  v.  Wheeler,  1  Black 
(U.  S.)  286  (1861).  See  also  Muller  v. 
Dows,  94  U.  S.  444  (1876);  Pennsyl- 
vania R.  Co.  V.  St.  Louis,  etc.  R.  Co., 
118  U.  S.  290  (1885),  (6  Sup.  Ct.  Rep. 
1094);  Nashua,  etc.  R.  Corp.  v.  Bos- 
ton, etc.  R.  Corp.,  136  U.  S.  356 
(1889),  (10  Sup.  Ct.  Rep.  1004); 
Racine  v.  Farmers  Loan,  etc.  Co., 
49  111.  348  (1868),  (95  Am.  Dec.  595); 
Missouri  Pac.  R.  Co.  v.  Meeh,  69  Fed. 
755  (1895),  (30  L.  R.  A.  250). 

Contra,  Railroad  Co.  v.  Harris,  12 
Wall.  (U.  S.)  82  (1870);  Copeland  v. 
Memphis,  etc.  R.  Co.,  3  Woods  (U.  S.) 
651  (1878);  Bishop  v.  Brainerd,  28 
Conn.  289  (1859). 

'  United  States:  In  Muller  v.  Dows, 


CHAP.  X] 


INTERSTATE    CONSOLIDATIONS 


§  101 


Quincy  Railroad  Bridge  Co.  v.  Adams  County,^  the  Supreme 
Court  of  Illinois  said:  "  The  only  possible  status  of  a  company 
acting  under  charters  from  two  States  is  that  it  is  an  associa- 
tion incorporated  in  and  by  each  of  the  States,  and,  when  actini^ 
as  a  corporation  in  either  of  the  States,  it  acts  under  the  au- 
thority of  the  charter  of  the  State  in  which  it  is  then  acting  and 


94  U.  S.  447  (187G),  where  a  Missouri 
and  an  Iowa  corporation  had  consoli- 
dated, the  Supreme  Court  of  the 
United  States  said:  "The  two  com- 
panies became  one.  But  in  the  State 
of  Iowa  it  was  an  Iowa  corporation, 
existing  under  the  laws  of  that  State 
alone.  The  laws  of  Missouri  had  no 
operation  in  Iowa." 

Also  Nashua,  etc.  R.  Corp.  v. 
Boston,  etc.  R.  Corp.,  13G  U.  S.  381 
(1890),  (10  Sup.  Ct.  Rep.  1004);  Peik 
V.  Chicago,  etc.  R.  Co.,  94  U.  S.  177 
(1876);  Delaware  R.  R.  Tax  Cases, 
18  Wall.  (U.  S.)  20G  (1873) ;  Railroad 
Co.  V.  Whitton,  13  Wall.  (U.  S.)  271 
(1871);  Missouri  Pacific  R.  Co.  v. 
Meeh,  69  Fed.  755  (1895),  (.30  L.  R.  A. 
250) ;  Fitzgerald  v.  Missouri  Pacific 
R.  Co.,  45  Fed.  812  (1891) ;  Burger  v. 
Grand  Rapids,  etc.  R.  Co.,  22  Fed. 
561  (1884). 

Illinois:  Ohio,  etc.  R.  Co.  v. 
People,  123  111.  467  (1888),  (14  X.  E. 
Rep.  874) ;  Quincy  Railroad  Bridge 
Co.  V.  Adams  County,  88  111.  615 
(1878) ;  Racine,  etc.  R.  Co.  v.  Farm- 
ers Loan,  etc.  Co.,  49  111.  331  (1868), 
(95  Am.  Dec.  595). 

Michigan:  Chicago,  etc.  R.  Co.  v. 
Auditor  General,  53  Mich.  91  (1884), 
(18  N.  W.  Rep.  586),  (per  Cooley, 
C.  J.):  "It  is  impossible  to  conceive 
of  one  joint  act  performed  simul- 
taneously by  two  sovereign  States 
which  shall  bring  a  single  corporation 
into  being  except  it  be  by  compact  or 
treaty.  There  may  be  .separate  con- 
sent given  for  the  consolidation  of 
corporations  separately  created ;  but 
where  the  two  unite,  they  severally 
bring  to  the  new  entity  the  powers 
and  privileges  alreath-  possessed,  and 


the  consolidated  company  simply 
exercises  in  each  jurisdiction  the 
powers  the  company  there  chartered 
had  possessed." 

Minnesota:  In  re  St.  Paul,  etc. 
R.  Co.,  36  Minn.  85  (1886),  (30  N.  W. 
Rep.  432). 

Nebraska:  Tre.ster  r.  Mi.ssouri  Pac. 
R.  Co.,  33  Neb.  171  (1891),  (49  N.  W. 
Rep.  1110). 

New  York:  People  v.  New  York, 
etc.  R.  Co.,  129  N.  Y.  474  (1892),  (29 
N.  E.  Rep.  361,  15  L.  R.  A.  82); 
Sage  V.  Lake  Shore,  etc.  R.  Co.,  70 
N.  Y.  220  (1877). 

Pennsylvania:  Appeal  of  Pitt.s- 
burgh,  etc.  R.  Co.,  4  Atl.  Rep.  385 
(1886). 

Texas :  Whaley  v.  Bankers'  Union 
of  the  World  (Tex.  Civ.  App.  1905), 
88  S.  W.  Rep.  259:  "Corporations 
have  no  power  to  consolidate  unless 
the  power  is  expressly  conferred  by 
their  charters,  or  by  the  charter  of 
one  of  them,  or  by  some  other  stat- 
ute, and  the  consolidation  must  be 
effected  in  compliance  with  the  terras 
of  the  statute.  And  when  corpora- 
tions are  created  by  different  States, 
as  were  those  involved  in  this  case, 
thcj''  can  only  consolidate  under  con- 
current legislation  of  each  State; 
but  in  such  a  case,  since  the  laws  of 
the  State  have  no  extraterritorial 
effect,  they  cannot  create  or  aid  in 
creating  a  corporation  in  another 
State;  and  there  is,  in  law,  a  separate 
and  distinct  corporation  in  each  State 
when  corporations  are  consolidated  by 
virtue  of  concurrent  legislation." 

'  Quincy  Railroad  Britlge  Co.  v. 
Adams  County,  88  111.  615  (1878). 

189 


§    101  INTERCORPORATE   RELATIONS  [PART    I 

that  only,  the  legislation  of  the  other  State  having  no  operation 
beyond  its  territorial  limits."  And  in  Fitzgerald  v.  Missouri 
Pacific  R.  Co.,^  Judge  Caldwell  said:  "By  the  consolidation, 
the  corporation  of  one  State  did  not  become  a  corporation 
of  another,  nor  was  either  merged  in  the  other.  The  corpora- 
tion of  each- State  had  a  distinct  legislative  paternity,  and  the 
separate  identity  of  each  as  a  corporation  of  the  State  by  which 
it  was  created,  and  as  a  citizen  of  that  State,  was  not  lost  by 
the  consolidation.  Nor  could  the  consolidated  company  be- 
come a  corporation  of  three  States  without  being  a  corporation 
of  each,  or  of  either.  While  the  consolidated  corporation  is  a 
unit,  and  acts  as  a  whole  in  the  transaction  of  its  corporate 
business,  it  is  not  a  corporation  at  large,  nor  is  it  a  joint  cor- 
poration of  the  three  States.  Like  all  corporations,  it  must 
have  a  legal  dwelling-place.  Every  corporation,  not  created 
by  act  of  Congress,  dwells  in  a  State.  This  consolidated  cor- 
poration dwells  in  three  States,  and  is  a  separate  and  single 
entity  in  each." 

This  principle  that  an  interstate  consolidated  corporation 
is  a  separate  and  distinct  entity  in  each  State  is  clearly  estab- 
lished, and  is,  perhaps,  necessary  in  order  to  give  each  State 
its  legitimate  control  over  the  charters  which  it  grants.  It 
is,  however,  founded,  in  a  measure,  upon  a  legal  fiction,  for  it 
makes  several  corporations  out  of  that  which  is,  in  fact,  one, 
and  ignores  the  essential  element  of  union.'' 

That  the  consolidated  corporation,  itself,  has  an  existence 
apart  from  its  constituents  may  be  recognized  without  affecting 
the  principles  already  considered.  Thus  in  Ashley  v.  Ryan,^ 
the  Supreme  Court  of  Ohio  said:  "  There  has  been  some  diver- 
sity of  opinion  as  to  the  status  of  a  corporation  formed  by  the 
consolidation  of  companies  under  the  laws  of  different  States. 
But  it  seems  prett}^  well  settled,  upon  principle  at  least,  that 
when  formed  under  cooperative  legislation  of  the  different 
States,  it  becom.es  a  corporation  in  each  State  where  its  road 
is  located.     It  is  a  legal  entity  residing  and  doing  business 

*  Fitzgerald  v.  Missouri  Pacific  R.  ^  Ashley  v.  Ryan,  49  Ohio  St.  529 

Co.,  45  Fed.  615  (1S91).  (1892),  affirmed  153  U.  S.  436  (1894), 

2  Home  V.  Boston,  etc.  R.  Co.,  18  (14  Sup.  Ct.  Rep.  865). 
Fed.  50  (1883). 

190 


CHAP.  X] 


INTERSTATE   CONSOLIDATIOXS 


§  101 


in  different  States,  with  a  status  in  each,  derived  from  and 
determined  by  the  laws  of  that  State." 

It  has  also  been  held  that  a  consolidated  railroad  corpora- 
tion, chartered  and  operated  in  two  States  and  made  subject 
to  the  laws  of  one  State  as  if  wholly  located  therein,  is  a  single 
entity  so  far  as  the  power  of  the  courts  of  that  State  to  fix 
rates  is  concerned.^  It  is  also  held  that  the  acts  and  neglects 
of  an  interstate  consolidated  corporation  are  its  acts  .  and 
neglects  as  a  whole.^ 

Constitutional  provisions  in  several  States  define  the  status 
of  interstate  consolidated  corporations.^ 


'  Providence  Coal  Co.  v.  Provi- 
dence, etc.  R.  Co.,  15  R.  I.  303  (1886), 
(4  Atl.  Rep.  394). 

2  Home  V.  Boston,  etc.  R.  Co.,  18 
Fed.  50  (1883).  See  also  Burger  v. 
Grand  Rapids,  etc.  R.  Co.,  22  Fed. 
561  (1884);  Fitzgerald  r.  Missouri 
Pac.  R.  Co.,  45  Fed.  812  (1891). 

An  interstate  consolidated  cor- 
poration is  a  "new"  corporation 
who.se  charter,  under  Mich.  Const. 
Art.  15,  §  1,  is  subject  to  amendment, 
alteration  or  repeal.  Smith  v.  Lake 
Shore,  etc.  R.  Co.,  114  Mich.  460 
(1897),  (72  N.  W.  Rep.  328). 

^  Idaho:  Const.  Art.  XI.  §  14: 
"If  any  railroad,  telegraph,  express, 
or  other  corporation,  organized  under 
any  of  the  laws  of  this  State,  shall 
consolidate,  by  sale  or  otherwise,  with 
any  railroad,  telegraph,  express,  or 
other  corporation  organized  under  any 
of  the  laws  of  any  other  State  or  Ter- 
ritory, or  of  the  United  States,  the 
same  shall  not  thereby  become  a 
foreign  corporation;  but  the  courts 
of  this  State  sliall  retain  jurisdiction 
over  that  part  of  the  corporate  prop- 
erty within  the  limits  of  the  State  in 
all  matters  that  may  arise,  as  if  said 
consolidation  had  not  taken  place." 

Kcntiu-ky.  Const.  §  200:  "If  any 
railroad,  telegraph,  express,  or  other 
corporation,  organized  under  the  laws 
of  this  Commonwealth,  shall  consoli- 
date, by  sale  or  otherwise,  with  any 


railroad,  telegraph,  express,  or  other 
corporation  organized  under  the  laws 
of  any  other  State,  the  same  shall  not 
thereby  become  a  foreign  corporation, 
but  the  courts  of  this  Commonwealth 
shall  retain  jurisdiction  over  that 
part  of  the  corporate  property  within 
the  limits  of  this  State  in  all  matters 
which  may  arise,  as  if  said  consolida- 
tion had  not  taken  place." 

Louisiana.  Const.  Art.  CCXLVI. : 
"If  any  railroad  company,  organized 
under  the  laws  of  this  State,  shall 
consolidate,  by  sale  or  otherwise, 
with  any  railroad  company  organized 
under  the  laws  of  any  other  State  or 
of  the  United  States,  the  same  shall 
not  thereby  become  a  foreign  cor- 
poration, but  the  courts  of  this  State 
shall  retain  jurisdiction  in  all  matters 
which  may  arise,  as  if  said  consoli- 
dation had  not  taken  place.  In  no 
case  shall  any  consolidation  take 
place  except  upon  public  notice  of  at 
lea.st  sixty  days  to  all  stockholders, 
in  such  manner  as  may  be  provided 
by  law." 

Missouri.  Const.  Art.  XII.  §  18. 
Same  as  Louisiatia,  supra. 

Montana.  Const.  Art.  XV.  §  15: 
"If  any  railroad,  telegraph,  telephone, 
express,  or  other  corporation  or  com- 
pany organized  under  any  of  the  laws 
of  this  State  shall  consolidate,  by  sale 
or  otherwise,  with  any  railroad,  tele- 
graph,   telephone,    express,    or   other 

191 


102 


INTERCORPORATE    RELATIONS 


[part  I 


§  102.  Effect  of  Interstate  Consolidation  upon  Status  of  Con- 
stituent Corporations.  —  Upon  the  creutiou  of  an  interstate 
consolidated  corporation  the  constituent  corporations  of  the 
different  States  do  not  cease  to  exist,  although  they  may  lie 
dormant  and  their  property,  rights,  powers  and  franchises 
be  vested  in  and  exercised  by  the  consolidated  corporation.' 
In  Racine,  etc.  R.  Co.  v.  Farmers  Loan,  etc.  Co.^  the  Supreme 
Court  of  Illinois  said:  "  Our  view  of  the  effect  of  the  consoli- 
dation between  the  [corporations  of  different  States]  which 
we  hold  to  have  been  legally  made,  is  briefly  this:  While  it 
created  a  community  of  stock  and  of  interest  between  the  two 
companies,  it  did  not  convert  them  into  one  company,  in  the 
same  way,  and  to  the  same  degree,  that  might  follow  a  consoli- 
dation of  two  companies  within  the  same  State.  Neither 
Illinois  nor  Wisconsin,  in  authorizing  the  consolidation,  can 
have  intended  to  abandon  all  jurisdiction  over  its  own  corpo- 
ration created  by  itself.  Indeed,  neither  State  could  take 
jurisdiction  over  the  property  or  proceedings  of  the  corpora- 
tion beyond  its  own  limits  and  a  corporation  can  have  no 


corporation  organized  under  any  of 
the  laws  of  any  other  State  or  Terri- 
tory, or  of  the  United  States,  the  same 
shall  not  thereby  become  a  foreign 
corporation;  but  the  courts  of  this 
State  shall  retain  jurisdiction  over 
that  part  of  the  corporate  property 
within  the  limits  of  the  State,  in  all 
matters  that  may  arise,  as  if  said 
consolidation  had  not  taken  place." 

'  Ohio,  etc.  R.  Co.  v.  People,  123 
111.  467  (1888),  (14  N.  E.  Rep.  874); 
Tagart  v.  Northern  Central  R.  Co., 
29  Md.  557  (1868);  Bishop  v.  Brain- 
erd,  28  Conn.  289  (1859).  Where 
two  corporations  are  created  by  ad- 
jacent States,  with  the  same  name, 
to  construct  a  canal  in  each  of  the 
States  and  afterwards  their  interests 
are  united  by  legislative  acts  of  the 
States  respectively,  this  does  not 
merge  the  separate  corporate  exist- 
ence of  such  corporations.  Farnum 
r.  Blackstone  Canal  Co.,  1  Sumn. 
(U.  S.)  62  (1830).     In    Nashua,    etc. 

192 


R.  Co.  V.  Boston,  etc.  R.  Co.,  136 
U.  S.  382  (1890),  (10  Sup.  Ct.  Rep. 
1004),  the  Supreme  Court  of  the 
United  States  said:  "It  is  evident 
that,  by  the  general  law,  railroad 
corporations  created  by  two  or  more 
States,  though  joined  in  their  inter- 
ests, in  the  operation  of  their  roads, 
in  the  i.ssue  of  their  stock,  and  in  the 
division  of  their  profits,  so  as  prac- 
tically to  be  a  single  corporation,  do 
not  lose  their  identity ;  and  that  each 
one  has  its  existence  and  its  standing 
in  the  courts  of  the  country,  only  bj^ 
virtue  of  the  legislation  of  the  State 
by  which  it  is  created.  The  union 
of  name,  of  officers,  of  business  and  of 
l^roperty,  does  not  change  their  dis- 
tinctive character  as  separate  cor- 
porations." 

See  also  Paul  v.  Baltimore,  etc.  R. 
Co.,  44  Fed.  513  (1890). 

2  Racine,  etc.  R.  Co.  v.  Farmers 
Loan,  etc.  Co.,  49  111.  348  (1868),  (95 
Am.  Dec.  595). 


CHAP.  X]  INTERSTATE   CONSOLIDATIONS  §    103 

existence  beyond  the  limits  of  the  State  sovereignty  which 
brings  it  into  hfe  and  endows  it  with  faculties  and  powers."  ' 

§  103.  Management  of  Interstate  Consolidated  Corporation.  — 
While  a  corporation  created  by  the  consolidation  of  corpora- 
tions of  different  States  is  a  domestic  corporation  of  each  State 
and  derives  its  powers,  in  each  State,  from  local  laws,  yet, 
in  the  conduct  of  its  business,  it  acts  as  a  unit,  —  as  one  cor- 
poration and  not  as  several, — "and,  in  the  absence  of  a 
statutory  provision  to  the  contrary,  it  may  transact  its  corporate 
business  in  one  State  for  all,  and  the  contracts  it  enters  into 
and  the  liabilities  it  incurs  in  one  State  are  binding  upon  it 
in  all  the  States  and  may  be  enforced  against  it  in  any  one  of 
them  when  the  action  is  transitory."  ^ 

A  meeting  in  one  of  several  States  of  the  stockholders  of  a 
corporation  created  by  the  consolidation  of  corporations  of 
those  States  is  valid  with  respect  to  the  property  of  the  cor- 
poration in  all  of  them,  without  the  nece.ssity  of  a  repetition 
of  such  meeting  in  the  other  States.^ 

The  affairs  of  an  interstate  consolidated  corporation  may 
be  —  and  uniformly  are  —  administered  by  a  single  board  of 
directors  which  may  control,  manage  and  dispose  of  its  prop- 
erty situated  in  the  different  States.  In  the  case  quoted  from 
in  the  last  section  —  Racine,  etc.  R.  Co.  v.  Farmers  Loan,  etc. 
Co.* — the  Supreme  Court  of  Illinois  also  said:  "  When  con- 
tinuous lines  of  road,  passing  through  different  States,  are 
consolidated  by  legislative  authority  .  .  .  although  the  con- 
solidated company  must,  from  the  very  nature  of  a  corpora- 
tion, be  regarded  as  a  distinct  entity  in  each  State,  yet  the 
objects  of  consolidation  would  be  very  liable  to  be  defeated, 
unless  the  entire  line  should  be  placed  under  one  board  of 

>  See  Ohio,  etc.  R.  Co.  ?•.  Wheeler,       .561  (1884)  ;    Home  v.  Boston,  etc.  R. 

1  Black  (U.  S.)  297  (1801).  Co.  18  Fed.  50  (1883). 

2  Fitzgerald  v.  Missouri  Pacific  R.  ^  Graham   v.    Boston,   etc.    R.   Co., 

Co.,  45  Fed.  810(1891),  (per  Caldwell,  118    U.    S.    161    (1880),    (6    Sup.    Ct. 

J).     Also  Graham  v.  Boston,  etc.  R.  Rep.    1009).     Compare    Aspinwall    t'. 

Co.,  118  U.  S.  109  (1886),  (0  Sup.  Ct.  Ohio,  etc.  R.  Co.,  20  Ind.  492  (1863), 

Rep.   1009);    Home  v.  Railroad  Co.,  (83  Am.  Dec.  329). 

02  N.  H.  454  (1883);  Providence  Coal  «  Racine,  etc.  R.  Co.  v.  Farmers 
Co.  V.  Pro\-idence,  etc.  R.  Co.,  15  R.  I.  Loan,  etc.  Co.,  49  111.  331  (1868),  (95 
303  (1886),  (4  Atl.  Rep.  394) ;   Burger  Am.  Dec.  595). 

V.  Grand  Rapids,  etc.  R.  Co.,  22  Fed. 

193 


§    104  INTERCORPORATE   RELATIONS  [PART   I 

directors.  .  .  .  When  the  consoUdated  hnes  are  placed  under 
a  common  board,  with  a  common  name  and  seal,  such  board 
will,  naturally,  act  as  if  the  consolidated  lines  made  but  one 
company,  and  when  their  contracts  assume  that  form,  the 
courts  must,  for  the  protection  of  the  public,  and  to  enforce 
good  faith,  hold,  as  we  have  done  in  this  case,  that  the  contract 
is  to  be  construed  as  made  by  the  corporation  of  each  State 
in  which  the  subject  matter  of  the  contract  Ues:  ut  res  magis 
valeat  quam  'per eat." 

§  104.  Rights  and  Powers  of  Interstate  Consolidated  Corpo- 
ration. —  An  interstate  consolidated  corporation  may  exercise 
all  the  powers  and  privileges  conferred  upon  it  —  expressly 
or  by  reference  —  in  the  acts  authorizing  the  consolidation 
and,  as  a  general  rule,  stands  in  fiach  State  in  the  position  of 
its  constituent  corporation  in  that  State. ^ 

An  interstate  consolidated  corporation  is  a  domestic  corpo- 
ration within  a  State  and  entitled  to  exercise  the  power  of 
eminent  domain  granted  by  a  State  to  its  corporations.^  It 
has  been  held,  however,  that  an  act  authorizing  the  consolida- 
tion of  a  domestic  railroad  company  with  corporations  of  other 
States  and  granting  the  consolidated  company  "  all  the  facul- 
ties, powers,  authorities,  privileges  and  franchises  conferred 
upon  it  by  any  of  said  States,"  relates  simply  to  the  faculties 
necessary  for  the  general  objects  of  its  business  and  does  not 
affect  the  local  law  in  regard  to  the  method  of  obtaining  title 
to  the  right  of  way.' 

'  Delaware  R.  R.  Tas:  Cas.,  18  Wall.  33  Neb.  171  (1891),  (49  N.  W.  Rep. 

(U.  S.)  206  (1873).  1110). 

A     railroad     corporation     formed  The  power  of  a  railroad  company 

under  a  Pennsylvania  statute  by  the  to  begin  proceedings  for  the  condem- 

consolidation  of  a  corporation  of  that  nation  of  lands  within  the  State  is  not 

State  with  a  New  York  corporation  lost  by  its  consolidation  with  another 

has  all  the  rights  and  franchises  of  railroad  company  into  a  new  organiza- 

the  consolidating  corporations  includ-  tion,  so  as  to  constitute  a  corporation 

ing    the    right    of    the    Pennsylvania  subject  to  the  laws  of  the  same  State 

corporation  to  increase  its  capital,  up  as  the  original  company.     Toledo,  etc. 

to  a  stated  amount  per  mile,  without  R.  Co.  v.  Dimlap,  47  Mich.  456  (1882), 

payment  of  bonus.  (11  N.  W.  Rep.  271). 

Commonwealth  v.  Buffalo,  etc.  R.  ^  Pittsburgh,  etc.  R.  Co.  v.  Reich, 

Co.,  207  Pa.  160  (1903),  (56  Atl.  Rep.  101  111.  174  (1887)  :    "It  [the  act]  re- 

412).'  lates  to  the  corporation  itself,  and  is 

2  Trester  v.  Missouri  Pacific  R.  Co.,  designed  to  make  it  a  unit  in  each  and 

194 


CHAP,  x] 


INTERSTATE    CONSOLIDATIONS 


§105 


An  interstate  consolidated  corporation  acquires  in  each 
State,  among  other  rights  and  powers,  the  right  therein  of  its 
constituent  corporation  to  issue  bonds  secured  by  mortgage;* 
and  may  issue  them  to  take  up  bonds  previously  issued  by 
such  constituent.^ 

§  105.  Duties  of  Interstate  Consolidated  Corporation  — 
Taxation.  —  A  corporation  formed  by  the  consolidation  of 
corporations  of  different  States  stands  in  relation  to  each 
State  as  a  separate  domestic  corporation,  governed  by  the  laws 
of  that  State  v;ith  respect  to  its  property  and  franchises  therein 
and  subject  to  taxation  in  conformity  with  the  laws,  and  to 
the  exercise  of  the  police  power,  of  such  State.'  The  property 
of  each  constituent  corporation  remains  subject  to  taxation 
in  the  same  manner  as  before  the  consolidation.*     Each  State, 


all  of  the  States  in  which  its  line  is 
located,  but  it  does  not  assume  to 
affeot  the  local  law  in  regard  to  ac- 
<iuiring  title  to  right  of  way." 

'  Mead  v.  New  York,  etc.  R.  Co.,  4.5 
Conn.  221  (1877)  :  "That  these  laws 
gave  to  the  original  New  York,  Housa- 
tonic  and  Northern  Railroad  Com- 
pany full  power  and  authority  to 
mortgage  its  property  and  franchises 
in  this  State  as  well  as  in  the  State 
of  New  York,  to  secure  the  payment 
of  such  sum  or  sums  of  money  bor- 
rowed as  might  be  necessary  for  com- 
{)leting  and  finislung  and  operating 
its  railroad,  counsel  for  the  plaintiffs 
in  error  admit.  But  they  deny  that 
the  consolidated  company  had  any 
such  power.  It  has,  however,  been 
shown  that  the  effect  of  the  consoli- 
<iation  was  to  confer  upon,  and  give 
to,  the  consolidated  company  in  this 
State,  all  the  rights,  powers,  privi- 
leges, exemptions,  franchises  and 
property  possessed  by  the  original 
New  York,  Housatonic  ami  Northern 
Railroad  Comj)any  in  this  State  .  .  . 
and  this,  of  course,  included  the  power 
of  borrowing  money  and  mortgaging 
the  property  and  franchises  of  a  cor- 
poration in  this  State  to  secure  its 
liayment.     The  mortgage  was,  there- 


fore, a  valid  secvirity  for  the  purposes 
for  which  it  was  executed,  and  oper- 
ated as  a  lien  upon  the  franchises  as 
well  as  upon  the  real  and  personal 
property  which  became  vested  in  the 
consolidated  corporation  by  the  agree- 
ment and  act  of  consolitiation." 

See  also  Racine  v.  Farmers  I^oan, 
etc.  Co.,  49  111.  331  (1808),  (95  Am. 
Dec.  595). 

2  Mead  v.  New  York,  etc.  R.  Co., 
45  Conn.  221  (1877). 

3  Ohio,  etc.  R.  Co.  i'.  People,  123  111. 
467  (1888),  (14  N.  E.  Rep.  874). 

A  corporation  fornunl  bj'  the  con- 
solidation of  various  foreign  anil 
domestic  railroad  companies  is  a 
domestic,  not  a  foreign  corporation, 
and,  therefore,  the  provisions  of  a 
New  York  statute  compelling  transfer 
agents  of  foreign  corjwrations  to  ex- 
hibit hsts  of  their  stockholders,  have 
no  api)lication  to  it.  Sage  i\  Lake 
Shore,  etc.  R.  Co.,  70  N.  Y.  220 
(1877). 

*  Delaware  R.  R.  Tax.  Cas.,  18 
Wall.  (U.  S.)  206  (1873);  Piiiladel- 
phia,  etc.  R.  Co.  r.  Maryland,  10  How. 
(U.  S.)  377  (1850) ;  Ohio,  etc.  R.  Co. 
V.  Weber,  96  111.  443  (1880)  ;  Quincy 
R.,  etc.  Co.  V.  Adams  County,  88  III. 
615  (1878). 

19.3 


§    106  INTERCOUPORATE    IlKLATIONS  [PART    I 

participating  in  the  creation  of  an  interstate  consolidated  cor- 
poration, may  legislate  for  such  corporation  just  as  it  would 
for  its  original  companies,  if  no  consolidation  had  taken  place. 
Corporations  and  stockholders  from  other  States  having  availed 
themselves  of  the  advantages  of  an  interstate  consolidation 
cannot  repudiate  the  corresponding  obligations.^ 

An  interstate  consolidated  corporation  is  "  incorporated 
under  the  laws  of  this  State  "  within  the  meaning  of  a  statute 
taxing  corporations  so  incorporated.^ 

A  provision  in  an  act  authorizing  the  consolidation  of  cor- 
porations of  different  States  that  the  new  consolidated  company 
shall  be  entitled  to  all  the  rights,  privileges  and  immunities 
which  each  and  all  of  its  constituents  enjoyed  under  their 
respective  charters,  in  no  respect  changes  the  position  of  the 
consolidated  company  in  any  State,  with  reference  to  taxation, 
from  that  of  the  original  corporation  in  such  State. ^ 

§  106.  Citizenship  of  Interstate  Consolidated  Corporation.  — 
Upon  principles  already  indicated,  an  interstate  consolidated 
corporation  is,  for  the  purpose  of  determining  the  jurisdiction 
of  the  federal  courts  and  for  securing  to  the  judicial  tribunals 
of  each  State  due  control  over  corporations  and  corporate 
property  therein,  conclusively  presumed  to  be  a  citizen  of  each 
State  concurring  in  its  creation.  "  It  enjoys  in  each  State 
all  the  powers  and  privileges  the  corporations  there  chartered 
had  and  must  answer  in  the  courts  and  is  amenable  to  the 

The  Michigan  general  railroad  law  as    to    its    business    in    Wisconsin    as 

in    permitting    the    consolidation    of  private    persons.     The    Illinois    com- 

railroad  companies  within  the  State  panics  might  have  stayed  out.     But 

with    others    beyond   its    boundaries,  they  chose  to  come  in  and  must  now 

contemplates    leaving    the    domestic  abide  the  consequences.     Thus,  ^^'is- 

company   in   its   original   position    as  cousin  is  permitted  to  legislate  for  the 

to  stock  and  loans  and  annexing  to  consolidated  company  in   that   State 

its  capital  and  loans  (for  purposes  of  precisely  the  same  as  it  would  for  its 

taxation)   additions  wliich   are  made  own  original  companies,  if  no  consoU- 

proportional  to  the  original  amounts.  dation  had  taken  place." 
Lake  Shore,  etc.  R.  Co.  v.  People,  46  "  Ohio,  etc.  R.  Co.  v.  Weber,  96  III. 

Mich.  193  (1881),  (9  N.  W.  Rep.  249).  443  (1880).     Compare  People  v.  New 

1  Peik  V.  Chicago,  etc.   R.  Co.,  94  York,    etc.    R.    Co.,    129    N.    Y.    474 

U.  S.  177  (1876)  :   "Upon  these  terms  (1892),  (29  N.  E.  Rep.  959,  15  L.  R. 

the  consolidation  was  finally  perfected  A.  82). 

and   the   consolidated   company  now  ^  Delaware    R.    R.    Tax    Cas.,    18 

exists  under  the  two  jurisdictions,  but  Wall.   (U.  S.)   228  (1873).     See  ante, 

subject  to  the  same  legislative  control  §  72  :    "  Exemptions  from  Taxation. " 

10(3 


CHAP.  X] 


INTERSTATE   CONSOLIDATIONS 


§  106 


laws  of  each  State,  respectively,  as  a  corporation  of  that 
State."  ' 

An  interstate  consolidated  corporation,  therefore,  being 
a  citizen  of  each  of  the  States  of  its  constituent  companies, 
cannot,  when  sued  in  one  of  those  States,  claim  the  right  of 
removal  to  the  federal  courts  upon  the  ground  that  it  is  a 
citizen  of  another  State.^ 

The  true  underlying  principle  seems  to  be  that  the  consoli-. 
dated  corporation,  by  the  concurrent  legislation,  is,  itself, 
created  a  citizen  of  each  State.  In  many  decisions  of  unques- 
tioned authority,  however,  it  is  reasoned  that  each  constituent 
corporation  retains  its  identity  and  citizenship  and  that  it, 


'  Fitzgerald  v.  Missouri  Pacific  R. 
Co.,  45  Fed.  812  (1891).  In  Railroad 
Co.  V.  Harris,  12  Wall.  (U.  S.)  82 
(1870),  the  Supreme  Court  said: 
"The  jurisdictional  effect  of  the  exist- 
ence of  such  a  [consolidated]  corpo- 
ration as  regards  the  federal  courts,  is 
tiie  same  as  that  of  a  copartnership 
of  individual  citizens  residing  in  dif- 
ferent States." 

2  United  States:  Nashua,  etc.  R. 
Corp.  V.  Boston,  etc.  R.  Corp.,  136 
U.  S.  382  (1890),  (10  Sup.  Ct.  Rep. 
1004) ;  Pennsylvania  R.  Co.  v.  St. 
Louis,  etc.  r'  Co.,  118  U.  S.  290 
(1886),  (6  Sup.  Ct.  Rep.  1094),  affirm- 
ing s.  c.  sub  nom.  St.  Louis,  etc.  R. 
Co.  v.  Indianapolis,  etc.  R.  Co.,  9 
Biss.  (U.  S.)  144  (1879);  MuUer  v. 
Dows,  94  U.  S.  444  (1876);  Railway 
Co.  V.  Whitton,  13  Wall.  (U.  S.)  270 
(1871);  Fitzgerald  v.  Mi.ssouri  Pacific 
R.  Co.,  45  Fed.  812  (1891);  Paul  v. 
Baltimore,  etc.  R.  Co.,  44  Fed.  513 
(1890);  Central  Trust  Co.  v.  Roches- 
ter, etc.  R.  Co.,  29  Fed.  609  (1886). 
Compare  Conn  v.  Chicago,  etc.  R.  Co., 
48  Fed.  177  (1891). 

Notwithstanding  the  provision  of 
a  statute  that  a  foreign  railroad  com- 
pany desiring  to  do  business  or  exer- 
cise any  corporate  franchise  within 
the  State,  must  comply  with  certain 
conditions  and  tliat  upon  comphMiig 
therewith  it  shall  become  a  domestic 


corporation,  the  character  of  the 
original  corjxjration  is  not  changed 
and  it  does  not  become  a  citizen  of 
the  State  so  far  as  to  affect  the  juris- 
diction of  the  federal  courts  based 
upon  diverse  citizenship. 

Southern  R.  Co.  v.  Allison,  190 
U.  S.  326  (1902),  (23  Sup.  Ct.  Rep. 
713). 

A  corporation  simultaneously  and 
voluntarily  organized  in  several  States 
exists  in  each  State  by  virtue  of  the 
laws  thereof,  and  when  it  incurs 
liability  in  any  such  State  and  is  sued 
therein  it  cannot  remove  the  case  to 
the  federal  court  upon  the  ground 
that  it  is  also  incorporated  in  an- 
other State.  Southern  R.  Co.  v. 
Allison,  supra,  distinguished  upon  the 
ground  that  in  that  case  the  corpo- 
ration was  compelled  to  become  a  cor^ 
poration  of  another  State. 

Patch  V.  Wabash  R.  Co.,  207  U.  S. 
277  (1907),  (28  Sup.  Ct.  Rep.  80). 

The  last  two  cases,  although  not 
dealing  with  consolidated  corpora- 
tions as  such,  shouUl  be  examined  as 
being  the  latest  decisions  of  the  Su- 
preme Court  uj)on  the  general  sub- 
ject. 

Georgia:  Angler  i>.  F.ast  Tennessee, 
etc.  R.  Co.,  74  Ga.  634  (1885). 

Illinois:  Racine,  etc.  R.  Co.  v. 
Farmers  Loan,  etc.  Co.,  49  111.  331 
(1868),  (95  Am.  Dec.  595). 

197 


106 


INTERCORPORATE     RELATIONS 


[part 


in  reality,  is  the  corporation  sued.*  The  distinction  is  that 
between  an  association  of  different  citizens  and  one  person 
possessing  different  attributes  of  citizenship. 

An  interstate  consohdated  corporation,  upon  similar  prin- 
ciples, may  institute  a  suit  in  a  federal  court  as  a  citizen  of  a 
State  concurring  in  its  creation.^  Upon  principle  it  would 
seem,  however,  that  it  could  not  maintain  such  a  suit  in  a 
State  also  concurring  in  its  creation. 


Michigan:  Chicago,  etc.  R.  Co.  v. 
Auditor  General,  53  Mich.  92  (1884), 
(18  N.  W.  Rep.  586). 

New  Hampshire:  Home  v.  Boston, 
etc.  R.  Co.,  62  N.  H.  454  (1883). 

'  Nashua,  etc.  R.  Corp.  v.  Boston, 
etc.  R.  Corp.,  136  U.  S.  356  (1890), 
(10  Sup.  Ct.  Rep.  1004);  Pennsyl- 
vania R.  Co.  V.  St.  Louis,  etc.  R.  Co., 
118  U.  S.  297  (1886),  (6  Sup.  Ct.  Rep. 
1094) ;  s.  c.  sub  nom.  St.  Louis,  etc. 
R.  Co.  V.  Indianapolis,  etc.  R.  Co.,  9 
Biss.  (U.  S.)  144  (1879). 

Notwithstanding  the  consolidation 
of  two  railroad  corporations  of  dif- 
ferent States,  each  retains  its  identity 
as  a  corporation  of  the  State  in  which 
it  was  originally  created ;  and  in  a 
suit  against  the  consolidated  corpora- 
tion brought  in  one  of  such  States  it 
cannot  dbtain  a  removal  to  the  federal 
courts  on  the  ground  that  it  is  a 
citizen  of  the  other  State,  though  the 
consolidation  was  had  under  the 
laws  of  the  latter  State.  Paul  v. 
Baltimore,  etc.  R.  Co.,  44  Fed.  514 
(1890). 

Under  a  statute  authorizing  the 
consolidation  of  a  railroad  company 
of  the  State  or  with  a  foreign  railroad 
company  when  domesticated  within 
the  State  and,  upon  consolidation, 
the  issuance  of  a  charter  to  the  con- 
solidated company,  it  has  been  held 
that  where  the  consolidation  takes 
the  form  of  an  absorption  by  the 
foreign  company  of  all  the  property 
and  franchises  of  the  domestic  cor- 
poration, the  former  does  not  by 
obtaining  a  charter  of  consolidation 

198 


become  a  citizen  of  the  State  with 
respect  to  the  jurisdiction  of  the 
federal  courts  but  remains  a  citizen 
of  the  State  of  its  creation,  although 
by  obtaining  the  charter  it  becomes 
a  domestic  corporation  for  other 
purposes. 

Lee  V.  Atlantic  Coast  Line  R.  Co., 
150  Fed.  775  (1906). 

^  In  St.  Louis,  etc.  R.  Co.  v.  Indian- 
apoHs,  etc.  R.  Co.,  9  Biss.  (U.  S.)  144 
(1879),  {affirmed  sub  nom.  Pennsyl- 
vania R.  Co.  V.  St.  Louis,  etc.  R.  Co., 
118  U.  S.  297  (1880),  (6  Sup.  Ct.  Rep. 
1094),  Judge  Drummond  said:  "If 
the  defendant  corporation,  though 
consolidated  with  another  of  a  dif- 
ferent State,  can  be  sued  in  the 
federal  court  in  the  State  of  its  crea- 
tion as  a  citizen  thereof,  why  can  it 
not  sue  as  a  citizen  of  the  State  which 
created  it?  I  can  see  no  difference 
in  the  principle.  It  seems  to  me  that 
when  the  plaintiff  comes  into  the 
federal  court,  if  a  corporation  of  an- 
other State,  it  is  clothed  with  all  the 
attributes  of  citizenship  which  the 
laws  of  that  State  confer,  and  the 
shareholders  of  that  corporation  must 
be  conclusively  regarded  as  citizens  of 
the  State  which  created  the  corpora- 
tion precisely  the  same  as  if  it  were  a 
defendant."  Quoted  ^vith  approval 
by  Mr.  Justice  Field  in  Nashua,  etc. 
R.  Corp.  V.  Boston,  etc.  R.  Corp.,  136 
U.  S.  378  (1890),  (10  Sup.  Ct.  Rep. 
1004).  The  conclusion  was  reached 
in  this  case  that  one  consolidating 
corporation,  as  a  citizen  of  one  State, 
might  sue  another  consolidating  cor- 


CHAP.  X]  ■  INTERSTATE   CONSOLIDATIONS  §    107 

§  107.  Foreclosure  of  Mortgages  after  Interstate  Consolida- 
tion. Jurisdiction.  —  A  State  is  not  presumed  to  waive  it.^ 
jurisdiction.  Such  waiver  must  be  clearly  expressed.  Upon 
these  principles  it  has  been  held  that  an  action  cannot  be 
maintained  in  one  State  to  foreclose  a  mortgage,  existing  at 
the  time  of  the  consolidation,  upon  property  of  a  constituent 
corporation  situated  in  another  State,  which  has  never  granted 
permission  to  maintain  such  action.' 

A  court  of  equity  of  one  State,  however,  acting  in  personam, 
may  entertain  jurisdiction  of  a  suit  to  foreclose  a  mortgage 
executed  by  an  interstate  consolidated  corporation  covering 
as  an  entirety  property  situated  in  several  States;  and  may 
require  the  defendant  to  convey  to  a  receiver  the  property 
outside  its  jurisdiction.^  In  Mullcr  v.  Dows,^  Mr.  Justice 
Strong  said:  "A  vast  number  of  railroads  partly  in  one  State 
and  partly  in  an  adjoining  State,  forming  continuous  lines, 
have  been  constructed  by  consolidated  companies,  and  mort- 
gaged as  entireties.  It  would  be  safe  to  say  that  more  than 
one  hundred  millions  of  dollars  have  been  invested  on  the 
faith  of  such  mortgages.  In  many  cases  these  investments  are 
sufficiently  insecure  at  the  best.  But  if  the  railroad,  under 
legal  process,  can  be  sold  only  in  fragments;  if,  as  in  this  case, 
where  the  mortgage  is  upon  the  whole  line,  and  includes  the 
franchises  of  the  corporation  which  made  the  mortgage,  the 
decree  of  foreclosure  and  sale  can  reach  only  the  part  of  the 
road  which  is  within  the  State,  —  it  is  plain  that  the  property 
must  be  comparatively  worthless  at  the  sale.  A  part  of  a 
railroad  may  be  of  little  value  when  its  ownership  is  severed 
from  the  ownership  of  another  part.  And  the  franchise  of 
the  company  is  not  capable  of  division.  In  view  of  this,  before 
we  can  set  aside  the  decree  which  was  made  it  ought  to  be 
made  clearly  to  appear  beyond  the  power  of  the  court.     With- 

poration    in    a    feileral    court,    as    a  Co.  v.  Rothschild,  4  Cent.   Rep.   107 

citizen  of  another  State.     Manifestly,  (188G). 

however,    an    interstate    consolidated  ^  Mullcr    v.    Dows,    94    U.    S.    449 

corporation  —  as   an   entity  —  cannot  (187G)  ;    Mead  v.  New  York,  etc.   R. 

sue   itself,   although   it   possesses  dif-  Co.,  45  Conn.  199  (1877). 

fcrcnt  attributes  in  different  States.  ^  Mullcr    v.    Dows,    94    U.    S.    449 

'  Eaton,   etc.   R.   Co.   v.   Hunt,   20  (1876). 
Ind.  4G4  (1803);    Pittsburgh,  etc.  R. 

199 


§    107  INTERCORPORATE   RELATIONS  [PART   I 

out  reference  to  the  English  chancery  decisions,  where  this 
objection  to  the  decree  would  be  quite  untenable,  we  think 
the  power  of  courts  of  chancery  in  this  country  is  sufficient 
to  authorize  such  a  decree  as  was  here  made.  It  is  here  un- 
doubtedly a  recognized  doctrine  that  a  court  of  equity  sitting 
in  a  State  and  having  jurisdiction  of  the  person,  may  decree 
a  conveyance  by  him  of  land  in  another  State,  and  may  enforce 
the  decree  by  process  against  the  defendant." 


200 


CHAP.  Xl]  SALES  OF  CORPORATE  PROPERTY  §  108 


PART   II 
CORPORATE  SALES 


Article    I 

SALES  OF  CORPORATE  PROPERTY  AND  FRANCHISES 


CHAPTER    XI 


SALES  OF  CORPORATE  PROPERTY 

I.     Sales  of  Property  of  Private  Corporations 

§  108.  Power  to  purchase  and  sell  generallj'. 

§  109.  Sale  of  Entire  Corporate  Property  by  Unanimous  Consent. 

§  110.  Sale  of  Entire  Property  of  Prosperous  Corporation  by  Majority  Vote. 

§  111.  Sale  of  Entire  Property  of  Losing  Corporation  by  Majority  Vote. 

§  112.  Sale  of  Entire  Corporate  Property  by  Directors. 

§  113.  Ratification  by  Stockholders  of  Sale  by  Directors. 

§  114.  Remedies  of  Dissenting  Stockholders  in  Case  of  Invalid  or  Unfair 

Sales.     Voidable  Sales. 

§  115.  Procedure  in  Stockholders'  Actions. 

§  116.  Defences  to  Stockholders'  Actions.     Estoppel.     Laches. 

§  117.  Effect  of  Sale  of  Entire  Corporate  Property. 

II.    Exchange  of  Property  of  One  Corporation  for  Stock  of  Another 

§  118.    Transfer  of  Entire  Corporate  Property  without  Unanimous  Consent 

requires  Monetary  Consideration. 
§  119.    Exchange  of  Property  for  Stock  ultra  vires. 
§  120.    Exchange  of  Property  for  Stock  Infringement  of  Rights  of  Dissenting 

Stockliolders. 
§  121.    Apprai.s.al  of  Stock  of  Dissenting  Stockholders. 
§  122.    Stock  received  upon  Exchange  belongs  primarily  to  Corporation. 
§  122  a.    Effect  of  Execution  of  vltra  vires  Contract  for  Exchange  of   Projv 

erty  for  Stock. 
§  122  b.    Remedies  of  Dissenting  Stockholders  in  Case  of  Exchange  of  Prop- 
erty for  Stock. 

201 


§    108  INTERCORPORATE    RELATIONS  [PART  II 

III.     Rights  and  Remedies  of  Creditors 

§  123.  Liability  of  Purchasing  Corporation  for  Debts  of  Vendor  Company. 

§  124.  Fraudulent  Sales. 

§  125.  Remedies  of  Creditors. 

§  126.  Priority  of  Purchaser's  Mortgage  over  Claims  of  Vendor's  Creditors. 

IV.     Sales  of  Property  of  Quasi-public  Corporations 

§  127.    Indispensable   Property  cannot   be   alienated   or  taken  on  Execution 

without  Statutory  Authority. 
§  128.    Test  of  Indispensability. 
§  129.    Sales  of  Surplus  Property. 

§  129a.     Ultra  vires  Sales  of  Property  of  Private  and  Qziasi-puhlic  Corpora- 
tions. 

I.   Sales  of  Property  of  Private  Corporations 

§  108.  Power  to  purchase  and  sell  generally.  It  is  an 
elementar}'  principle  of  corporation  law  that  a  corporation, 
subject  to  the  limitations  of  its  charter  and  constitutional  and 
statutory  prohibitions,  has  inherent  power  to  acquire  and  hold 
any  property,  real  or  personal,  reasonably  useful  or  convenient 
in  carrying  on  the  business  for  which  it  was  organized.^ 

The  right  to  acquire  property  carries  with  it  the  corre- 
sponding power  of  disposition,  subject  likewise  to  any  restric- 
tions in  the  charter  of  the  corporation  and  considerations  of 

'  Lathrop  v.  Commercial   Bank,   8  conveyance  is  a  question  which  can 

Dana  (Ky.)  114  (1839),  (33  Am.  Dec.  only  be  rai.sed  by  the  State."   Springer 

481)  :    "No  doctrine  of  the  common  v.  Chicago  Real  Estate,  etc.  Co.,   102 

law  is  more  clearly  and   undeniably  111.  App.  294  (1902). 
established  than  that  which  concedes  Massachusetts:     Old  Colony  R.  Co. 

to  corporations  an  inherent  or  result-  v.  Evans,  6  Gray,  38  (1856). 
ing  right  to  acquire  and  hold  title  to  Michigan:    Thompson    v.   Waters, 

land  by  contract,  except  so  far  only  25   Mich.   227   (1872),   (12  Am.   Rep. 

as    they    may    be    restricted    by    the  243). 

objects  of  their  creation,  or  the  limita-  New  Jersey:     Freeman  r.  Sea  View 

tions  of  their  charters."  Hotel  Co.,  57  N.  J.  Eq.  68  (1898). 

See  also  :  New   York:     Nicoll  v.   New  York, 

United     States:     Blanchard     Gun  etc.    R.    Co.,    12    N.    Y.    121    (1854); 

Stock,    etc.    Factory    v.    Warner,     1  Moss  v.  Averell,  10  N.  Y.  449  (1853)  ; 

Blatch.    277    (1848),    (Fed.    Cas.    No.  Spear    v.    Crawford,     14    Wend.     23 

1521).  (1835),  (28  Am.  Dec.  513). 

Illinois:  "If  a  corporation  has  North  Carolina:  Mallett  v.  Simp- 
power  to  hold  real  estate  for  any  son,  94  N.  C.  37  (1886),  (55  Am.  Rep. 
purpose,  a  deed  to  it  passes  the  title  594). 

of   the   grantor,   and   whether  it   has  Vermont:     Page  v.   Heineberg,    40 

exceeded  its  powers  in  accepting  the  Vt.  81  (1868),  (94  Am.  Dec.  378). 

202 


CHAP.  Xl] 


SALES  OF  CORPORATE  PROPERTY 


§  109 


public  policy.*  As  said  by  Mr.  Justice  Campbell,  in  White 
Water,  etc.  Co.\.  Valette:^  "  It  is  well  settled  that  a  corpora- 
tion, without  special  authority,  may  dispose  of  lands,  goods 
and  chattels,  or  any  interest  in  the  same."  A  private  corpora- 
tion, therefore,  by  proper  corporate  action  —  generally  by 
its  directors  and  always  by  vote  of  a  majority  of  its  stock- 
holders —  may  sell  any  portion  of  its  property  not  sufficient 
to  constitute  an  abandonment  of  its  business.^ 

§  109.  Sale  of  Entire  Corporate  Property  by  Unanimous 
Consent.  —  A  corporation  which,  in  consideration  of  the  grant 
of  franchises,  has  assumed  the  performance  of  public  duties 
— a  quasi-public  corporation — cannot  dispose  of  all  its  prop- 


'  United  States :  Jones  v.  Guaranty, 
etc.  Co.,  101  U.  S.  625  (1879):  "At 
the  common  law,  every  corporation 
had,  as  incident  to  its  existence,  the 
power  to  acquire,,  hold,  and  convey 
real  estate,  except  so  far  as  it  was 
restrained  by  its  charter  or  by  act  of 
Parliament.  This  comprehensive  ca- 
pacity included  also  persotial  effects 
of  every  kind."  Also  White  Water, 
etc,  Co.  V.  Valette,  21  How.  424 
(1858^. 

A  corporation,  while  solvent  and 
a  going  concern,  has  the  same  do- 
minion over  its  property  as  an 
indi\adual  and  may  dispose  of  it  as 
it  deems  best,  subject  to  the  pro- 
visions of  its  charter  and  those  other 
restraints  upon  conveyances  .which 
apply  alike  to  corporations  and  indi- 
viduals. New  Hampshire  Sav.  Bank 
V.  Richey,  121  Fed.  9.5G  (1903). 

Alabama:  Hall  v.  Tanner,  etc.  En- 
gine Co.,  91  Ala.  363  (1890),  (8  So. 
Rep.  .348). 

California:  Miner's  Ditch  Co.  v. 
Zellcrbach,  37  Cal.  543  (1869),  (99 
-\m.  Dec.  300) ;  People  v.  California 
College,  38  Cal.  166  (1869). 

Georgia:  Railroad  companies  under 
the  cotle  of  this  State  may  purchase 
and  operate  steamboats  in  connection 
with  their  lines  of  road. 

Graham  ?'.  Macon,  etc.  R.  Co.,  120 
Ga.  757  (1904),  (49  S.  E.  Rep.  75). 


Iowa:  Buell  v.  Buckingham,  16 
Iowa,  284  (1864),  (85  Am.  Dec.  516). 

Maryland:  Binney's  Case,  2  Bland. 
142  (1840). 

Michigan:  Joy  v.  Jack.son,  etc. 
Plank  Road  Co.,  11  Mich.  165  (1863). 

New  Hampshire:  Pierce  v.  Emery, 
32  N.  H.  484  (1856). 

New  York:  Barry  v.  Merchants 
Exch.  Co.,  1  Sandf.  Ch.  280  (1844). 

North  Carolina:  Benbow  v.  Cook, 
115  N.  C.  324  (1894),  (20  S.  E.  Rep. 
453,  44  Am.  St.  Rep.  454). 

Ohio:  Reynolds  v.  Stark  Count j' 
Comm'rs,  5  Ohio,  204  (1831). 

Pennsylvania:  Ardesco  Oil  Co.  v. 
North  American  Oil,  etc.  Co.,  66  Pa. 
St.  382  (1870);  Dana  v.  Bank  of 
United  States,  5  W.  &  G.  243 
(1843). 

Utah:  Hearst  v.  Putnam  Min.  Co., 
28  Utah,  184  (1904),  (77  Pac.  Rep. 
753). 

England:  Mayor,  etc.  of  Colchester 
V.  Lawton,  1  V.  &  B.  244  (1813). 

2  White  Water,  etc.  Co.  v.  Valette, 
21  How.  (U.  S.)  424  (1858). 

^  In  the  absence  of  statutorj-  pro- 
hibition, a  corporation  may  purchase, 
hoUl  and  convej'  real  estate  as  full}' 
in  a  foreign  State  as  in  the  State 
where  it  is  chartered. 

Blodgett  V.  Lanj'on  Zinc  Co.,  120 
Fed.  893  (1903). 

203 


§109 


INTERCORPORATE    RELATIONS 


[part  II 


erty  and  disable  itself  from  fulfilling  its  obligations  without 
the  consent  of  the  State— the  other  party  to  the  contract.  It 
is  immaterial  that  all  the  stockholders  approve  of  the  sale. 

A  private  corporation  on  the  other  hand,  with  the  unani- 
mous consent  of  its  stockholders,  may  sell  and  dispose  of  its 
entire  property  without  other  restriction  or  qualification  than 
that  the  purpose  must  be  lawful  and  free  from  fraud  —  actual 
or  constructive.^  It  may  make  such  terms  as  it  may  deem 
expedient,  and,  if  intra  vires,  may  accept  stock  in  other  cor- 
porations in  payment  for  property  sold.^ 

But  a  corporation  by  the  sale  of  all  its  property,  even  with 
the  consent  of  all  its  stockholders,  and  by  the  winding  up  of  its 


'  Holmes,  etc.  Mfg.  Co.  v.  Holmes, 
etc.  Metal  Co.,  127  N.  Y.  252  (1891), 
(27  N.  E.  Rep.  841,  24  Am.  St.  Rep. 
448),  (per  Haight,  J.)  :  "The  plaintiff 
was  a  private  manufacturing  corpora- 
tion. It  exercises  no  power  of  a  pub- 
lic nature  and  has  attempted  no  com- 
bination by  which  the  public  may 
in  any  manner  be  prejudiced.  There 
are  consequently  no  questions  of  pub- 
lic policy  to  be  considered.  .  .  .  The 
plaintiff  had  the  right,  with  the  con- 
sent of  its  stockholders,  to  sell  its 
plant  and  retire  from  business ;  and 
it  appears  from  the  e\ndence  in  this 
case  that  the  consent  of  all  the  stock- 
holders was  given  to  the  sale  that 
was  made." 

Leathers  v.  Janney,  41  La.  Ann. 
1123  (1889),  (6  So.  Rep.  884,  6  L.  R. 
A.  661)  :  [It  is  maintained]  "that  the 
sale  was  the  whole  property  of  the 
selling  corporation  and  was,  there- 
fore, ultra  vires  and  void.  The  in- 
ference does  not  follow  from  the  predi- 
cate. There  is  no  law  prohibiting  a 
corporation  from  selling  all  or  any  of 
its  property  provided  its  charter  con- 
tains no  restraint  thereof  and  it  acts 
under  proper  authority." 

A  private  corporation  —  a  mer- 
cantile company  —  owing  no  public 
duties  has  the  same  dominion  as  an 
individual  over  its  property,  and  may, 
with  the  consent  of  all  its  stockholders, 

204 


discontinue  business  and  dispose  of  its 
entire  assets  with  a  view  of  winding 
up  its  affairs  and  paying  its  debts. 
And  it  may  for  such  purpose  accept 
real  estate  in  part  payment  for  its 
stock  of  merchandise. 

Morisette  v.  Howard,  62  Kan.  463 
(1901),  (63  Pac.  Rep.  756). 

See  also  Jordan  v.  Collins,  107  Ala. 
572  (1894),  (18  So.  Rep.  137);  State 
V.  Western  Irrigating  Canal  Co.,  40 
Kan.  96  (1888),  (19  Pac.  Rep.  349, 
10  Am.  St.  Rep.  166). 

When  all  the  stockholders  have 
authorized  a  conveyance  of  the  en- 
tire assets  of  a  corporation  any  modi- 
fication of  such  conveyance  requires 
similar  action. 

Pinchback  v.  Mining  Co.,  137  N.  C. 
171  (1904),  (49  S.  E.  Rep.  106). 

2  Kohl  V.  Lilienthal,  81  Cal.  378 
(1889),  (20  Pac.  Rep.  401,  6  L.  R. 
A.  520).     See  also  post,  §§  118-122. 

A  corporation  has  the  same  right 
as  an  indi\Tdual  to  sell  its  propertj' 
upon  credit.  Consequently  when  a 
corporation  sells  all  its  property  to 
another  corporation  and  receives  in 
pajonent  therefor  mortgage  bonds 
upon  the  property  conveyed,  the  sale 
is  not  without  consideration  and,  if 
free  from  fraud,  is  valid. 

Fort  Payne  Bank  v.  Alabama 
Sanitarium,  103  Ala.  358  (1893),  (15 
So.  Rep.  618). 


CHAP.  Xl] 


SALES  OF  COKPORATE  PROPERTY 


§  110 


affairs  cannot  clothe  another  corporation  with  the  right  to 
maintain  its  corporate  life  or  exercise  its  corporate  powers.^ 

§  110.  Sale  of  Entire  Property  of  Prosperous  Corporation  by 
Majority  Vote.  — The  implied  contract  — the  contract  of  asso- 
ciation — ■  between  stockholders  in  forming  a  corporation  is 
that  a  majority  shall  bind  the  whole  body  as  to  all  transactions 
within  the  scope  of  the  corporate  powers.  The  authority 
carries  with  it  a  corresponding  obligation.  The  powers  of  a 
corporation  must  be  exercised  in  furtherance  of  the  objects  for 
which  it  was  created  and  with  due  regard  to  the  rights  of 
minority  stockholders.^ 

A  majority  of  the  stockholders  of  a  prosperous  corporation 
have  no  authority  to  sell  its  entire  property  in  order  to  engage 
in  a  new  enterprise;  for  purposes  of  speculation,  or  when  no 
reasons  of  expediency  require  the  sale.^     But   when,   in   the 


'  Anglo- American  Land,  etc.  Co.  v. 
Lombard,   132  Fed.  721  (1904). 

*  Ervin  v.  Oregon  R.,  etc.  Co.,  27 
Fed.  631  (1886),  (Wallace,  J.):  "Tt 
cannot  be  denied  that  minority  stock- 
iiolder.s  are  bound  hand  and  foot  to 
the  majority  in  all  matters  of  legiti- 
mate admini.stration  of  the  corporate 
affairs ;  and  the  courts  are  powerless 
to  redress  many  forms  of  oppres.sioii 
practised  upon  the  minority  under 
the  guise  of  legal  sanction  which 
fall  short  of  actual  fraud.  This  is 
a  consequence  of  the  implied  contract 
of  association,  by  which  it  is  agreed 
in  advance  that  a  majority  shall  bind 
the  whole  body  as  to  all  matters 
within  the  scope  of  the  corporate 
powers.  But  it  is  also  of  the  essence 
of  the  contract  that  the  corporate 
powers  shall  only  be  exercised  to 
accomplish  the  objects  for  which  they 
were  called  into  existence,  and  that 
the  majority  shall  not  control  those 
powers  to  prevent  or  destroy  the 
original  purposes  of  the  corjwrators. " 

Taylor  v.  Chichester,  etc.  R.  Co., 
L.  R.  2  E.xch.  379  (1867),  (Black- 
burn, J.)  :  "As  the  shareholders  are, 
in  substance,  partners  in  a  trading 
corporation,     the     management     of 


which  is  intrusted  to  the  body  cor- 
porate, a  trust  is,  by  implication, 
created  in  favor  of  the  shareholders 
that  the  corporation  will  manage 
the  corporate  affairs,  and  appl.v  the 
corporate  funds,  for  the  purpose 
of  carrying  out  the  original  specula- 
tion." 

^  Forrester  v.  Bo.ston,  etc.  Min.  Co., 
21  Mont.  544,  5.53  (1898),  (55  Pac. 
Rep.  229,  3.53):  "At  common  law, 
neither  the  directors  nor  a  majority 
of  the  stockholders  have  power  to 
sell  or  otherwise  transfer  all  the 
property  of  a  going,  prosperous  cor- 
poration, able  to  achieve  the  objects 
of  its  creation,  as  against  the  dissent 
of  a  single  stockholder.  This  doc- 
trine is  firmly  established  by  the 
authority  of  adjudged  cases,  and 
rests  upon  the  soundest  principles." 

Price  V.  Holcomb,  89  Iowa,  135 
(1893),  (.56  N.  "\V.  Rep.  407):  "It  is 
unquestionably  true  that  a  private 
corporation  holds  its  property  as  a 
tru.st  fund  for  the  stockholders  and 
that,  when  a  majority  of  the  stock- 
hoklcrs  act  together,  they  are  in  a 
sense  the  corporation  and  must  act 
with  tlue  regard  to  the  right  of  the 
minority.     If     the     majority     decide 

205 


§110 


INTERCORPORATE  RELATIONS 


[part  H 


opinion  of  a  majority,  the  interests  of  tiie  stockholders  as  a 
whole  require  that  the  affairs  of  a  corporation  should  be  wound 
up,  a  majority  may  authorize  the  sale  of  the  entire  assets  of  a 
corporation,  for  a  pecuniary  consideration,  as  a  step  towards 
liquidation} 


arbitrarily,  and  without  just  cause, 
to  sell  the  property  of  the  corpora- 
tion to  the  prejudice  of  the  minority, 
and  thereby  compel  the  winding  up 
of  the  business  of  the  corporation,  it 
is  a  fraud  upon  the  minority  and 
courts  of  equity  will  interfere.  If, 
however,  just  cause  exists  for  selling 
the  property,  as  when  the  corporation 
is  insolvent,  and  the  sale  is  necessary 
to  pay  debts,  or  when,  from  any  cause, 
the  business  is  a  failure  and  an  un- 
profitable one,  and  the  best  interests 
of  all  require  it,  the  majority  have 
clearly  power  to  order  the  sale,  and 
in  such  case  their  acts  are  not  ultra 
vires."  The  conclusion  reached  in 
this  case  that  the  courts  may  deter- 
mine whether  "just  cause"  exists 
for  winding  up  the  affairs  of  a  cor- 
poration is  opposed  to  sound  prin- 
ciple. They  may  properly  determine 
whether  fraud  or  oppression  towards 
the  minority  exists,  but  the  inquiry 
cannot  go  further  without  encroach- 
ing upon  the  rights  of  the  ma- 
jority. 

The  decision  in  Price  v.  Holcomb, 
supra,  should  be  compared  with  that 
of  the  same  court  in  the  later  case 
of  Traer  v.  Prospecting  Co.  124  Iowa 
107  (1904),  (99  N.  W.  Rep.  290). 

The  rule  that  a  majority  cannot 
sell  the  entire  corporate  assets  has 
been  stated  very  broadly  by  courts  of 
high  authority.  Thus  in  Bj^me  v. 
Schuyler  Electric  Mfg.  Co.,  65  Conn. 
351  (1895),  (31  Atl.  Rep.  833,  28 
L.  R.  A.  304),  the  Supreme  Court 
of  Errors  of  Connecticut  said:  "It 
results  that  neither  the  directors  nor 
a  majority  of  the  stockholders  can 
sell  the  corporate  property  against 
the  dissent  of  any  stockholder.     This 

206 


is  entirely  clear  in  case  of  a  solvent 
corporation."  And  in  People  v. 
Ballard,  134  N.  Y.  294  (1892),  (32 
N.  E.  Rep.  84,  17  L.  R.  A.  737), 
the  New  York  Court  of  Appeals 
said:  "While  a  corporation  may  sell 
its  property  to  pay  its  debts  or  to 
carry  on  its  business,  it  cannot  sell 
its  property  in  order  to  deprive  itself 
of  existence." 

An  examination  of  these  cases, 
however,  clearly  indicates  that  the 
courts  merely  intended  to  state  the 
general  rule  that  a  majority  cannot 
sell  the  entire  corporate  assets  of  a 
solvent  corporation  and  did  not  in- 
tend to  negative  the  exception  stated 
in  the  text  that,  for  the  boiia  fide 
purpose  of  winding  up  the  affairs  of 
the  corporation,  such  power  exists. 
In  the  New  York  cases  the  sales  were 
to  foreign  corporations  for  the  pur- 
pose of  escaping  State  control  over 
domestic  companies. 

'  United  States:  Hayden  v.  Official 
Red  Book  and  Directory  Co.,  42  Fed. 
876  (1890):  "The  right  of  the  ma- 
jority stockholders  of  a  corporation 
established  for  manufacturing  or 
trading  purposes  to  wind  up  its 
affairs,  and  dispose  of  its  assets,  even 
against  the  objections  of  the  minority 
stockholders,  whenever  it  appears 
that  the  business  can  be  no  longer 
advantageously  carried  on,  is  well 
recognized." 

Alabama:  Eljrton  Land  Co.  v. 
Dowdell,  113  Ala,.  186  (1896),  (20 
So.  Rep.  981,  59  Am.  St.  Rep.  105) 
semble. 

Louisiana:  Pringle  v.  Eltringham 
Construction  Co.,  49  La.  Ann.  303 
(1897),  (21  So.  Rep.  515). 

Maine:      Inhabitants    of    AValdo- 


CHAP.  Xl] 


SALES  OF  CORPORATE  PROPERTY 


§  110 


In  Pringle  v.  Eltringham  Construction  Co}  Judge  McEnery 
said:  "  It  is  a  fundamental  principle  that,  in  a  corporation 
organized  for  the  exclusive  benefit  of  the  corporators  or  share- 
holders, the  majority  of  its  members  may,  in  their  discretion, 
wind  up  its  business  whenever  they  deem  this  step  to  be  in 
the  interests  of  the  whole  association.  The  majority  may, 
without  the  consent  of  the  minority,  sell  the  whole  of  the  com- 
pany's property,  close  up  its  business  and  distribute  its  assets, 
provided  this  is  done  in  good  faith  and  not  for  the  purpose  of 
speculation  and  the  intention  of  starting  the  company's  busi- 
ness anew  at  a  subsequent  time." 

The  power  to  sell  the  entire  corporate  assets  follows,  there- 
fore, as  an  incident  to  the  power  to  wind  up  the  affairs  of  the 


borough  V.  Knox,  etc.  R.  Co.,  84  Me. 
469  (1892),  (24  Atl.  Rep.  942). 

Massachusetts:  In  Treadwell  v. 
SaUsbury  Mfg.  Co.,  7  Gray,  404  (1856), 
(66  Ani.  Dec.  490),  .Judge  liigelow 
said:  "At  common  law,  the  right  of 
corporations,  acting  by  a  majority 
of  their  stockholders,  to  sell  their 
property  is  absolute,  and  is  not 
limited  as  to  objects,  circumstances 
or  quantity.  .  .  .  To  this  general 
rule  there  are  many  exceptions, 
arising  from  the  nature  of  particular 
corporations,  the  purposes  for  which 
they  were  created,  and  the  duties 
and  liabilities  imposed  on  them  by 
their  charters.  Corporations  estab- 
lished for  objects  (/i/n.st-public,  such 
as  railway,  canal  and  turnpike  cor- 
porations, to  which  the  riglit  of 
eminent  domain  and  other  large 
privileges  are  granted  in  order  to 
enable  them  to  accommodate  the 
public,  may  fall  within  the  exception ; 
as  also  charitable  and  religious  bodies, 
in  the  administration  of  whose  affairs 
the  community  or  some  portion  of 
it  has  an  interest  to  see  that  their 
corporate  duties  are  properly  dis- 
charged. Such  corporations  may, 
perhaps,  be  restrained  from  alienat- 
ing their  property,  and  compelled 
to  approi^riate  it  to  specific  uses,  by 


mandamus  or  other  proper  process. 
But  it  is  not  so  with  corporations  of  a 
private  character,  established  solely 
for  trading  and  manufacturing  pur- 
poses. Neither  the  public  nor  the 
legislature  have  any  direct  interest 
in  their  business  or  its  management. 
The.se  were  committed  .solely  to  the 
stockholders,  who  have  a  pecuniary 
stake  in  the  proper  conduct  of  their 
affairs.  By  accepting  a  charter,  they 
do  not  undertake  to  carry  on  the 
business  for  which  they  are  incor- 
porated, indefinitely,  and  without 
any  regard  to  the  condition  of  their 
corporate  property.  Public  policy 
does  not  require  them  to  go  on  at  a 
loss.  On  the  contrary,  it  would  seem 
very  clearly  for  the  public  welfare, 
as  well  as  for  the  interest  of  the  stock- 
holders, that  they  should  eea.se  to 
transact  business  as  soon  as,  in  the 
exercise  of  a  sound  judgment,  it  is 
found  that  it  cannot  be  prudently 
continued." 

Rhode  Island:  Peabody  v.  West- 
erly Water  A\'orks,  20  R.  I.  176 
(1897),  (.37  Atl.  Rep.  807).      . 

'  Pringle  r.  Eltringham  Construc- 
tion Co.,  49  La.  Ann.  303  (1897). 
(21  So.  Kep.  515),  citing  1  Morawetz 
on  Priv.  Corp.  §  413. 

207 


110 


INTERCORPORATE   RELATIONS 


[part  T1 


corporation.  Corporate  action  towards  dissolution  is  essentially 
•within  the  powers  of  a  corporation  and,  consequently,  may 
be  exercised  by  a  majority  of  the  stockholders.* 

It  has  been  urged  that  the  power  of  a  majority  to  wind  up 
a  corporation,  and  to  dispose  of  its  assets  for  such  purpose, 
exists  only  in  the  case  of  failing  concerns.^  The  distinction 
is  not  well  drawn.  Where  no  time  is  fixed  for  its  duration 
in  the  charter  of  a  corporation  or  in  some  general  or  special 
law,^  there  is  no  contract  between  the  stockholders  that  it 
shall  go  on  forever  or  until  it  becomes  embarrassed.  The 
very  best  time  to  wind  up  the  affairs  of  a  corporation  may 
be  —  in  view  of  future  uncertainties  —  when  it  is  most  pros- 
perous and  has  accumulated  a  large  surplus.  The  determina- 
tion of  the  question  when  this  action  shall  be  taken,  must 
rest  in  the  discretion  of  the  majority.  If  unanimous  consent 
were  necessary  a  single  stockholder  might  prevent  action  and 
thus,  negatively,  control  the  corporation. 

The  courts  cannot  pass  upon  the  question  whether  a  corpo- 
ration should  be  wound  up,  further  than  to  determine  whether 


'  United  States :  Hayden  v.  Official 
Red  Book,  etc.  Co.,  42  Fed.  876 
(1890).  Compare  Ervin  v.  Oregon 
R.,  etc.  Co.,  27  Fed.  625  (1886). 

Alabama:  Merchants,  etc.  Line  v. 
Waganer,  71  Ala.  581  (1882). 

Louisiana:  Pringle  v.  Eltringham, 
etc.  Co.,  49  La.  Ann.  301  (1897),  (21 
So.  Rep.  515) ;    Trisconi  v.  Winship, 

43  La.  Ann.  45  (1891),  (9  So.  Rep. 
29,  26  Am.  St.  Rep.  175). 

Massachusetts :  Treadwell  v.  Salis- 
bury Mfg.  Co.,  7  Gray,  393  (1856), 
(66    Am.    Dec.    490). 

New  Jersey:  Black  v.  Delaware, 
etc.  Canal  Co.,  22  N.  J.  Eq.  415 
(1871). 

Pennsylvania:    McCurdy  v.  Myers, 

44  Pa.  St.  535  (1863);  Lauman  v. 
Lebanon  Valley  R.  Co.,  30  Pa.  St. 
42  (1858),   (72  Am.  Dec.  685). 

Rhode  Island:  Wilson  v.  Central 
Bridge  Co.,  9  R.  I.  590  (1870).  Com- 
pare, however,  Boston,  etc.  R.  Co.  v. 
New  York,  etc.  R.  Co.,  13  R.  I.  260 
(1881). 

208 


2  Kean  v.  Johnson,  9  N.  J.  Eq.  401 
(1853),  dictum  of  Parker,  Master. 
See  also  Price  v.  Holcomb,  89  Iowa, 
135  (1893),  (56  N.  W.  Rep.  407), 
2  Cook  on  Corp.  §  670. 

^  When  the  term  of  existence  of  a 
corporation  is  of  fixed  duration,  the 
imphed  contract  of  the  stockholders 
refers  to  such  period,  and  the  dis- 
solution of  a  prosperous  corporation 
before  its  expiration  would  require 
unanimous  action.  Barton  v.  Enter- 
prise, etc.  Ass'n,  114  Ind.  226  (1887), 
(16  N.  E.  Rep.  486,  5  Am.  St.  Rep. 
608).  Compare  Black  v.  Delaware, 
etc.  Canal  Co.,  22  N.  J.  Eq.  130  (1871)  ; 
Zabriskie  v.  Hackensack,  etc.  R.  Co., 
18  N.  J.  Eq.  178  (1867),  (90  Am. 
Dec.  617) ;  Kean  v.  Johnson,  9  N.  J. 
Eq.,  401  (1853). 

Where  a  corporation,  even  with 
such  a  charter,  is  in  a  failing  condi- 
tion, however,  the  majority  are  jus- 
tified in  acting  ex  necessitate. 


CHAP.  Xl] 


SALES   OP   CORPORATE    PROPERTY 


§  110 


the  majority  act  in  good  faith  and  without  oppression  towards 
the  minority.  Questions  of  expediency  in  corporate  man- 
agement cannot  properly  be  brought  before  the  courts  for 
review.* 

Where  the  charter  of  a  corporation,  or  the  statutes  under 
which  it  is  organized,  prescribe  the  vote  of  a  majority  of  the 
stockholders  as  the  proper  corporate  action  for  the  sale  of  its 
property  and  discontinuance  of  its  business,  the  majority  have 
the  absolute  right  to  execute  the  power  conferred.^  But  in 
such  a  case  the  power  is  express,  rather  than  incidental, 
and  must  be  strictly  followed.  Authority  to  make  a  sale  of 
corporate  assets  will  not  justify  an  exchange  thereof  for  stock 
in  another  corporation.* 


•  Compare,  however,  Price  v.  Hol- 
comb,  89  Iowa,  135  (1893),  (56  N.  W. 
Rep.  407). 

2  Metcalf  V.  American  School  Fur- 
niture Co.,  122  Fed.  119  (1903)  :  "The 
trend  of  the  decisions  is  to  the  effect 
that  where  the  charter  and  by-laws 
of  a  corporation,  and  the  statute 
under  which  it  was  created,  vest  in 
the  stockholders  a  right  of  sale  of  the 
corporate  properties  and  discontin- 
uance of  corporate  existence,  such 
power  may  be  exercised  by  them 
pursuant  to  the  laws  of  the  State  to 
which  the  corporation  owes  life.  .  .  . 
The  general  rule  under  the  common 
law  undoubtedly  prohibited  a  pro.s- 
perous  corporation  from  dissolving 
unless  all  the  stockholders  assented. 
A  dissenting  stockholder  was  enabled 
to  prevent  such  a  sale.  .  .  .  Where, 
however,  the  statute  of  the  State  under 
which  the  corporation  was  organized 
prescribes  the  manner  in  which  a 
corporation  may  be  dissolved,  a 
minority  stockholder  must  abide  by 
the  statutorj'  proxnsion  and  the  cor- 
porate by-laws.  Theoreticallj'  the 
law  appears  to  be  founded  upon  the 
contract  between  the  corporation 
and  its  stockholders.  A  shareholder 
presumptively  knows  the  power  and 
authority    conferred    upon    directors 


and  majority  stockholders.  When 
such  majority  undertake  to  exercise 
their  legal  powers,  a  minority  stock- 
holder cannot  be  heard  to  complain, 
in  the  absence  of  fraud  or  attempts 
to  exceed  their  legal  authority." 

See  also  Werle  v.  Northwestern 
Flint,  etc.  Co.  125  Wis.  534  (1905), 
(104  N.  W.  743);  Pitcher  v.  Lone 
Pine,  etc.  Min.  Co.,  39  Wash.  608 
(1905),  (81  Pac.  Rep.  1047). 

^  In  Forrester  v.  Boston,  etc. 
Mining  Co.,  21  Mont.  544  (1898), 
(55  Pac.  Rep.  229,  353)  it  was  held 
that  a  statute  authorizing  the  holders 
of  a  majority  of  the  shares  of  a  mining 
corporation  to  abandon  its  business, 
sell  its  assets  and,  by  amending  its 
charter,  embark  in  a  new  enterprise 
did  not  authorize  the  exchange  of 
the  property  of  a  corporation  for 
stock  in  a  foreign  corporation. 

In  Traer  v.  Lucas  Prospecting  Co., 
124  Iowa  107  (1904),  (99.  N.  W.  Rep. 
290),  however,  it  was  held  that  where 
the  charter  of  a  corporation  author- 
ized it  to  sell  all  its  property,  and 
al.so  to  deal  in  the  stock  of  other 
corporations,  it  had  the  right  to  sell 
all  its  property  for  stock  in  another 
corporation.  The  Court  said:  "The 
controlling  purpose  of  the  corpora- 
tion,  as  thus  expressed,   was   not    to 

209 


§  111 


INTERCORPORATE   RELATIONS 


[part  n 


A  sale  of  the  property  of  a  prosperous  corporation  pursuant 
to  the  unauthorized  action  of  a  majority  of  the  stockholders 
is  voidable  and  not  void.  As  will  be  shown,  it  may  be  enjoined 
or  set  aside  at  the  suit  of  a  minority  stockholder  but,  in  the 
absence  of  such  action,  it  will  stand.* 

§  111.  Sale  of  Entire  Property  of  Losing  Corporation  by 
Majority  Vote.  —  The  general  rule  that  a  majority  cannot  sell 
the  entire  assets  of  a  prosperous  corporation  is  based  upon  the 
principle  that  a  majority  cannot  control  corporate  powers  to 
defeat  corporate  purposes.  It  is  subject  to  the  exception  — 
noted  in  the  last  section  —  that  such  sale  may  be  made  as  a 
step  towards  dissolution. 

The  power  of  a  majority  to  dispose  of  all  the  property  of  a 


conduct  mining  operations  itself, 
but  to  secure  mineral  or  supposed 
mineral  lands,  and  to  prospect  them. 
The  power  to  seU  and  convey  any 
rights  thus  acquired  is  expressly 
given.  .  .  .  The  express  power  here 
given,  construed  in  connection  with 
the  declared  object  and  business  of 
the  corporation,  and  the  general 
power  to  sell  given  by  the  terms  of 
article  2  clearly  conferred  the  power 
to  sell  all  of  the  property  of  the  cor- 
poration notwithstanding  the  dissent 


*  In  Tanner  v.  Lindell  R.  Co., 
180  Mo.  17  (1904),  (79  S.  W.  Rep. 
155)  the  Court  said  :  "  None  of  the 
authorities  cited  says  that  a  sale  of 
all  the  property  of  a  corporation 
pursuant  to  a  resolution  of  a  majoritj' 
of  its  members  is  void.  They  all 
recognize  that  the  majority  in  in- 
terest have  the  right  to  rule  within 
reasonable  bounds  .  and  that  whilst 
they  have  no  right,  arbitrarily  or 
oppressively,  to  close  out  a  corpora- 
tion   for    their    own    advantage    yet 


of    any   indi\ddual    stockholder.   .   .   .        they  are  not  compelled  to   continue 


It  is,  undoubtedly,  the  general  rule 
that  a  corporation  may  not  sell  any 
part  or  all  of  its  property  for  other 
than  a  cash  consideration,  unless 
authorized  to  do  so  by  its  charter. 
.  .  .  But  the  articles  of  incorpora- 
tion expressly  gave  the  Lucas  com- 
pany the  right  to  purchase,  sell  and 
deal  in  the  corporate  stocks  of  cor- 
porations authorized  to  conduct 
mining  operations.  It  had  mining 
rights  and  property  to  sell,  but  no 
power  to  mine ;  hence,  we  think  the 
power  to  exchange  or  sell  its  prop- 
erties for  the  stock  of  a  corporation 
which  wouli!  engage  in  the  business 
is  implied." 

See  also  post,  §  120:  "Exchange 
of  Property  for  Stock  Infringement 
of  Rights  of  Dissenting  Stockholders." 

210 


an  unprofitable  business  or  to  pay 
the  minority  more  than  their  stock 
is  worth  for  the  privilege  of  closing  it 
up.  The  principle  invoked  by  the 
plaintiffs  is  wise  and  just,  but,  since 
it  is  liable  to  abuse,  its  wisdom  and 
justice  are  seen  only  in  its  applica- 
tion to  the  facts  of  the  given  case. 
It  is,  as  before  said,  designed  for  the 
protection  of  the  minority,  but  like 
some  other  equitable  principles  it 
is  to  be  used  as  a  shield,  not  as  a 
sword." 

See  also  Boston,  etc.  Min  Co.  v. 
Montana  Ore-Purchasing  Co.,  89  Fed. 
529  (1903). 

Compare,  however,  Forrester  v. 
Boston,  etc.  Min.  Co.,  29  Mont.  397 
(1903),  (76  Pac.  Rep.  211). 


CHAP.  Xl] 


SALES  OF  CORPORATE  PROPERTY 


§  112 


losing  corporation,  however,  is  in  furtherance  of  the  purposes 
of  the  corporation  and  arises  ex  necessitate. 

When  the  further  prosecution  of  the  business  of  the  corpora- 
tion would  be  unprofitable,  it  is  the  duty,  as  well  as  the  right, 
of  the  majority  to  dispose  of  its  property  and  take  action 
towards  the  liquidation  of  its  affairs.' 

§  112.  Sale  of  Entire  Corporate  Property  by  Directors.  — 
The  directors  of  a  corporation  are  appointed  to  manage  its 
affairs.  They  have  implied  authority  to  acquire  and  dispose 
of  its  property  in  the  usual  course  of  business.  They  have 
no  right  to  take  any  action  which  will  thwart  the  purpose  for 
which  the  corporation  was  created. 

The  powers  of  directors  are  defined  by  the  charter  and  by- 
laws of  the  corporation.  The  extraordinaiy  power  of  dis- 
posing of  the  entire  corporate  assets  might  be  conferred  upon 


•  United  States:  Hayden  v.  Of- 
ficial Hotel  Red  Book,  etc.  Co.,  42 
Fed.  875  (1890);  Hancock  v.  Hol- 
brook,  9  Fed.  353  (1881).  Compare 
Hunt  V.  American  Grocer}'  Co.,  81 
Fed.  532  (1897). 

loiva :  Price  v.  Holconib,  89  Iowa, 
123  (1893),  (56  N.  W.  Rep.  407). 
Compare  Buell  v.  Buckingham,  16 
Iowa.  284  (1864),  (85  Am.  Dec. 
516). 

Louisiana :  Hancock  v.  Holbrook, 
40  La.  Ann.  53  (1883),  (3  So.  Rep. 
351). 

Massachusetts :  Trcadwcll  v.  Salis- 
bury Mfg.  Co.,  7  Gray,  393,  404 
(1856),  (66  Am.  Dec.  490);  Sargent 
V.  Webster,  13  Met.  497  (1847),  (46 
Am.  Dec.  743). 

Michigan :  Doyle  v.  Leitelt,  (Mich. 
1893),  56  N.  W.  Rep.  .553. 

Minnesota:  Rotliwell  v.  Robinson, 
44  Minn.  538  (1890),  (47  N.  W.  Rep. 
255). 

Mississippi:  Berry  v.  Broach,  65 
Miss.  4.53  (1888),  (4  So.  Rep.    117). 

Netv  Jersey:  Sewell  v.  Ea.st  Cajie 
May  Beach  Co.,  50  N.  J.  Eq.  717 
(1892),  (25  Atl.  Rep.  929). 

New  York :  Skinner  v.  Smith,  134 
N.  Y.  240  (1892),  (31  N.  E.  Rep.  911). 


Quaere  People  v.  Ballard,  136  N.  Y. 
639  (1892),  (32  N.  E.  Rep.  611, 
17  L.  R.  A.  737),  motion  for  reargu- 
ment  of  s.  C.  134  N.  Y.  269  (1892). 
(32  N.  E.  Rep.  54). 

Rhode  Island:  Phillips  v.  Provi- 
dence Steam  Engine  Co.,  21  R.  I. 
304  (1899),  (43  Atl.  Rep.  598,  45 
L.  R.  A.  560)  :  "There  is  a  difference 
of  opinion  as  to  the  power  of  a  cor- 
poration to  sell  its  entire  property 
and  thus  practically  retire  from  busi- 
ness. Some  courts  holil  that  it  may 
be  done  by  the  consent  of  all  the 
stockholders  and  others  that  it  may 
be  done  by  a  majority.  .  .  .  A\'e 
think  this  the  correct  rule  [that 
majority  maj'  authorize  sale  when 
tlie  corporation  is  no  longer  able  to 
profitably  continue  its  business.] 
It  has  been  recognized  in  this  State. 
.  .  .  Tlie  principle  upon  whitli 
those  cases  rests  is  tliat  a  corporation 
may  dispo.se  of  its  property  by  a 
majority  vote  in  ca-ses  which  are 
free  from  unfairness,  oppression  and 
fraud.  -Against  wrongs  of  this  kind 
ciiuity  will  interfere." 

Wisco7>si7i :  A'S'erle  r.  Northwestern 
Flint,  etc.  Co.,  125  Wis.  534  (1905), 
(104  N.  W.  Rep.  743). 

211 


§  112 


INTERCORPORATE    RELATIONS 


[part   II 


them.*  But,  unless  expressly  conferred,  the  directors  of  a 
prosperous  corporation  have  no  power  to  sell  out  its  entire 
_ property  and  deprive  it  of  the  means  of  continuing  business. 
And  the  directors  of  a  losing,  but  not  insolvent,  corporation 
are  equally  without  implied  authority  to  wind  up  its  affairs 
and  dispose  of  its  assets.^ 

The  distinction  between  a  losing  corporation  able  to  pay  its 
debts  and  an  insolvent  corporation  must  be  observed.  The 
transfer  of  the  entire  property  of  the  one  involves  primarily 
the  relations  between  a  corporation  and  its  stockholders;    of 


'  Mahaska  County  R.  Co.  v.  Des 
Moines  Valley  R.  Co.,  28  Iowa,  451 
(1870). 

2  In  the  leading  case  of  Abbott  v. 
American  Hard  Rubber  Co.,  33  Barb. 
(N.  Y.)  578  (1861),  a  majority  of  the 
trustees  of  a  business  corporation 
transferred  all  its  personal  property, 
which  was  especially  adapted  to  its 
business,  to  two  persons,  who  forth- 
with caused  another  corporation  to 
be  formed,  and  transferred  such 
property  to  it.  It  was  held,  that  as 
such  transfer  practically  terminated 
the  corporation  by  taking  from  it  the 
power  to  fulfil  the  object  of  its  organi- 
zation, it  was  a  violation  of  that 
object,  was  not  within  the  power  of 
the  trustees,  and  was  ultra  vires  and 
void. 

Compare  Wolf  v.  Arminus  Copper 
Mine  Co.,  6  Misc.  (N.  Y.)  562  (27  N. 
Y.  Supp.  642)  (1894),  distinguishing 
Abbott  V.  American  Hard  Rubber 
Co.,  supra. 

For  other  cases  holding  that  the 
directors  of  a  corporation  have  no  im- 
plied authority  to  dispose  of  its  prop- 
erty so  as  to  prev^ent  it  from  carr3'ing 
on  the  business  for  which  it  was 
created,  see  : 

Missouri :  Feld  v.  Roanoke  Invest- 
ment Co.,  123  Mo.  613  (1894),  (27  S. 
W.  Rep.  635)  :  "The  officers  of  a  cor- 
poration cannot,  against  the  wishes 
of  its  stockholders  or  anj'  one  of  them, 
sell  and  transfer  the  entire  propertj- 
from  which  it  derives  its  emoluments 

212 


or  which  forms  the  basis  of  its  busi- 
ness operations.  To  do  so  would 
be  to  commit  a  breach,  if  not  of  the 
express  terms  of  the  contract,  of  its 
implied  terms,  by  which  the  general 
objects  defined  in  its  charter  would 
be  diverted  and,  in  effect,  de- 
stroyed." 

New  York:  People  v.  Ballard,  134 
N.  Y.  269  (1892),  (32  N.  E.  Rep. 
54,  17  L.  R.  A.  737) ;  Blatcliford  v. 
Ross,  54  Barb.  42  (1869);  Met- 
ropolitan El.  R.  Co.  V.  Manhattan 
R.  Co.,  14  Abb.  N.  C.  103  (1882) ; 
Smith  V.  New  York  Consolidated 
Stage  Co.,  18  Abb.  Pr.  419  (1864). 

Pennsylvania :  Carter  v.  Producers 
Oil  Co.,  164  Pa.  St.  463  (1894),  (30 
Atl.  Rep.  391)  ;  Balliet  v.  Brown, 
103  Pa.  St.  554  (1883). 

Tennessee:  Deaderick  v.  Wilson, 
8  Baxt.  108  (1874). 

In  Manufacturers'  Sav.  Bank  v. 
Big  Muddy  Iron  Co.,  97  Mo.  38  (1888), 
(10  S.  W.  Rep.  865),  however,  it  was 
held  that  the  directors  of  a  corpora- 
tion are  justified  in  disposing  of  all 
its  property  if  it  is  necessary  to  do 
so  to  obtain  the  means  of  meeting 
its  obligations. 

That  the  officers  of  a  going  cor- 
poration have  no  power  to  convej'' 
its  entire  manufacturing  plant  is 
manifest  without  authoritj',  and  is 
held  in  Consolidated  Water  Power 
Co.  V.  Nash,  109  Wis.  490  (1901), 
(85  N.  W.  Rep.  485). 


CHAP.  Xl] 


SALES  OF  CORPORATE  PROPERTY 


§  113 


the  other,  the  relations  between  a  corporation  and  its  creditors. 
As  said  by  Judge  Peckham  in  Vanderpoel  v.  Gorman:^  "  The 
assignment  of  property  by  an  insolvent  corporation  to  pay  its 
debts  is  a  very  different  action  from  so  disposing  of  its  prop- 
erty when  solvent,  as  to  make  its  continued  exercise  of  its 
franchises  impossible." 

In  the  absence  of  a  controlling  statute  or  by-law  of  the  cor- 
poration, the  directors  have  power  to  authorize  an  assignment 
of  the  property  of  an  insolvent  corporation  for  the  benefit 
of  its  creditors.^ 

§  113.  Ratification  by  Stockholders  of  Sale  by  Directors.  — 
While  directors  have  no  implied  authority  to  sell  the  entire 


'  Vanderpoel  v.  Gorman,  140  N.  Y. 
563  (1894),  (3.5  N.  E.  Rep.  932, 
37  Am.   St.    Rep.  596). 

'  Vanderpoel  v.  Gorman,  140  N.  Y. 
563  (1894),  (35  N.  E.  Rep.  932, 
37  Am.  St.  Rep.  596).  "The  corpo- 
ration had  the  power  to  make  an 
assignment.  It  was  a  corporate  act 
and  neither  the  statute  nor  any  by- 
law provided  that  it  should  be  other- 
wise done  than  by  the  president  and 
secretary  and  treasurer,  under  the 
authority  of  the  board  of  directors. 
This  sufficiently  appears  to  have  been 
.so  done  and  that  is  enough." 

See  also : 

Alabama:  Chamberlain  v.  Brom- 
berg,  83  Ala.  576  (1887),  (3  So.  Rep. 
434). 

Connecticut:  Chase  v.  Tuttle, 
55  Conn.  455  (1887),  (12  Atl.  Rep. 
874,  3  Am.  St.  Rep.  64). 

Illinois:  Reichwald  v.  Commercial 
Hotel  Co.,  106  111.  439  (1883). 

Indiana:  De  Camp  v.  Aylward, 
52  Ind.  468  (1876). 

Iowa:  Buell  v.  Buckingham,  16 
Iowa  284  (1864),  (85  Am.  Dec. 
516). 

Massachusetts:  Sargent  v.  Web- 
ster, 13  Mete.  497  (1847),  (46  Am. 
Dec.  543). 

Michigan:  Boynton  v.  Roe,  114 
Mich.  401  (1897),  (72  N.  W.  Rep. 
257). 


Minnesota:  Tripp  v.  Northwe.stern 
Nat.  Bank,  41  Minn.  400  (1889), 
(43  N.  W.  Rep.  60). 

Missouri:  Calumet  Paper  Co.  v. 
Haskell  Show  Printing  Co.,  144  Mo. 
331  (1898),  (45  S.  W.  Rep.  1115,  66 
Am.  St.  Rep.  425). 

New  Jersey :  ^\■ilkinson  v.  Banerle, 
41  N.  J.  Eq.  635  (1886),  (7  Atl.  Rep. 
514). 

Pennsylvania:  Ardesco  Oil  Co. 
V.  North  American  Oil,  etc.  Co.,  66  Pa. 
St.  375  (1870). 

SoiUh  Dakota:  Wright  v.  Lee, 
2  S.  D.  596  (1892),  (57  N.  W.  Rep. 
706). 

Texas:  Birmingham,  etc.  Co.  v. 
Freeman,  15  Tex.  Civ.  App.  451 
(1897),  (39  S.  W.  Rep.  626). 

Utah:  Cupit  v.  Park  City  Bank, 
20  Utah  292  (1899),  (58  Pac.  Rep. 
839). 

Wisconsin:  Goetz  v.  Knie,  103 
Wis.  366  (1899),  (79  N.  W.  Rep. 
401). 

Mo.st  of  these  decisions  are  based 
upon  State  in.solvency  .statutes.  In 
W^est  Virginia,  however,  a  vote  of 
the  stockholders  is  necessary  to  au- 
thorize an  assignment  for  the  benefit 
of  creditors.  Action  by  the  directors 
is  insufficient. 

Kyle  V.  Wagner,  45  W.  Va.  349 
(1898),  (32  S.  E.  Rep.  213). 

213 


§113 


INTERCORPORATE    REI.ATIONS 


[part  II 


assets  of  a  corporation,  a  sale  made  by  them  may  be  validated 
by  the  subsequent  ratification  of  the  stockholders.^ 

Ratification  and  authorization  are  governed  by  the  same 
principles.  A  sale  of  corporate  property  which,  in  the  first 
instance,  requires  unanimous  consent,  can  only  be  made  good 
by  the  approval  of  all  the  stockholders.  A  sale  requiring  the 
vote  of  a  majority  may  be  ratified  by  a  majority.^ 


»  In  Sheldon,  etc.  Co.  v.  Eicke- 
meyer,  etc.  Co.,  90  N.  Y.  613  (1882), 
the  Court  of  Appeals  said:  "In  trans- 
ferring the  property  of  the  corporation 
to  pay  its  debts  the  trustee.?  believed 
that  they  were  acting  within  the  scope 
of  their  authority,  and  the  defendant 
accepted  the  transfer  and  received  the 
property  in  satisfaction  of  its  claim 
against  the  plaintiff,  in  the  honest 
belief  that  it  acquired  good  title 
thereto.  If  the  trustees  had  no 
power,  as  the  agents  of  the  corpora- 
tion, to  transfer  all  its  property,  thus 
depriving  it  of  the  means  of  carrying 
on  the  business  for  which  it  was 
organized,  it  is  but  the  case  of  an 
agent  making  a  contract  in  excess  of 
his  authority.  The  act  is  voidable, 
not  void.  The  principal  may,  never- 
theless, affirm  the  act,  and  a  ratifica- 
tion is  equivalent  to  a  prior  authoriza- 
tion. If  all  the  stockholders  of  this 
corporation  had,  with  full  knowledge, 
subsequently  ratified  the  transfer  and 
affirmed  the  settlement,  the  act  — • 
though  beyond  the  powers  given  the 
trustees  by  the  charter  —  could  not 
be  subsequently  avoided  by  tlie  stock- 
holders, or  by  the  corporation." 

The  conveyance  under  the  authority 
of  the  directors,  whose  action  is  rati- 
fied subsequently  by  a  majority  of  the 
stockholders,  of  the  total  assets  of  a 
private  corporation  in  payment  of  its 
debts,  operates  as  a  valid  conveyance 
of  the  property,  as  against  other  stock- 
holders, in  the  absence  of  fraud,  and 
when  a  longer  continuance  of  the  busi- 
ness would  be  prejudicial  to  all  parties. 
Hancock  v.  Holbrook,  9  Fed.  353 
(1881). 

214 


See  also  Metcalf  v.  American  School 
Furniture  Co.,  122  Fed.  115  (1903); 
Hancock  v.  Holbrook,  40  La.  Ann.  53 
(1888),  (3  So.  Rep.  351);  Kent  v. 
Quicksilver  Mining  Co.,  78  N.  Y.  159 
(1879). 

Where  the  directors  of  a  mercan- 
tile corporation  called  a  stockholder.';' 
meeting  to  consider  the  propriety  of  a 
sale  of  its  business,  at  which  less  than 
one-third  of  the  stock  was  represented, 
but  a  resolution  was  adopted  instruct- 
ing the  directors  to  dispose  of  the 
business  upon  such  terms  as  they 
should  deem  best,  it  was  held  that 
as  the  statutes  fully  pro\'ided  for 
winding  up  the  corporation  in  case 
its  business  was  unprofitable,  or  in 
case  it  was  obliged  to  suspend  for 
want  of  funds,  the  directors  should  be 
enjoined,  at  the  suit  of  a  stockholder, 
from  disposing  of  the  assets,  so  as  to 
prevent  the  corporation  from  carrying 
out  the  objects  of  its  incorporation. 
Hunt  V.  American  Grocery  Co.,  81 
Fed.  532  (1897). 

A  purchaser  of  stock  after  the 
ratification  at  a  stockholders'  meeting 
of  a  sale  of  the  property  of  a  corpora- 
tion by  its  trustees  cannot  ordinarilj- 
maintain  an  action  to  set  aside  the 
sale,  although  the  stock  purchased 
was  not  voted  at  such  meeting. 

Pitcher  v.  Lone  Pine-Surprise  Con- 
sol.  Co.,  39  Wash.  608  (1905),  (81 
Pac.   Rep.   1047). 

2  Irregular  action  of  the  board  of 
directors  of  a  corporation  in  dispos- 
ing of  its  property  but  which  was 
unihin  the  corporate  power  may  be 
validated  by  the  ratification  of  the 
stockholders. 


CHAP.  Xl]  SALES  OF  CORPORATE  PROPERTY  §  114 

The  approval  by  the  stockholders  of  a  sale  made  by  the 
directors  may  also  be  inferred  from  their  failure  to  object 
within  a  reasonable  time.^  In  Stokes  v.  Detrick  ^  the  Supreme 
Court  of  Maryland  said:  "  While  it  is  well  settled  that  the 
directors  of  a  corporation  cannot,  ordinarily,  alone  sell  and 
convey  the  whole  of  its  property,  yet  it  is  equally  true  that, 
if  such  an  unauthorized  transfer  is  made,  it  may  be  ratified  bj^ 
the  assent  of  the  stockholders,  and  such  assent  may  be  inferred 
from  their  failure  to  protest  against  and  promptly  condemn 
the  unauthorized  acts  of  the  officers  of  the  corporation." 

§  114.  Remedies  of  Dissenting  Stockholders  in  Case  of  Tn- 
valid  or  Unfair  Sales.  Voidable  Sales. ^  —  A  sale  of  the  entire 
property  of  a  prosperous  corporation  for  purposes  other  than 
the  winding  up  of  its  affairs,  or  an  exchange  of  corporate  assets 
for  property  entailing  outside  obligations,  requires,  for  reasons 
elsewhere  indicated,  the  unanimous  consent  of  the  stockholders.* 
Any  such  sale  or  exchange  is  ultra  vires  the  majority  and  an 
infringement  upon  the  rights  of  minority  stockholders. 

A  dissenting  stockholder  has  a  right  to  stand  upon  the 
contract  of  association  as  made,  and  equity  will  afford  him  a 
remedy  —  preventive  or  annulling  —  against  any  acts  of  the 
majority  beyond  their  powers.^     It  is  entirely  immaterial  that 


Morrisettc    v.    Howard,    62    Kan.  other  corporations.     See  posi,  §§  IIS, 

403  (1901),  (G3  Pac.  Rep.  756).  119,  120,  121  and  122. 

'  Balliet  v.  Brown,  103  Pa.  St.  554  *  See  ante,  §  109:    "Sale  of  Entire 

(1883) ;   Stokes  v.  Detrick,  75  Md.  256  Corporate  Property  by  Unanimous  Con- 

(1892),  (23  Atl.  Rep.  846).  sent;"    ante,   §   110:    "Sale  of  Entire 

Ratification    of    an    unauthorized  Property  of  Prosperous  Corporation  by 

act    b}'    acquiescence    to    be    binding  Majority  Vote;"  post,  ^  IIS:   "Trans- 

niust   be   shown   to   have   been    with  fer  of  Entire  Corporate  Property  with- 

knowledge   of   all   the   material    facts  out  Unanimous  Consent  requires  Monc- 

connected  with  the  transaction.  tary  Consideration." 

Morris    v.    Elyton    Land    Co.,  125  ^  United  States :  Mason  r.  Pewabic 

Ala.     263      (1899),      (28      So.     Rep.  Mining  Co.,  133  U.  S.  50  (1890),  (10 

518).  Sup.   Ct.   Rep.    224);    Mackintosh   r. 

2  Stokes    V.    Detrick,    75    Md.    263  Flint,  etc.  R.  Co.,  34  Fed.  582  (1888). 

(1892),  (23  Atl.  Rep.  846).  In     Dodge     v.     Woolsey,     18     How. 

*  In    this    section    the    rights    and  (U.   S.)   331    (1855),   Justice    Wayne 

remedies    of    dissenting    stockholders  clearly   states   the   general    iirincii)les 

are  considered,  not  only  with  respect  governing  the  application  of  prevon- 

to  invalid,  unfair  and  voidable  sales,  tive   remedies   by   injunction,   at   the 

but  with  respect  to  invalid  e.vchangcs  instance  of  stockholders,   to   restrain 

of    corporate   property    for   stock   in  those  administering  the  affairs  of  a 

215 


§  114 


INTERCORPORATE   RELATIONS 


[part  U 


a  proposed  purchase  or  sale  may,  in  the  opinion  of  the  court, 
be  advantageous  to  such  stockholder.^  He  alone  can  deter- 
mine that.  So  his  motive  in  bringing  suit  is  of  no  importance.^ 
Where  a  majority  of  the  stockholders  of  a  corporation  have 
power  to  dispose  of  its  entire  assets,  they  must  act  with  fairness 
towards  minority  stockholders.  A  sale  wherein  the  majority 
obtain,  directly  or  indirectly,  more  favorable  terms  than  the 


corporation  from  doing  acts  amount- 
ing to  a  violation  of  its  charter  or 
from  monopolizing  its  funds.  And 
in  the  later  leading  case  of  Hawes  v. 
Oakland,  104  U.  S.  450  (1881),  Jus- 
tice Miller  formally  states  the  rules 
governing  the  grant  of  equitable  relief 
to  stockholders  of  corporations.  See 
also  Mumford  v.  Ecuador  Devel.  Co., 
Ill  Fed.  639  (1901);  Eldred  v. 
American  Palace  Car  Co.,  96  Fed.  59 
(1899). 

Connecticut:  Byrne  v.  Schuyler 
Electric  Mfg.  Co.,  65  Conn.  336 
(1895),  (31  Atl.  Rep.  833,  28  L.  R. 
A.  304). 

Georgia:  Central  R.,  etc.  Co.  v. 
Collins,  40  Ga.  582  (1869). 

Illinois:  Chicago  Hansom  Cab  Co. 
V.  Yerkes,  141  111.  320  (1892),  (30 
N.  E.  Rep.  667,  33  Am.  St.  Rep.  315). 

Missouri :  Tanner  v.  Lindell  R. 
Co.,  180  Mo.  1  (1904),  (79  S.  W.  Rep. 
155). 

Montana :  Forrester  v.  Boston,  etc. 
Min.  Co.  21  Mont.  544  (1898),  (55 
Pac.  Rep.  229,  353). 

New  York:  Abbott  v.  American 
Hard  Rubber  Co.,  33  Barb.  578 
(1861). 

Pennsylvania :  Lauman  v.  Lebanon 
Valley  R.  Co.,  30  Pa.  St.  42  (1858), 
(72  Am.  Dec.  664). 

Rhode  Island:  Boston,  etc.  R.  Co. 
V.  New  York,  etc.  R.  Co.,  13  R.  I. 
260  (1881). 

England:  Beman  v.  Rufford,  1 
Sim.  (N.  s.)  550  (1851);  Ware  v. 
Grand  Junction  Water  Co.,  2  Russ. 
&  Myl.  470  (1831);  Bagshaw  v. 
Eastern  Union  R.  Co.,   7  Hare,   114 

216 


(1849).  See  also  Bird  v.  Bird's 
Patent  Deodorizing,  etc.  Co.  9  L.  R. 
Ch.  App.  358  (1874). 

Compare  Treadwell  v.  Salisbury 
Mfg.  Co.,  7  Gray  (Mass.),  393  (1856), 
(66  Am.  Dec.  490);  Hodges  v.  New- 
England  Screw  Co.,  1  R.  I.  312 
(1850),  (53  Am.  Dec.  624);  Dudley 
V.  Kentucky  High  School,  9  Bush 
(Ky.),  576  (1873). 

'  Central  R.,  etc.  Co.  v.  Collins,  40 
Ga.  617  (1869):  "We  do  not  think 
the  profitableness  of  this  contract  to 
the  stockholders  of  the  Central  Rail- 
road Co.,  .  .  .  has  anything  to  do 
with  the  matter.  These  stockholders 
have  the  right,  at  their  pleasure,  to 
stand  on  their  contract.  If  the  char- 
ters do  not  give  to  these  companies 
the  right  to  go  into  this  new  enter- 
prise, any  one  stockholder  has  the 
right  to  object.  He  is  not  to  be 
forced  into  an  enterprise  not  included 
in  the  charter.  That  it  will  be  to  his 
interest  is  no  excuse;  that  is  for  him 
to  judge." 

See  also  BjTue  v.  Schuyler  Electric 
Mfg.  Co.,  65  Conn.  336  (1895),  (31  Atl. 
Rep.  833,  28  L.  R.  A.  304) ;  Stevens 
V.  Rutland,  etc.  R.  Co.,  29  Vt.  545 
(1851);  Beman  v.  Rufford,  1  Sim. 
(N.  s.)  550  (1851). 

2  Central  R.,  etc.  Co.  v.  Collins,  40 
Ga.  582  (1869);  Carson  v.  Iowa,  etc. 
Co.,  80  Iowa,  638  (1890),  (45  N.  W. 
Rep.  1068) ;  Elkins  v.  Camden,  etc. 
R.  Co.,  36  N.  J.  Eq.  5  (1882) ;  Ramsey 
V.  Gould,  57  Barb.  (N.  Y.),  398 
(1870) ;  Pender  v.  Lushington,  L.  R. 
6  Ch.  70  (1877). 


CHAP.  Xl] 


SALES  OF  CORPORATE  PROPERTY 


§  114 


minority  may  be  avoided  by  the  latter,  or  the  majority  may  be 
compelled  to  account.^  Upon  similar  principles,  the  courts 
will  closely  scrutinize  a  sale  of  corporate  property  effected  by 
majority  stockholders  to  another  corporation,  which  they  con- 
trol or  are  interested  in.  Such  a  sale  is  not  void  nor  con- 
structively fraudulent.  But  if  it  is  unfair  to  the  minority,  or 
if  any  unconscionable  advantage  of  their  position  has  been  taken 
by  the  majority,  the  courts  will  not  hesitate,  at  the  suit  of  the 
minority,  to  set  the  sale  aside.  Regardless  of  the  means  em- 
ployed, when  it  appears  that  "the  majority  have  put  something 
in  their  pockets  at  the  expense  of  the  minority  "  a  court  of 
ecjuity  will  grant  relief.^     So  where  the  directors  of  the  vendor 


■  In  Ervin  v.  Oregon  R.,  etc.  Co., 
27  Fed.  625  (1886),  where  a  majority 
of  the  stockholders  of  a  corporation 
merged  its  business  and  property 
with  businesses  and  properties  be- 
longing to  themselves  and  embarked 
the  whole  in  a  joint  venture,  Judge 
Wallace  said  (p.  632):  "Applying 
these  principles  to  the  case  in  hand, 
although  the  minority  of  stockholders 
cannot  complain  merely  because  the 
majority  have  dissolved  the  corpora- 
tion and  sold  its  property,  they  may 
justly  complain  because  the  majority, 
while  occupying  a  fiduciary  relation 
towards  the  minority,  have  exercised 
their  powers  in  a  way  to  buy  the 
property  for  themselves,  and  exclude 
the  minority  from  a  fair  participa- 
tion in  the  fruits  of  the  sale.  In  the 
language  of  Mellish,  L.  J.,  in  Menier 
V.  Hooper's  Telegraph  Works,  L.  R. 
9  Ch.  App.  354  (1874) :  'The  majority 
cannot  sell  the  a.ssets  of  the  company, 
and  keep  the  consideration,  but  mu.st 
allow  the  minority  to  have  their  share 
of  any  consideration  which  may  come 
to  them.' " 

For  other  somewhat  similar  cases 
where  the  courts  have  protected  the 
interests  of  minority  stockholders  see 
Buckley  v.  Big  Muddy  Iron  Co.,  7 
Mo.  App.  589  (1879);  Fougeray  r. 
Cord,  50  N.  J.  Eq.  185  (1899),  (24 
Atl.  Rep.  499).     Sec  also  Hay  den  v. 


Official  Red  Book,  etc.  Co.,  42  Fed. 
875  (1890).  Compare  Goodwin  v 
Bodcaw  Lumber  Co.,  109  La.  1050 
(1902),  (34  So.  Rep.  74). 

^  In  Mumford  v.  Ecuador  Devel. 
Co.,  Ill  Fed.  643,  (1901)  Judge  Coxe 
said:  "Although  a  majority  may  law- 
fully make  a  contract  with  the  com- 
pany such  contract  will  be  scrutinized 
with  much  greater  care  than  if  made 
with  a  third  party,  and  unless  it 
appears  that  it  was  made  honestly 
and  for  an  adequate  consideration  a 
court  of  equity  will  interpose  to  pre- 
vent such  contract  from  being  used 
oppressively  and  in  violation  of  the 
rights  of  the  minority.  It  matters 
not  in  what  form  these  rights  are 
invaded;  it  is  the  business  of  ecjuity 
to  penetrate  through  subterfuges 
and  discover  the  actual  transaction 
stripped  of  its  disguises.  If  then  it 
shall  appear,  no  matter  what  may  be 
the  machinery  employed,  that  the 
majority  have  sold  the  corporate 
property  to  themselves  for  a  wholly 
inadequate  consideration  a  court  of 
equity  will  grant  relief  to  the  minority 
who  have  thus  been  despoiled  of  their 
property." 

In  Chicago  Hansom  Cab  Co.  v. 
Yerkes,  141  111.  335  (1892),  (30  N.  E. 
Rep.  667),  (33  Am.  St.  Rep.  315) 
the  Supreme  Court  of  Illinois  said: 
"The    right    of    a     majority   of    the 

217 


§114 


INTERCORPORATE    RELATIONS 


[part   II 


corporation  are  substantially  interested  in  the  vendee  corpora- 
tion, a  sale  of  corporate  assets  will  be  annulled  if  unfair,  and 


stockholders  to  sell  the  corporate 
property  can  by  no  reasonable  con- 
struction be  held  to  involve  the  right 
to  seize  the  property  to  their  own 
use.  A  sale  conducted,  as  it  may  be, 
fairly  and  openly,  cannot,  theo- 
retically, operate  to  the  prejudice  of 
one  stockholder  more  than  to  an- 
other. There  is  in  such  case  no  pre- 
sumptive antagonism  between  the 
different  stockholders.  But  where, 
under  pretence  of  a  sale  to  themselves, 
the  majority  seize  the  property  and 
undertake  to  invest  themselves  with 
title,  their  interests  are  wholly  hostile, 
for  the  gain  of  the  one  is  the  loss  of 
the  other." 

Where  a  majority  of  the  stock- 
holders sell  the  corporate  assets  to 
another  corporation  owned  by  them- 
selves, in  violation  of  the  rights  of 
the  minority  the  latter  have  an 
equitable  lien  upon  the  property 
sold  to  the  extent  of  their  interests. 

Ervin  v.  Oregon  R.,  etc.  Co.,  27 
Fed.  625  (1886). 

In  Rothschild  v.  Memphis,  etc.  R. 
Co.,  113  Fed.  476  (1902),  where  a 
majority  stockholder  of  a  corporation 
did  not  have  the  actual  control  of  its 
affairs  it  was  held  that  he  did  not 
occupy  a  trust  relation  toward  the 
minority  and,  in  the  absence  of 
fraud,  might  purchase  the  property 
of  the  corporation  at  a  judicial  sale. 
The  Court  said  (p.  479):  "Stock- 
holders are  not  tenants  in  common 
of  the  property  of  the  corpora- 
tion, and  a  stockholder,  as  such, 
even  though  he  owns  a  majority  of 
the  stock,  does  not  occupy  a  trust 
relation  toward  the  other  stock- 
holders, and  he  may  deal  with  them 
or  with  the  corporation  in  good  faith. 
In  order  to  establish  a  trust  relation, 
the  majority  stockholder  must  actually 
control  the  affairs  of  the  company  for 
his  own  benefit  and  to  the  prejudice 

218 


of  the  minority  stockholders.  If  he 
is  not  in  control  of  the  property,  and 
does  not  mismanage  it  to  the  prejudice 
of  the  minority  stockholders,  he  may 
purchase,  if  there  is  no  actual  fraud, 
the  property  of  the  corporation  at  a 
judicial  sale  for  his  own  benefit,  and 
he  is  not  accountable  to  any  other 
stockholder  for  the  property  so  pur- 
chased. .  .  ."  (p.  481)  "It  is  true 
that  every  transaction  of  a  majority 
stockholder  with  the  corporation  will 
be  viewed  by  the  courts  with  jealousy, 
and  set  a-side  on  slight  grounds;  but 
it  is  not  void,  and,  if  the  relations  of 
the  majority  stockholder  are  fair  and 
open,  there  is  no  rule  which  forbids 
his  dealing  with  the  corporation,  and 
no  presumption  that  such  dealing  is 
fraudulent.  The  actual  control  of 
the  property,  which  is  the  basis  in  all 
of  the  cases  of  the  trust  relation,  not 
existing,  and  the  sale  not  having 
been  brought  about  by  the  fraudu- 
lent action  of  the  defendant,  it  did 
not,  •  by  its  purchase,  become  a 
trustee  for  the  complainant  and  other 
stockholders  of  the   .    .    .   company." 

Where  the  majority  of  the  stock- 
holders of  a  corporation  entered  into 
an  agreement  for  the  sale  of  all  its 
assets  to  another  corporation  in  con- 
sideration of  the  payment  of  the 
debts  of  the  selling  company  and  an 
exchange  of  its  shares  for  those  of 
the  purchasing  company  upon  an 
agreed  basis,  and  the  latter  com- 
pany, although  receiving  a  transfer 
of  the  property,  failed  to  perform  its 
part  of  the  agreement  and  attempted 
to  dispose  of  the  stock  it  was  entitled 
to  under  the  agreement,  it  was  held 
that  there  was  sufficient  evidence  of 
fraud  to  warrant  the  issuance  of  a 
preliminary  injunction. 

Eldred  v.  American  Palace  Car 
Co.,  96  Fed.  59  (1899). 

Where  a  corporation  is  prosperous 


CHAP.  Xl] 


SALES  OF  CORPORATE  PROPERTY 


§  114 


the  burden  is  upon  the  directors  to  show  its  fairness.'  And 
if  the  directors  of  the  vendor  corporation  are  hkewise  directors 
of  the  vendee  corporation  and  thus  control  the  action  of  both, 
a  sale  is  voidable  and  will  be  set  aside  at  the  instance  of  a 
stockholder,  regardless  of  its  fairness.^ 


and  no  reason  appears  why  it  should 
be  voluntarih'  dissolved  and  its  assets 
sold,  a  court  of  equity  will,  at  the  in- 
stance of  minority  stockholders  who 
allege  that  the  dissolution  and  pro- 
posed sale  constitute  a  scheme  by  the 
majority  to  "freeze  out"  the  minority, 
restrain  the  same. 

Elbogen  v.  Gerbereux-Flj-nn  Co., 
30  Misc.  (N.  Y.)  2G4  (1900),  (62  X.  Y. 
Supp.  287). 

See  also  Russell  v.  Fuel  Gas  Co., 
184  Pa.  102  (1898),  (39  Atl.  Rep.  21)  ; 
Devine  v.  Frankford  Steel,  etc.  Co., 
205  Pa.  114  (1903),  (54  Atl.  Rep. 
578) ;  Glengarry  Consol.  Min.  Co.  v. 
Boehmer,  28  Colo.  1  (1900),  (62  Pac. 
Rep.  839). 

'  Directors  of  a  corporation  stand 
in  a  fiduciary  relation  to  the  stock- 
holders, and  will  not  be  permitted  to 
manage  the  corporation's  affairs  so 
as  to  give  them  an  advantage  over 
other  stockholders.  The  courts  will 
carefully  scrutinize  tran.sactions  be- 
tween two  corporations  where  the 
directors  of  one  are  largely  interestetl 
in  the  stock  of  the  other,  although 
they  are  not  necessarily  fraudulent. 
"The  law  required  of  them  the  ut- 
most good  faith  in  their  manage- 
ment and  control  of  the  corporate 
property." 

Hill  V.  Gould,  129  Mo.  106,  112 
(1895),  (30  S.  W.  Rep.  181). 

If  a  conveyance  of  corporate 
property  is,  in  whole  or  part,  for  the 
benefit  of  one  or  more  of  tlie  directors 
who  acted  in  the  board  and  voted  for 
the  resolution  authorizing  the  con- 
veyance, the  same  will,  in  a  court  of 
equity,  be  regarded  as  prima  facie 
fraudulent  and  will  be  so  declared 
unless  it  should  be  shown  to  be  fair, 


rea.sonable  and  wholly  free  from 
fraud. 

Sweeny  v.  Grape  Sugar  Refining 
Co.,  30  W.  Va.  443  (1887),  (4  S.  E. 
Rep.  431,  8  Am.  St.  Rep.  88). 

^  In  Chicago  Hansom  Cab  Co.  7'. 
Yerkes,  141  111.  335  (1892),  (30  X.  E. 
Rep.  667,  33  Am.  St.  Rep.  315),  the 
Court  said:  "It  is  a  general  rule,  ad- 
ministered by  courts  of  equity,  that 
where  one  person  has  the  power  of 
disposition  of  the  propertj'  of  another 
without  the  consent  of  that  other,  he 
shall  not  be  allowed  to  become  per- 
sonalh'  interested  in  it  himself  —  and 
this  without  regard  to  anj'  question  of 
fairness  in  the  immediate  transaction, 
—  for  he  shall  not  be  allowed  to 
occupy  a  position  where  self-interest 
would  tempt  a  betrayal  of  duty." 

In  O'Connor  Mining,  etc.  Co.  v. 
Coo.sa  Furnace  Co.,  95  Ala.  614,  618 
(1891),  (10  So.  Rep.  290,  36  Am.  St. 
Rep.  251),  it  was  said:  "  The  duty 
which  disqualifies  the  directors  from 
binding  the  corporation  by  a  transac- 
tion in  which  they  have  an  adverse 
interest,  is  one  owing  to  the  corpora- 
tion which  they  represent,  and  to  the 
stockholders  thereof.  A  principal  may 
con.sent  to  be  bountl  by  a  contract 
made  for  him  by  an  agent  who,  at  the 
.same  time,  rcj^resentetl  an  interest  ad- 
verse to  that  of  the  principal.  A  cc.i- 
tui  que  trust  may  elect  to  confirm  a 
transaction  which  he  could  have  re- 
jjudiated  on  tlie  ground  that  the  trus- 
tee had  an  interest  in  the  matter  not 
consistent  with  his  trust  relation.  In 
like  manner,  dealings  between  cor- 
jiorations,  represented  by  the  same 
persons  as  directors,  may  be  accepted 
as  binding  by  each  corporation  and 
the  stockholders  thereof.     Tlie  general 

219 


§  114 


INTERCOBPORATE    RELATIONS 


[part  n 


Where  the  majority  stockholders,  in  viohition  of  the  rights 
of  the  minority,  have  sold  all  the  assets  of  a  corporation  the 
minority  are  not  bound  to  accept  a  fro  rata  share  of  the  pro- 
ceeds of  the  sale,  nor  shares  of  the  vendee  corporation  in  lieu 
thereof,  but  may  insist  upon  the  market  value  of  their  shares 
at  the  time  of  the  sale ;  may  follow  the  property  and  share  in 
the  profits  arising  from  its  use,  or  may,  under  some  circum- 
stances, have  the  sale  set  aside.  Where,  however,  the  sale  has 
been  carried  into  effect  and  the  rights  of  innocent  persons 
have  intervened,  the  court  may  decline  to  annul  the  sale  and 
leave  the  dissenting  minority  to  their  remedies  at  law.^     It  has 


rule  is,  that  such  dealings  are  not 
absolutely  void,  but  are  voidable  at 
the  election  of  the  respective  cor- 
porations, or  of  the  stockholders 
thereof.  They  become  binding,  if 
acquiesced  in  by  the  corporations 
and  their  stockholders." 

The  mere  fact  that  directors  sell 
the  assets  of  a  corporation  to  another 
corpoFation  in  which  they  are  direct- 
ors and  stockholders  does  not  render 
the  transaction  absolutely  void. 

Manufacturers'  Sav.  Bank  v.  Big 
Muddy  Iron  Co.  97  Mo.  38  (1888), 
(10  S.  W.  Rep.  965). 

See  also: 

United  States:  Worth  Mfg.  Co.  v. 
Bingham,  116  Fed.  791  (1902); 
Miller  v.  Consolidated  Lake  Superior 
Co.,  110  Fed.  480  (1901). 

Colorado :  Morgan  v.  King,  27  Colo. 
539  (1900). 

Louisiana:  Leathers  v.  Janney,  41 
La.  Ann.  1120  (1889),  (6  So.  Rep. 
884,  6  L.  R.  A.  661). 

Missouri:  Hill  v.  Gould,  129  Mo. 
106  (1895),  (30  S.  W.  181). 

Neiv  Hampshire :  Pearson  v.  Con- 
cord R.  Co.,  62  N.  H.  537  (1883), 
(13  Am.  St.  Rep.  590). 

New  York:  Barr  v.  New  York, 
etc.  R.  Co.,  125  N.  Y.  263  (1891), 
(26  N.  E.  Rep.  145). 

Oregon :  Patterson  v.  Portland 
Smelting  VV^orks,  35  Or.  96  (1899), 
(56  Pac.  Rep.  407). 

220 


Rhode  Island:  Wilson  v.  Central 
Bridge  Props.,  9  R.  I.  590  (1870). 

Washington:  Pitcher  v.  Lone  Pine- 
Surprise,  etc.  Min.  Co.,  39  Wash.  608 
(1905),   (81   Pac.  Rep.  1047). 

'  In  Tanner  v.  Lindell  R.  Co.,  180 
Mo.  1  (1904),  (79  S.  W.  Rep.  155), 
the  Court  said  (p.  21):  "When  the 
majority  of  stockholders  against  the 
will  of  the  minority  sell  all  the 
property  of  the  corporation  and 
thereby  work  a  practical  dissolu- 
tion of  it,  the  minority  stockholders 
are  not  bound  to  take  in  payment 
for  their  stock  a  pro-rata  share  of 
the  proceeds  of  the  sale,  or,  in  sub- 
stitution therefor,  the  stock  of  an- 
other corporation,  but,  "at  their  elec- 
tion, may  have  out  of  the  proceeds 
of  the  sale,  whether  it  be  money  or 
other  property,  the  market  value  of 
their  stock  at  the  date  of  the  sale  of 
their  proportional  share  of  the  pro- 
ceeds, or  they  may  follow  the  property 
into  the  hands  of  the  purchaser  and 
share  in  the  profits  arising  from  its 
use  in  the  same  ratio  that  they 
would  have  shared  if  the  sale  had 
not  been  made,  and,  if  the  transac- 
tion be  made  with  bad  faith,  they 
may,  under  some  circumstances,  have 
the  sale  set  aside  and  a  rehabitation 
of  the  corporation,  or,  if  equity  re- 
quires it,  and  the  application  is  timely, 
they  may  have  an  injunction  to  arrest 
the  transaction." 


CHAP.  Xl] 


SALES   OF    CORPORATE    PROPERTY 


§  ii: 


also  been  held  that  a  court  of  equity  will  not  set  aside,  at  the 
instance  of  a  minority  stockholder,  a  sale  which  is  voidable  by 
reason  of  common  directors  in  both  corporations,  unless  such 
stockholder  shows  that   he   has  sustained   damages.' 

§  115.  Procedure  in  Stockholders'  Actions.  — All  the  minor- 
ity stockholders  may  join  in  a  suit  to  enjoin  the  execution 
of  a  contract  of  sale,  proposed  by  the  majority  and  requiring 
unanimous  consent — or  for  its  cancellation  if  executed;  or 
any  less  number  of  such  stockholders  may  maintain  the  suit. 
In  the  latter  case,  in  order  to  prevent  a  multiplicity  of  suits 
and  that  all  parties  interested  shall,  theoretically,  be  before 
the  court,  it  is  necessary  that  the  stockholder  —  in  case  an 
individual  stockholder  acts  —  should  institute  the  suit  in  be- 
half of  him.self  and  of  other  stockholders  similarly  situated. - 


In  this  case,  however,  the  Court, 
while  stating  the  different  remedies, 
held  that  although  the  sale  in  ques- 
tion infringed  the  riglits  of  minority 
stockholders  yet  that,  as  a  court  of 
equity,  it  would  not  decree  its  re- 
scission because,  on  account  of  inter- 
vening rights,  such  rescission  would 
be  productive  of  more  injury  than  the 
refusal  of  it;  that  the  dissenting 
stockholders  had  an  adequate  remedy 
at  law  for  damages  for  the  injury 
sustained  and  would  be  left  to  such 
remedy. 

'  Smith  V.  Ferries,  etc.  R.  Co. 
(Cal.  1897)  51  Pac.  Rep.  710, 
citing  Hill  v.  Nisbet,  100  Ind.  341, 
354  (1884)  where  the  Court  said: 
"The  rule  is  well  established  that, 
unless  under  peculiar  and  exceptional 
circumstances,  a  court  of  equity  will 
not  interfere  to  set  aside  a  tran.saction 
in  itself  voidable  only,  unless  it  ap- 
pears that  the  complainant  has  sus- 
tained or  may  sustain  some  damages." 

When  the  business  of  a  corpora- 
tion is  unprofitable  and  the  majority 
have  authority  to  sell  the  corporate 
assets,  a  bill  by  a  di.ssenting  stock- 
holder to  restrain  a  pro|iosed  sale 
upon  the  ground  of  inadef|uacy  of 
price,   and  praying  for  a   public  sale 


under  the  direction  of  the  court,  will 
not  be  sustained  in  the  absence  of 
proof  that  a  larger  bid  than  the  price 
arranged  for  could  reasonably  be  ex- 
pected at  such  public  sale  or  that 
anj'  jierson  was  read}'  to  bid  as  much 
as  that  price. 

Phillips  V.  Providence,  etc.  Co.  21 
R.  I.  302  (1899),  (43  Atl.  Rep.  598, 
45  L.  R.  A.  560).  The  Court  also 
said  the  fact  that  the  sale  was  ap- 
proved by  a  vote  of  3675  to  75 
tended  to  show  the  fairness  of  the 
price  agreed  upon. 

2  United  States :  Zabriskie  v.  Cleve- 
land, etc.  R.  Co.,  23  How.  395  (1859). 
See  also  Metcalf  v.  American  School 
Furniture  Co.,  122  Fed.  115  (1903). 

Illinois:  Whitney  v.  Mayo,  ^5  111. 
251  (1853). 

Massachtisetts:  Peabody  v.  Flint, 
G  Allen,  52(1863). 

Nexv  Hampshire :  March  v.  Eastern 
R.  Co.,  40  N.  H.  548  (1860),  (77  Am. 
Dec.  732). 

New  York :  Blatchford  v.  Ross,  54 
Barb.  42  (1809). 

Vermojtt :  Stevens  i'.  Rutland,  etc. 
R.  Co.,  29  Vt.  545  (1851). 

England:  Clinch  ?•.  Financial 
Corp.,  L.  R.  4  Ch.  App.  117  (1868); 
Taylor  v.   Salmon,   4   Myl.   &   C.    134 

221 


§115 


INTERCORPORATE   RELATIONS 


[part    II 


All  the  actors,  in  transactions  by  which  the  rights  of  minority 
stockholders  have  been  infringed,  are  proper  parties  defendant 
to  suits  at  their  instance.^ 

As  a  suit  to  set  aside  a  sale  of  corporate  property  is  for  the 
benefit  of  the  corporation  and  all  its  stockholders  rather  than 
for  the  exclusive  benefit  of  the  stockholder  who  institutes  it, 
mone3^  compensation  cannot,  against  his  objection,  be  decreed 
to  him.^  Upon  similar  principles,  it  follows  that  a  judgment 
in  such  a  suit  instituted  by  certain  stockholders  in  behalf  of 
the  corporation  is  a  bar  to  a  subsequent  suit  by  other  stock- 
holders for  the  same  purpose  based  upon  the  same  grounds.* 

While  a  rule  of  the  federal  courts,  established  to  prevent 
collusive  transfers  of  stock  merely  for  the  purpose  of  confer- 
ring jurisdiction,  requires  that  a  plaintiff  stockholder  should 
have  been  such  at  the  time  when  the  transaction  complained  of 
took  place,*  the  prevailing  rule  in  England  and  this  countrj' 


(1838);  Mozley  v.  Alston,  1  Phill. 
790  (1847);  Beman  v.  Rufford,  1  Sim. 
(n.  s.)  550  (1851);  Winch  v.  Birken- 
head, etc.  R.  Co.,  5  De  G.  &  S.  562 
(1852). 

Compare,  however,  Hoole  v.  Great 
Western  R.  Co.,  L.  R.  3  Ch.  App.  262 
(1867). 

•  Ervin  r.  Oregon  R.,  etc.  Co.,  27 
Fed.  625  (1886). 

^  Morris  v.  Ely  ton  Land  Co.  125 
Ala.   263   (1899),   (28  So.   Rep.   513). 

Where  the  only  relief  prayed  for 
in  a  suit  by  a  minority  stockholder 
is  the  annulment  of  the  sale  of  cor- 
porate property  and  such  relief  can- 
not be  granted,  it  is  held  that  there 
is  no  basis  for  granting  other  relief 
depending  upon  the  affirmance  of  the 
sale,  the  validity  of  which  the  bill 
expressly  repudiates. 

Tanner  v.  Lindell  R.  Co.,  180  Mo. 
1  (1904),  (79  S.  W.  Rep.  155). 

3  Hearst  v.  Putnam  Min.  Co.  28 
Utah  184  (1904),  (77  Pac.  Rep.  753, 
66  L.  R.  A.  784). 

*  Supreme  Court  equity  rvile  94  is 
as  follows:  "Every  bill  brought  by 
one  or  more  stockholders  in  a  cor- 
poration against  the  corporation  and 

222 


other  parties,  founded  on  rights  which 
may  properly  be  a.sserted  by  the  cor- 
poration, must  be  verified  by  oath, 
and  must  contain  an  allegation  that 
the  plaintiff  was  a  shareholder  at  the 
time  of  the  transaction  of  which  he 
complains,  or  that  his  share  had  de- 
volved on  him  since  by  operation  of 
law,  and  that  the  suit  is  not  a  collu- 
sive one  to  confer  on  a  court  of  the 
United  States  jurisdiction  of  a  case 
of  which  it  would  not  otherwise  have 
cognizance." 

For  cases  in  the  federal  courts  con- 
struing the  rule  see  Lafayette  Co.  r. 
Neely,  21  Fed.  738  (1884);  Evans  r. 
Union  Pacific  R.  Co.,  58  Fed.  497 
(1893);  Symmes  v.  Union  Trust  Co., 
60  Fed.  830  (1894). 

A  bill  attacking  the  validity  of  the 
purchase  by  one  corporation  of  the 
property  of  another  comes  within 
the  operation  of  Supreme  Court 
Equity  rule  94  as  one  founded  upon 
a  right  existing  in  favor  of  the  cor- 
poration, and,  under  such  rule,  is  not 
maintainable  in  the  absence  of  specific 
statements  of  the  efforts  of  the  plain- 
tiff to  secure  action  through  the  di- 
rectors and  the  cause  of  their  inaction. 


CHAP.  Xl] 


SALES  OF  CORPORATE  PROPERTY 


§  116 


is  that  a  transferee,  taking  his  stock  since  that  time,  may 
sue.^ 

The  general  rule  of  equity  that  a  stockholder  must  first 
seek  relief  within  his  corporation,  manifestly  has  no  applica- 
tion when  the  minority  seek  relief  from  the  wrongful  acts  of 
the  majority.  The  majority  will  hardly  attack  sales  which 
they,  themselves,  have  made  or  authorized.  Under  such  cir- 
cumstances, demand  that  the  corporation  take  action  is  un- 
necessary before  bringing  suit.- 

§116.  Defences  to  Stockholders' Actions.  Estoppel.  Laches. 
—  Sales  of  corporate  property,  for  an  unla\\"ful  purpose,  are 
ultra  vires  of  the  corporation.  Sales  of  corporate  property, 
for  a  purpose  requiring  unanimous  consent,  are  tdtra  vires  of 
the  majority.  Principles  of  estoppel  may  make  good  the  latter 
but  not  the  former.^ 


Worth  Mfg.  Co.  V.  Bingham,  116 
Fed.   785  (1902). 

>  Winsor  v.  Bailej',  55  N.  H.  218 
(1875);  Ervin  v.  Oregon  R.,  etc.  Co., 
.35  Hun  (N.  Y.),  544  (1885),  s.  c.  28 
Hun,  269  (1882) ;  Chicago  v.  Cameron, 
22  111.  App.  91  (1886);  Seaton  v. 
Grant,  L.  R.  2  Ch.  App.  459 
(1867). 

In  Georgia  the  rule  of  the  federal 
courts  has  been  adopted.  Alexander 
V.  Searcy,  81  Ga.  536  (1889),  (8  S.  E. 
Rep.  630,  12  Am.  St.  Rep.  337).  See 
also  Moore  v.  Mining  Co.,  104  N.  C. 
534  (1889),  (10  S.  E.  Rep.  679). 

In  HoUins  v.  St.  Paul,  etc.  R.  Co., 
29  N.  Y.  St.  Rep.  208  (1889),  (9  N.  Y. 
Supp.  909),  it  was  held  that  a  stock- 
holder could  not  object  to  a  transfer 
of  corporate  proj)erty  for  stock  in  an- 
other corporation,  decided  upon  be- 
fore he  bought  his  stock ;  that  he 
stood  in  the  shoes  of  those  from 
whom  he  had  bought. 

In  Bloxham  i\  Metropolitan  R.  Co., 
L.  R.  3  Ch.  App.  337  (1868),  it  was 
held  to  he  immaterial  that  the  stock 
was  purchased  for  the  purpose  of 
bringing  suit. 

2  Davis  V.  Gcmmell,  70  Md.  376, 
(1889),  (17  Atl.  Rep.  259);    Chic.-\go 


Hansom  Cab  Co.  v.  Yerkcs,  141  111. 
320  (1892),  (30  N.  E.  Rep.  667,  33 
Am.  St.  Rep.  315);  Nathan  v. 
Tompkins,  82  Ala.  437  (1887),  (2  So. 
Rep.  747)  ;  Forrester  v.  Boston,  etc. 
Min.  Co.,  21  Mont.  544  (1898),  (55 
Pac.  Rep.  229,  353). 

*  In  Kent  v.  Quicksilver  Mining  Co., 
78  N.  Y.  185  (1879),  Judge  Folger 
said:  "When  it  is  a  question  of  the 
right  of  a  stockholder  to  restrain  the 
corporate  bodj'  within  its  express  or 
incidental  powers,  the  stockholder 
may  in  many  cases  be  denied,  on  the 
ground  of  his  express  assent  or  his 
intelligent  though  tacit  consent  to  the 
corporate  action.  If  there  be  a  de- 
parture from  statutory  direction, 
which  is  to  be  considered  merely  a 
breach  of  trust  to  be  restrained  by  a 
stockholder,  it  is  pertinent  to  con.sider 
what  has  been  his  conduct  in  regard 
thereto.  A  corporation  may  do  acts 
which  affect  the  public  to  its  harm, 
inasmuch  as  they  arc  per  sc  illegal  or 
are  malum  prohibitum.  Then  no 
assent  of  stockholders  can  validate 
them.  It  may  do  acts  not  thus  il- 
legal, though  there  is  a  want  of 
power  to  do  them,  which  affect  only 
the     interests    of    the     stockholders. 

223 


§  116 


INTERCORPORATE    RELATIONS 


[part    II 


Where  the  want  of  a  stockholder's  assent  affects  the  vaUdity 
of  a  sale,  he  may  be  estopped  from  setting  it  up.  By  partici- 
pating in  the  transfer  of  corporate  property/  or  by  acquiescing 
and  failing  for  an  unreasonable  time  to  take  steps  to  set  it 
aside/  a  stockholder  may  be  estopped  from  taking  action. 


They  may  be  made  good  by  the  assent 
of  the  stockholders,  so  that  strangers 
to  the  stockholders,  dealing  in  good 
faith  with  the  corporation,  will  be 
protected  in  a  reliance  upon  those 
acts." 

Symmes  v.  Union  Trust  Co.,  60 
Fed.  855  (1894)  :  "In  reference  to  the 
acts  and  conduct  of  complainants 
and  their  participation  and  acquies- 
cence in  the  various  transactions,  it 
must  be  remembered  that  the  doctrine 
of  ultra  viref  has  two  separate  and 
distinct  phases,  —  one,  where  the 
public  or  creditors  are  concerned, 
which  has  no  application  to  this 
case ;  the  other,  where  the  question 
is  between  the  stockholders  and  the 
corporation,  or  between  it  and  its 
stockholders  and  third  parties  deal- 
ing with  it  and  through  it  with  them." 
■  Where  minority  stockholders  who 
opposed  a  transfer  of  corporate  assets 
for  stock,  subscribed  for  their  pro- 
portion under  protest,  and  permitted 
the  purchasing  corporation  to  trans- 
act business  for  eighteen  months,  it 
was  held  that  they  were  then  estopped 
to  ask  for  a  rescission.  Post  v.  Bea- 
con Pump,  etc.  Co.,  84  Fed.  371 
(1898). 

A  stockholder  who  accepts  his 
shares  of  the  stock  cannot  complain 
of  the  transaction.  Feld  v.  Roanoke 
Inv.  Co.,  123  Mo.  603  (1894),  (27  S. 
W.  Rep.  635).  See  also  Glymont 
Imp.  Co.  V.  Toller,  80  Md.  278  (1894), 
(30  Atl.  Rep.  651)  ;  Hoene  v.  Pollak, 
118  Ala.  617  (1897),  (24  So.  Rep.  349, 
72  Am.  St.  Rep.  189,  43  L.  R.  A.  376). 
Stockholders,  after  voting  for  and 
appro\'ing  a  sale  or  purchase,  cannot 
be  heard  to  complain  thereof  in 
equity. 

224 


McGeorge  v.  Big  Stone  Gap  Imp't. 
Co.,  57  Fed.  262  (1893);  Burr  v. 
Pittsburgh,  etc.  Co.,  51  Fed.  33  (1892). 
Where  at  a  stockholders'  meeting 
a  plan  for  the  sale  of  the  assets  of  the 
corporation  to  another  corporation, 
partly  for  cash  and  partly  for  .stock, 
was  presented,  explained  and  unani- 
mously approved,  and  at  a  subse- 
quent meeting  the  officers  were  au- 
thorized "to  complete  the  .sale"  and 
executed  a  deed,  it  was  held  that  a 
stockholder  who  was  present  at  the 
first  meeting  was  bound  by  its  action 
and  could  not  refuse  the  stock  of  the 
purchasing  corporation  in  part  pay- 
ment of  his  shares. 

Carr  v.  Rochester  Tumbler  Co., 
207  Pa.  392  (1904),  (56  Atl.  Rep. 
945). 

Where  a  corporation,  without  the 
consent  of  all  its  stockholders,  sold 
all  its  property  to  another  corpora- 
tion for  stock  in  the  latter,  it  was  held 
that  the  exchange  could  be  annulled 
at  the  instance  of  a  stockholder  of 
the  former  corporation  who  did  not 
participate  in  the  transaction.  It 
was  also  held  that  the  fact  that  the 
purchasing  corporation  had  given  its 
bonds  in  exchange  for  certain  bonds 
of  the  vendor  corporation  did  not 
estop  such  stockholder  from  taking 
steps  to  set  aside  the  transfer. 

Morris  v.  Elyton  Land  Co.,  125 
Ala.  263  (1899),  (28  So.  Rep.  513). 

See  also  generally  as  to  estoppel 
against  stockholders,  Sheldon,  etc. 
Co.  V.  Eickemeyer,  etc.  Co.,  90  N.  Y. 
667  (1882);  Berry  v.  Broach,  65 
Miss.  450  (1888),  (4  So.  Rep.  117). 

-  Sir   .John   Romilly  in   Gregor\^  i'. 
Patchett,   33  Beav.  602   (1864),   thus' 
stated    the    position    of    stockholders 


CHAP.  Xl] 


SALES  OF  CORPORATE  PROPERTY 


§  116 


"Acquiescence  is  an  implied  sanction  of  the  sale,"  '  and.  as  a 
defence,  is  essentially  the  same  as  laches,  although  the  former 
carries  the  idea  of  tacit  approval  and  the  latter  of  neglect  or 
delay. 

An  injunction  will  not  be  granted,  at  the  instance  of  a  minor- 
ity stockholder,  to  restrain  a  sale  where  such  stockholder,  by 
his  laches,  has  permitted  the  interests  of  innocent  persons  to 
inteiTene  so  that  it  cannot  be  granted  without  inflicting  serious 
injuries.^ 

The  defence  of  estoppel  involves  both  knowledge  and  un- 
reasonable delay  on  the  part  of  the  stockholder  who  brings 
the  suit,^  or  the  prior  holder  of  his  shares,^  although  the  means 
of  knowledge,  readily  available,  may  be,  in  legal  effect,  equiva- 
lent to  knowledge.^  No  rule  can  be  laid  down  for  determining 
what  length  of  time  will  constitute  unreasonable  delay.  It 
will  depend  upon  the  facts  and  circumstances  of  each  case.^ 


who  acciuiescc  and  outstay  thoir 
time:  "Sharchohlors  cannot  lie  by, 
sanctioning,  or  by  their  silence  at 
least  acquiescing  in,  an  arrangement 
which  is  ultra  vires  of  tlie  company  to 
which  they  belong,  watching  tlie  re- 
sult ;  if  it  be  favorable  and  profitable 
to  themselves,  to  abide  by  it  and  in- 
sist on  its  validity,  but  if  it  pro\e 
unfavorable  and  disastrous,  then  to 
institute  proceedings  to  sot  it  aside." 
See  also  Watt's  Appeal,  78  Pa.  St. 
370  (1875);  Fort  Worth  Pub.  Co.  v. 
Hitson,  80  Tex.  216  (1391),  (14  S.  W. 
Rep.  846). 

'  Boston,  etc.  R.  Co.  v.  New  York, 
etc.  R.  Co.,  13  R.  I.  260  (1881). 
Evans  v.  Smallcomb,  L.  R.  3  H.  L. 
249  (1868). 

2  Taimer  v.  Lindell  R.  Co.,  180  Mo. 
1  (1904),  (79  S.  W.  Rep.  155). 

^  Cumberland  Coal  Co.  v.  Sher- 
man, 30  Barb.  (N.  Y.)  553  (1859). 

*  A  transferee  stand.^  in  no  better 
position  than  the  holder  of  the  stock 
at  the  time  of  the  tran.saction.  Brown 
V.  Duluth,  etc.  R.  Co.,  53  Fed.  889 
(1893).  Re  Syracuse,  etc.  R.  Co., 
91  N.  Y.  1  (1883). 

•Jessup  V.  Illinois  Central  R.  Co., 


43  Fed.  483  ( 1890) .  See  also  Taylor  v. 
Railroad  Co.,  4  Woods  (U.  S.),  575 
(1882). 

^Connecticut:  Se\en  years'  dclaj' 
a  bar.  Banks  v.  Judah,  8  Conn.  145 
(1830),  (the  earliest  reorganization 
case).  Six  months'  delay  after  the 
annual  meeting  not  a  bar.  Byrne  v. 
Schuyler  Electric  Mfg.  Co.,  65  Conn. 
336  (1895),  (31  Atl.  Rep.  833,  28 
L.  R.  A.  304). 

Georgia:  Alexander  v.  Searcy,  81 
Ga.  536  (1888),  (8  S.  E.  Rep.  630, 
12  Am.  St.  Rep.  337),  four  years' 
delay  a  bar  to  stockholder's  suit. 

Louisiana:  Hancock  v.  Holbrook, 
40  La.  Ann.  53  (1888),  3  So.  Rep. 
351),  two  years'  delay  a  bar. 

Massachusetts :  Snow  v.  Boston, 
etc.  Co.,  158  Mass.  325  (1893),  (33  N. 
E.  Rep.  588),  one  year  a  bar.  Pea- 
body  V.  Flint,  88  Mass.  52  (1863),  three 
and  a  half  years  a  bar. 

Minnesota :  Pinkus  v.  Minneapolis 
Linen  Mills,  65  Minn.  40  (1896),  (07 
N.  W.  Rep.  643),  two  years  a  bar. 

Missouri:  Descombes  v.  Wood,  91 
Mo.  196  (1886).  (4  S.  W.  Rep.  82, 
60  Am.  Rep.  239)  four  years  a  bar. 

Pennsylvania:     Ashhurt's   Appeal, 

225 


§  117 


INTERCORPORATE    RELATIONS 


[part   II 


§  117.  Effect  of  Sale  of  Entire  Corporate  Property.  — A  cor- 
poration, having  been  created,  is  not  dissolved,  in  contempla- 
tion of  law,  without  some  legislative  or  judicial  act  —  or  act 
in  pursuance  of  legislative  authority  —  extinguishing  its  fran- 
chises. So  long  as  they  exist,  the  corporation  exists.  Con- 
sequently, while  the  sale  of  the  entire  property  of  a  corporation 
may  render  it  unable  to  fulfil  the  purposes  of  its  organization, 
it  does  not  dissolve  it.  "  A  corporation  may  exist  without  prop- 
erty." ' 


60  Pa,.  St.  290  (1869),  seven  years  a 
bar. 

Rhode  Island:  Boston,  etc.  R.  Co. 
V.  New  York,  etc.  R.  Co.,  13  R.  I.  260 
(1881),  twelve  years  a  bar. 

England:  In  Re  Pinto  Silver  Min. 
Co.,  L.  R.  8  Ch.  273  (1877),  Lord  Jus- 
tice James  held  three  years'  delay  a 
bar  and  said:  "But  when  a  person, 
having  knowledge  of  what  is  being 
done,  assents  by  his  trustees  to  the 
transfer  of  the  property  of  the  com- 
pany to  another  company,  being  aware 
that  the  former  company  was  in 
course  of  winding  up,  and  takes  no 
step  during  the  whole  of  that  wind- 
ing up,  it  is  utterly  out  of  the  question 
that  he  should  be  at  liberty  to  come, 
after  the  lapse  of  years,  and  upset  all 
that  has  been  done." 

»  Price  V.  Holcomb,  89  Iowa,  137 
(1893),  (56  N.  W.  Rep.  407):  "The 
sale  of  all  the  property  may  have  the 
effect  of  terminating  the  business  for 
which  the  corporation  was  organized, 
but  it  does  not  dissolve  it.  Such  a 
sale  no  more  dissolves  the  corporation 
than  would  the  giving  of  a  mortgage 
that  might  ultimately  result  in  all  the 
property  being  taken  from  the  cor- 
poration." 

See  also : 

Illinois:  Reichwald  v.  Commercial 
Hotel  Co.,  106  111.  439  (1883) ;  Brufett 
V.  Great  Western  R.  Co.,  25  111.  353 
(1861). 

Maryland :  State  v.  Bank  of  Mary- 
land, 6  Gill  &  J.  205  (1834),  (26  Am. 
Dec.  561). 

226 


Missouri:  Kansas  City  Hotel  Co. 
V.  Sauer,  65  Mo.  279  (1877)  ;  Hill  v. 
Fogg,  41  Mo.  563  (1867). 

New  York:  Brickerhoff  v.  Brown, 
7  Johns  Ch.  217  (1823). 

North  Carolina:  Pinchback  v. 
Bessemer  Min.  etc.  Co.,  137  N.  C. 
171  (1904),  (49  S.  E.  Rep.  106). 

Texas:  Island  City  Sav.  Bank  v. 
Sachtleben,  80  Tex.  420  (1887);  (3 
S.  W.  Rep.  733,  26  Am.  St.  Rep. 
759). 

And  see  note  to  99  Am.  Dec.  333, 
"Sale  by  corporation  of  all  its  assets 
and  effect  thereof." 

In  Coler  v.  Tacoma  R.  etc.  Co.,  65 
N.  J.  Eq.  347  (1903),  (54  Atl.  Rep. 
413),  however,  it  was  held  that  the 
arrangement  there  proposed,  consist- 
ing of  the  transfer  of  the  property 
and  franchises  of  a  corporation,  in 
consideration  of  the  distribution  of 
the  shares  of  the  purchasing  corpora- 
tion among  the  stockliolders  of  the 
vendor  company,  with  a  prov-ision  for 
a  cash  payment  to  dissenting  stock- 
holders, amounted  to  a  dissolution 
of  the  vendor  corporation  within  the 
meaning  of  the  New  Jersey  statute, 
and  could  be  legallj'  carried  out  only 
according  to  the  provisions  of  such 
statute. 

So  it  has  been  held  under  peculiar 
provisions  of  the  statutes  of  Tennes- 
see that  an  educational  institution 
is  dissolved  by*  the  conveyance  of  its 
property  and  francliises  to  another 
institution  which  assumes  its  obli- 
gations. 


CHAP.  Xl]  SALES  OF  CORPORATE  PROPERTY  §  119 


II.    Exchange   of   Property   of   One    Corporation  for   Stock   of 

Another 

§  118.  Transfer  of  Entire  Corporate  Property  without  Unani- 
mous  Consent   requires   Monetary   Consideration.  —  Upon   the 

winding  up  of  the  affairs  of  a  corporation,  every  stockholder 
has  a  right  to  insist  that  the  property  of  the  corporation  be 
converted  into  money  and  that  the  proceeds  be  distributed.^ 
He  has  a  right  to  require  the  valuation  of  the  corporate  prop- 
erty to  be  fixed  by  a  sale. 

Similarly,  it  is  the  right  of  every  stockholder  to  demand 
that  sales  of  corporate  assets  made  preliminary  to,  and  for  the 
purposes  of,  liquidation  shall  be  for  money.  He  cannot  be 
compelled  to  accept  "  chips  and  whetstones  "  instead  of  cash. 
Whether  the  exchange  of  one  species  of  property  for  another 
is  even  a  step  towards  liquidation  depends  entirely  upon  their 
comparative  marketableness.     An  exchange  is  not  a  sale. 

A  transfer  of  all  the  property  of  one  corporation  for  stock 
in  another  is  an  exchange.  Its  legalit}'  depends  upon  two 
considerations: 

(1)  The  power  of  the  corporation  to  acquire  stock  in  an- 
other corporation. 

(2)  The  power  of  the  majority  to  authorize  such  transfer. 

§  119.  Exchange  of  Property  for  Stock  ultra  vires.  — A 
private  corporation,  by  the  unanimous  consent  of  its  stock- 
holders, may  exchange  its  assets  for  any  other  property  it  ha.s 
power  to  acquire.  The  validity  of  a  transfer  of  the  property 
of  one  corporation  for  stock  in   another  therefore  depends, 

State  V.   U.   S.   Grant   University,  manage   its   business,    witliout    prop- 

115  Tenn.  238  (1905),  (90  S.  W.  Rep.  erty  with  which  to  do  business,  and 

294).  without  the  right  lawfully  to  do  busi- 

And    compare  the  decision  in  the  ness,  is  dissolved  by  the  operation  of 

very  recent  case  of  Rochester  R.  Co.  the  law  which  brings  this  condition 

V.  City  of  Rochester,  205  U.  S.  236,  into  existence." 

255  (1907),   (27  Sup.  Ct.   Rep.  409),  '  Mason    v.    Pewabio    Mining    Co., 

where  tlic  Supreme  Court  said  :   "The  133  U.  S.  50  (1890),  (10  Sup.  Ct.  Rep. 

law   does   not   expressly   dissolve   the  224).     See   also  ca.ses  cited  in   notes 

selling   corporation,    but   it    leaves   it  to  §  120,  pos<.-   "  Excliauf/c  of  Property 

without    stock,    ofTiccrs,    property    or  for   Stock    Infringement    of  Rights   of 

franchises.     \     corporation     without  Dissenting  Stockholders." 
tsliareholders,      without     oflTicers       to 

227 


§  11^ 


INTERCORPORATE    RELATIONS 


[part    II 


primarily,  upon  the  power  of  the  former  corporation  to  acquire 
the  stock. 

The  general  rule  that  one  corporation  has  no  implied  au- 
thority to  acquire  and  hold  stock  in  another  corporation,  and 
the  exceptions  thereto,  are  considered  at  length  in  another 
part  of  this  treatise.^  Unless  the  corporation  transferring  its 
property  has  express  statutory  authority  to  acquire  stock,  or 
the  circumstances  are  such  as  to  bring  it  within  an  exception 
to  the  rule,  a  transfer  of  corporate  property  for  stock  in  an- 
other corporation  is  ultra  vires? 

It  would  seem,  however,  that  the  objection  of  ultra  vires  to 
an  exchange  of  property  for  stock  when  all  the  stockholders 
agree,  might  be  avoided  by  directly  distributing  the  stock 
among  the  stockholders  instead  of  delivering  it  to  the  cor- 
poration.    If  the  rights  of  creditors  are  protected  and  stock- 


'  See  ■post,  Part  IV.:  "Corporate 
Stockholding  and  Control." 

"  A  New  Jersey  corporation  en- 
tered into  an  agreement  with  a  cor- 
poration of  the  State  of  Washington 
wherein  it  agreed  to  transfer  to  the 
latter  corporation  all  its  property 
and  franchises,  except  the  franchise 
of  being  a  corporation,  in  considera- 
tion that  the  latter  should  issue  to  it 
its  shares  of  fully  paid-up  stock  to 
an  agreed  amount,  and  should  pay 
to  its  stockholders  who  refused  to 
accept  such  stock  a  sum  in  cash  in 
lieu  thereof.  It  was  helU,  upon  a 
bill  filed  by  a  stockholder  of  the  New 
Jersey  corporation,  that  the  con- 
summation of  the  arrangement  should 
be  restrained  for  the  reason,  among 
others,  that  the  Con.stitution  and 
judicial  decisions  of  the  State  of 
"\^'ashington  which  make  it  unlawful 
for  any  corporation  to  hold  stock 
and  exercise  the  rights  of  a  stock- 
holder in  a  corporation  of  that  State, 
apply  to  foreign  as  well  as  to  do- 
mestic corporations. 

Coler  V.  Tacoma  R.  etc.  Co.,  65 
N.  J.  Eq.  347  (1903),  (54  Atl.  Rep. 
413). 

A  corporation  haA-ing  power  under 

228 


its  charter  "to  take  stock"  in  other 
corporations  cannot,  without  the 
consent  of  all  its  stockholders,  trans- 
fer all  its  property  to  another  cor- 
poration in  consideration  of  stock  in 
the  latter  corporation  to  be  dis- 
tributed an\ong  its  stockholders. 
Such  a  transaction  is  ultra  vires  the 
transferring  corporation. 

Morris  v.  Elyton  Land  Co.,  125  Ala. 
263    (1899),    (28    So.    Rep.    513). 

A  transfer  of  all  tlie  property  of  a 
corporation  to  a  foreign  corporation 
in  consideration  of  the  latter  cor- 
poration assuming  the  obligations  of 
the  former  and  agreeing  to  turn  over 
its  entire  capital  stock  in  exchange 
for  the  shares  of  the  former  corpora- 
tion —  provision  being  made  for 
paj-ing  cash  to  dissenting  stock- 
holders—  is  neither  a  "sale"  nor  an 
"exchange,"  and  is  tmauthorized  bj- 
the  laws  of  Montana. 

Forrester  v.  Boston,  etc.  Min.  Co., 
21  Mont.  544  (1898),  (55  Pac.  Rep. 
229,  353). 

For  further  consideration  of  this 
subject  see  post,  §  281,  "Incidental 
Power  to  take  Stock  in  Exchange  for 
Corporate  Assets." 


CHAP.  Xl] 


SALES  OF  CORPORATE  PROPERTY 


§  120 


holders  agree,  no  one  else  can  complain  of  a  donaticm  by  a 
private  corporation  for  the  direct  pecuniary  benefit  of  its  stock- 
holders.* 

§  120.  Exchange  of  Property  for  Stock  Infringement  of 
Rights  of  Dissenting  Stockholders.  — A  corpoiatioii,  having 
the  power  to  acquire  stock  in  other  corj)oration8,  may,  in  ordi- 
naiy  transactions,  exercise  it  in  the  same  manner  as  other 
powers. 

But  a  transfer  of  the  entire  property  of  a  corporation  is  an 
extraordinary  transaction  rer^uiring  unanimous  consent,  ex- 
cept for  liquidating  purposes,  and  for  those  purposes  requiring 
a  pecuniary  consideration. 

A  majority  of  the  stockholders  cannot  authorize  the  transfer 
of  the  corporate  assets  for  stock  in  another  corporation.^     They 


*  A  transfer  of  the  property  of  a 
corporation  for  stock  in  another  cor- 
poration not  objected  to  bj'  any 
stockholder  or  creditor  cannot  be 
•  inestioncd  by  any  one,  except  the 
State  in  a  proper  proceeding. 

Read  v.  Citizens  St.  R.  Co.,  110 
Tenn.  316  (1903),  (75  S.  W.  Rep. 
1056). 

2  United  States :  In  Post  v.  Beacon 
Vacuum  Pump,  etc.  Co.,  84  Fed. 
375  (1898),  Judge  Putnam  said  : 
"The  minority  has  a  lawful  riglit 
to  maintain  that  the  contractual 
relations  which  it  established  with  a 
corporation  whose  shareholders  they 
became  does  not  include  a  contrac- 
tual relation  with  any  other  corpora- 
tion." 

See  also  McCutcheon  v.  Merz  Cap- 
.suleCo.,  71  Fed.  787  (1896),  (31  L.  R. 
A.  41.'>) ;  Easun  v.  Buckeye  Brewing 
Co.,  51  Fed.  156  (1892). 

Alahama:  Elyton  Land  Co.  v. 
Dow.lell,  113  Ala.  186  (1896),  (20 
So.  Rep.  981,  59  Am.  St.  Rep.  105)  : 
"  It  may  be  that  a  private  business 
corporation  may  sell  out  its  entire 
property,  by  and  with  the  consent  of 
less  than  all  its  stockholders,  for  the 
purposes  of  paying  its  debts  or  for 
the     purposes     of     dissolution     and 


settlement,  but  when  this  is  the  pur- 
pose, it  must  be  clearly  untlerstood, 
and  the  terms  and  conditions  of  the 
sale  must  be  within  the  contractual 
relations  between  the  corporation 
and  its  creditors  or  shareholders. 
There  can  be  no  presumption  that  a 
creditor  or  stockholder  of  the  dis- 
solved corporation  will  accept,  in  pay- 
ment of  his  demand,  anything  but 
money.  He  cannot  be  re<iuired  to 
do  so  arbitrarily."  See  also  Morris 
V.  Elyton  Land  Co.,  125  Ala.  263 
(1899),  (28   So.  Rep.  513). 

Connecticvt:  Bj-rne  v.  Schuyler 
Electric  Mfg.  Co.,  65  Conn.  350 
(1895),  (3  Atl.  Rep.  833,  28  L.  R.  A. 
304). 

Illinois:  Harding  v.  American 
Glucose  Co.,  182  HI.  628  (1899),  (55 
N.  E.  Rep.  .'577,  74  Am.  St.  Rep. 
189,  64  L.  R.  A.  738). 

Maryland :  Glymont  Imp.  Co.  v. 
Toller,  80  Md.  278  (1894),  (30  Atl. 
Rep.  651). 

Afontana:  Forrester  v.  Boston, 
etc.  Min.  Co.,  21  Mont.  544  (1898), 
(55  Pac.  Rep.  229,  353). 

Missouri :  Feld  v.  Roanoke  In- 
vestment Co.,  123  Mo.  614  (1894),  (27 
S.  W.  Rep.  635)  :  "  Xor  can  the  stock 
of   such    new    corporation    be    forceil 

229 


§120 


INTERCORPORATE   RELATIONS 


[part  II 


cannot  force  the  minority,  against  their  will,  into  a  new  com- 
pany nor  compel  them  to  elect  between  so  entering  and  losing 
their  interests.^ 


upon  the  dissenting  stockholders  in 
payment  of  their  stock  in  the  original 
company,  who  are  entitled  to  pay- 
ment in  money." 

New  York:  Frothingham  v.  Bar- 
ney, 6  Hun,  372  (1876)  :  "They  had 
no  right  to  exchange  the  assets  of  the 
old  association  for  the  corporate 
stock  of  any  corporations,  without 
the  consent  of  all  the  stockholders. 
.  .  .  Equally  were  they  without 
authority  in  making  this  partial  ex- 
change, without  such  consent.  Stock- 
holders of  the  old  association  could 
not  thus,  against  their  will,  be  forced 
into  relations  with  the  new  com- 
pany." 

See  also  Taylor  v.  Earle,  8  Hun,  1 
(1876) ;  People  v.  Ballard,  134  N.  Y. 
269  (1892),  (32  N.  E.  Rep.  54). 

Rhode  Island:  Boston,  etc.  R.  Co. 
V.  New  York,  etc.  R.  Co.,  13  R.  I.  260 
(1881). 

South  Dakota:  Summers  v.  Glen- 
wood  Gold,  etc.  Min.  Co.,  15  S.  D. 
20  (1901),  (86  N.  W.  Rep.  749). 

1  Notwithstanding  the  rule  stated 
in  the  text,  transfers  of  the  entire 
property  of  corporations,  authorized 
only  by  a  majority  of  their  stock- 
holders, in  exchange  for  the  stock  of 
other  corporations  have  been  re- 
peatedly made  —  often  in  the  guise 
of  a  "reorganization"  —  and  have 
sometimes  received  the  approval  of 
the  courts.  I'hus  in  Sawyer  v.  Du- 
buque Printing  Co.,  77  Iowa,  242 
(1889),  (42  N.  W.  Rep.  300),  it  was 
held  that  where  a  corporation  could 
not  carry  on  a  business  with  profit, 
and  was  approaching  serious  financial 
embarrassment,  the  sale,  withoxit 
fraud  and  in  good  faith,  of  all  its 
propertj'  to  a  rival  corporation  whose 
paid-up  stock  was  given  in  payment, 
afforded  no  ground  of  complaint  to  a 
stockholder  who  was  not  notified  of, 

230 


nor  present  at,  the  meeting  at  which 
the  transfer  was  decided  upon.  In 
this  ca.se,  however,  the  question 
whether  an  exchange  of  property  for 
stock  was  valid  was  not  passed  upon 
by  the  Court.  And  in  Farmers 
Loan,  etc.  Co.  v.  Toledo,  etc.  R.  Co., 
54  Fed.  759  (1893),  it  was  assumed  by 
Judge  Jackson  that  an  e.xchange  of 
property  for  stock  was  a  sale,  and, 
from  this  wrong  premise,  the  conclu- 
sion was  reached  that,  under  statu- 
tory power  to  sell,  a  transfer  of  prop- 
erty for  stock  by  the  prescribed 
majority  left  the  minority  remediless. 

Moreover,  in  the  recent  case  of 
Metcalf  V.  American  School  FmTii- 
ture  Co.,  122  Fed.  126  (1903)  Judge 
Hazel  said  :  "I  am,  therefore,  of  opin- 
ion that  the  weight  of  authority  sup- 
ports the  view  that,  where  a  corpora- 
tion obtains  by  its  charter  the  right 
to  dispose  of  its  property  and  to  dis- 
solve its  corporate  existence,  it  has 
the  power  to  accept  stock  in  another 
corporation  in  payment  of  the  pur- 
chase price,  provided  the  transaction 
is  bona  fide."  * 

In  Germer  v.  Triple-State  Natural 
Gas,  etc.  Co.,  60  W.  Va.  143  (1906), 
(54  S.  E.  Rep.  509),  the  Court  said: 
"Did  the  stockholders  have  the  right, 
under  the  laws  of  West  Virginia,  to 
vote  and  sell  all  the  property  of  the 
corporation,  and  take  in  pajTnent  the 
stock  and  bonds  of  another  corpora- 
tion? ...  It  will  be  seen  that  the 
section  provides  that  holders  of  60 
per  centum  of  the  out-standing  stock 
of  the  corporation  may  sell,  transfer, 
or  assign  in  good  faith  all  of  its  prop- 
erty and  assets,  and,  while  it  does  not 
expressly  and  iu  terms  authorize  the 
corporation  to  take  in  payment 
therefor  the  stock  or  bonds  of  another 
corporation,  yet,  with  the  full  power 
to   sell,    transfer,    or   assign    in    good 


CHAP.  Xl] 


SALES  OF  CORPORATE  PROPERTY 


§  120 


A  possible  exception  to  this  rule  may  arise  where  the  stock, 
taken  upon  an  exchange,  has  an  established  market  value,  so 
that  it  may  fairly  be  considered  an  equivalent  for  money.  In 
such  a  case  there  is,  practically,  a  sale  upon  a  monetary  con- 
sideration.' 

In  order  to  avoid  the  objection  that  dissenting  stockholders 
cannot  be  forced  into  a  new  corporation,  reorganization  plans 
have  often  provided  that  stockholders  who  do  not  choose  to 
go  into  the  new  or  purchasing  company  may  take  a  stated 
sum  of  money  in  lieu  of  the  shares  to  which  they  would  be 
entitled.  The  objection  to  a  plan  of  this  character  is  that  the 
majority  have  no  right  to  fix  the  value  of  the  property  of  the 


faith  all  of  its  property  and  assets 
under  the  said  .section,  it  would  .seem 
clear  that  under  the  provisions  of  the 
Code  of  1899,  as  amended  by  the  acts 
of  1901,  the  corporation  has  full 
power  to  subscribe  for  or  purchase 
the  stock,  bonds,  or  securities  of  any 
joint-stock  company.  This  it  can  do, 
upon  aniajority  vote  of  the  stock,  by 
plain  implication.  Having  the  right 
to  sell,  transfer,  and  assign  all  its 
property  .  .  .  and  ha^^ng  the  right 
to  subscribe  for,  or  purcha.se  the 
stock,  bonds  or  other  securities  of 
any  joint-stock  company,  it  would 
follow  as  a  necessary  sequence  that 
it  could  take  the  one  in  payment  for 
the  other." 

For  other  cases  where  the  courts 
have,  for  various  rea.sons,  approved 
the  exchange  of  the  assets  of  one 
corporation  for  stock  in  another,  see 
Buford  V.  Keokuk,  etc.  Packet  Co., 
3  Mo.  App.  159  (1876);  Treadwcll  v. 
Salisbury  Mfg.  Co.,  7  Gray  (Mass.), 
393  (1856),  (66  Am.  Dec.  490); 
Hodges  V.  New  England  Screw  Co., 
1  R.  f  312  (1850)  ;  Wilson  v.  yEolian 
Co.,  64  App.  Div.  (N.  Y.)  337  (1901), 
(72  N.  Y.  Supp.  150). 

'  The  decision  in  Treadwcll  v.  Salis- 
bury Mfg.  Co.,  7  Cray  (Ma.ss.),  393 
(1856),  cannot  be  justified  upon  prin- 
ciple.    In   this   case   the   Court   said 


(p.  405)  :  "Nor  can  we  see  anything 
in  the  proposed  sale  to  a  new  corpora- 
tion, and  the  receipt  of  their  stock  in 
payment,  which  makes  the  tran.saction 
illegal.  It  is  not  a  sale  by  a  trustee 
to  himself,  for  his  own  benefit ;  but  it 
is  a  sale  to  another  corporation  for  the 
benefit  and  with  the  consent  of  the 
cestuis  que  triist,  the  old  stockholders. 
The  new  stock  is  taken  in  lieu  of 
mone}',  to  be  distributed  among  those 
stockholders  who  are  willing  to  receive 
it,  or  to  be  converted  into  money  by 
those  who  do  not  desire  to  retain  it. 
Being  done  fairly,  and  not  collusively, 
as  a  mode  of  payment  for  the  property 
of  the  corporation,  that  transaction  is 
not  open  to  valid  objection  by  a 
minority  of  the  .stockholders." 

The  rights  of  minority  .stockholders 
cannot  be  made  to  depend  upon  their 
ability  to  convert  into  money  stock 
which  has  no  established  market  value 
—  is  not  regularly  bought  and  .sold. 
Compare  Easun  v.  Buckeye  Brewing 
Co.,  51  Fed.  156  (1892);  Byrne  v.. 
Schuyler  Electric  Mfg.  Co.,  65  Conn. 
336  (1895),  (31  Atl.  Rep.  833)  ; 
Bufortl  V.  Keokuk,  etc.  Packet  Co., 
3  Mo.  App.  159  (1876).  Compare  also 
decision  of  the  Chancellor  in  Black  r. 
Delaware,  etc.  Canal  Co.,  22  N.  J. 
Eq.  415  (1871). 

231 


§    121  INTERCORPORATE   RELATIONS  [PART  II 

minority.*  As  said  by  Mr.  Justice  Miller  in  Moson  v.  Pewahic 
Mining  Co.:^  "It  is  further  said  that,  in  the  present  case, 
the  dissenting  stockholders  are  not  compelled  to  enter  into  a 
new  corporation  with  a  new  set  of  corporators,  but  have  their 
option,  if  they  do  not  choose  to  do  this,  to  receive  the  value 
of  their  stock  in  money.  It  seems  to  us  that  there  are  two 
insurmountable  objections  to  this  view  of  the  subject.  The 
first  of  these  is  that  the  estimate  of  the  valu§  of  the  property 
which  is  to  be  transferred  to  the  new  corporation  and  the  new 
set  of  stockholders  is  an  arbitrary  estimate  made  by  this  major- 
it}^  and  wdthout  any  power  on  the  part  of  the  dissenting  stock- 
holders to  take  part,  or  to  exercise  any  influence,  in  making 
this  estimate.  They  are,  therefore,  reduced  to  the  proposition 
that  they  must  go  into  this  new  company,  however  much 
they  may  be  convinced  that  it  is  not  likely  to  be  successful,  or 
whatever  other  objection  they  may  have  to  becoming  members 
of  that  corporation,  or  they  must  receive  for  the  property  which 
they  have  in  the  old  company  a  sum  which  is  fixed  by  those 
who  are  buying  them  out.  The  injustice  of  this  needs  no  com- 
ment. If  this  be  established  as  a  principle  to  govern  the 
winding  up  of  dissolving  corporations,  it  places  any  unhappy 
minority,  as  regards  the  interest  which  they  have  in  such  cor- 
poration, under  the  absolute  control  of  a  majority,  who  may 
themselves,  as  in  this  case,  constitute  the  new^  company,  and 
become  the  purchasers  of  all  the  assets  of  the  old  company  at 
their  owti  valuation." 

§  121.  Appraisal  of  Stock  of  Dissenting  Stockholders.  — 
Several  of  the  statutes,  already  referred  to,  providing  for  the 
appraisal  of  the  shares  of  dissenting  minority  stockholders, 
are  probably  broad  enough  to  be  available  in  aid  of  a  reorgani- 
zation through  the  transfer  of  corporate  assets  in  exchange 
for  stock.^     Theoretically,  such  statutes  when  constitutionally 

'  Mason  v.  Pewabic  Mining  Co.,  133  corporation,     or      compensation      for 

U.  S.  50  (1890),  (10  Sup.  Ct.  Rep.  224).  them  on  any  arbitrarj-  basis  which  a 

See  also  Post  V.  Beacon  Vacuum  Pump  reorganization    may   give." 

etc.  Co.,  84  Fed.  375  (1898),  where  it  2  Mason  v.  Pewabic  Mining  Co.,  133 

was  said  :  "There  is  no  right  in  law  to  U.  S.  58  (1890),  (10  Sup.  Ct.  Rep.  224). 

conipel  it  [the  minority]  to  elect  be-  ^  See  ante,  §  .57:    "Statutory  Provi- 

tween  such  new  contractual  relations  sions  for  Appraisal  of  Stock." 

and  the  loss  of  its  shares  in  the  old  The  English  statute  applicable  in 

232 


CHAP.  Xl] 


SALES  OF  CORPORATE  PROPERTY 


§  121 


applicable  may  do  exact  justice  to  a  dissenting  stockholdei-. 
He  is  given  the  option  of  entering  the  new  corporation  or  sell- 
ing out  for  the  value  — fixed  by  appraisal — of  his  interest  in 
the  old.  The  result  is  apparently  so  equitable  that  it  has 
been  intimated  by  the  Supreme  Court  of  the  United  States 
that  a  court  of  equity,  without  such  a  statute,  might  be  justi- 
fied in  itself  appraising  the  interests  of  minority  stockholders." 
It  is,  however,  fundamentally  wrong  in  principle  and  should 
not  be  extended  by  judicial  legislation. 

If  the  business  of  a  corporation  is  not  to  be  continued  accord- 
ing to  the  contract  of  association,  each  stockholder  is  entitled 
to  his  actual  distributive  share  of  the  proceeds  of  the  corporate 
property.  A  court  of  equity  cannot  equitably  put  him  off 
by  securing  for  him  "a  theoretical  distributive  share"  fixed  by 
appraisal.^ 


case  of  transfers  of  corporate  property 
for  stock  is  containetl  in  Companies 
Act  1862  (25  and  20  Vict.  ch.  89,  § 
161):  "Where  any  company  is  pro- 
posed to  be  or  is  in  the  course  of 
being  wound-up  altogether  volun- 
tarily, and  the  whole  or  a  portion  of 
its  business  and  property  is  proposed 
to  be  transferred  or  sold  to  another 
company,  the  liquidators  of  the  first 
mentioned  company  may,  with  the 
sanction  of  a  special  resolution  of 
the  company  by  whom  they  were  aj)- 
pointed,  .  .  .  receive  in  compensa- 
tion or  in  part  compensation  for  such 
transfer  or  sale,  shares,  policies  or 
other  like  interests  in  such  other  com- 
pany, for  the  purpose  of  distribution, 
amongst  the  members  of  the  company 
being  wound  up." 

Section  101  also  jirovides  that  dis- 
sentient stockholders  may  require  the 
liquidator  to  purchase  their  interests. 

Section  102  provides  for  determin- 
ing the  price  by  arbitration. 

For  construction  of  this  statute  see 
In  re  London,  etc.  Bread  Co.,  02  L.  T. 
Rep.  224  (1890) ;  In  re  Imperial  Mer- 
cantile Credit  Ass'n,  L.  R.  12  Eq.  hM, 
(1871);  Southall  v.  British  Mutual 
Life  Assur.  Soc,  L.  R.  6  Ch.  App.  614 


(1871);  In  re  Irrigation  Co.,  L.  R.  6 
qh.  App.  176  (1871) ;  Chnch  v.  Finan- 
cial Corp.,  L.  R.  4  Ch.  App.  117 
(1868). 

Sec  also  Pennsylvania  appraisal 
.statute,  Laws  1901,  Act  No.  20,  p.  53. 
'  Mason  v.  Pewabic  Min.  Co.,  133 
U.  S.  50  (1890),  (10  Sup.  Ct.  Rep.  224). 
See  conclusion  of  opinion  of  Justice 
Miller  and  opinion  of  Justice  Bradley. 
See  also  Lauman  r.  Lebanon  Vallej' 
R.  Co.,  30  Pa.  St.  42  (1858),  (72  Am. 
Dec.  685)  ;  McVicker  v.  Ross,  55  Barb. 
(N.  Y.)  247  (1869). 

2  4  Thompson  Corp.  §  4543.  In 
Morris  v.  Ely  ton  Land  Co.,  125 
Ala.  263,  278  (1899),  (28  So.  Rep. 
513),  the  Supreme  Court  of  Alabama 
said:  "It  would  necessarily  and  logi- 
cally follow  from  this  principle  that 
a  moneyed  compensation  to  the  com- 
plaining shareholder  for  the  value  of 
his  stock  could  not  against  his  objec- 
tion be  decreeil  as  his  relief.  To  do 
so  would  be  nothing  more  nor  less 
than  compelling  the  shareholder  to 
sell  his  stock,  which  a  court  of  e<iuity 
has  not  the  i)ower  to  do.  That  it 
would  be  to  the  benefit  of  the  corpo- 
ration and  all  other  shareholders  in  it 
to    let    the    transaction    stand    and 

233 


§  122 


INTERCORPORATE    RELATIONS 


[part  II 


§  122.  Stock  received  upon  Exchange  belongs  primarily  to 
Corporation.  —  When  the  property  of  a  corporation  is  duly 
transferred  to  another  corporation  for  its  shares  of  stock,  the 
title  to  such  shares  —  the  consideration  for  the  transfer  — 
vests,  in  the  absence  of  express  agreement  otherwise,  in  the 
vendor  corporation  as  a  distinct  corporate  entity.  The  stock 
so  acquired  becomes  the  property  of  the  corporation  —  in  lieu 
of  the  property  transferred  —  and  the  stockholders  of  the 
corporation  have  only  an  indirect  interest  therein,  through 
their  interest  in  the  corporation  as  a  whole.  The  stockholders 
own  the  corporation,  but  the  corporation  owns  the  stock.  The 
powers  of  the  corporation,  under  its  charter,  will  determine 
the  question  w^hether  the  stock  so  acquired  can  be  perma- 
nently held,  or  whether  the  immediate  winding  up  of  the  cor- 
poration's affairs  and  distribution  of  the  stock  is  necessar}\ 
But  whether  distributed  sooner  or  later,  the  stockholders  take 
only  through  the  distribution.^ 


compel  the  dissentient  to  accept 
compensation  for  his  stock,  is  an 
argument  that  rests  upon  no  higher 
grounds  than  that  of  expedienc3\ 
In  the  administration  of  justice  by 
the  courts,  principle  should  never  be 
sacrificed  at  the  altar  of  expediencJ^" 

1  In  Kohl  V.  Lilienthal,  81  Cal.  378 
(1889),  (20  Pac.  Rep.  401),  two  cor- 
porations sold  their  property  to  a 
third  corporation,  under  an  agree- 
ment that  its  stock  should  be  delivered 
in  payment,  and  stockholders  of  a 
vendor  company  brought  suit  asking 
that  the  stock  should  be  divided 
among  them.  The  Court  held  that 
as  the  former  companies  had  not 
passed  out  of  existence  nor  been 
dissolved,  the  new  stock,  received  in 
payment  for  their  property,  belonged 
to  them  and  could  not  be  divided 
among  their  stockholders  until  after 
the  dissolution  of  the  corporations 
in  the  manner  provided  by  statute. 

It  appears,  however,  that  there 
was  an  agreement  that  the  new  stock 
should  be  divided  among  the  stock- 
holders and  the  decision  is  opposed 

234 


to  the  weight  of  authority  except 
when  placed  upon  the  ground  that 
the  laws  of  California  permit  the 
liquidation  of  corporations  only  in 
the  statutory  way.  See  also  Martin 
r.  Zellerbach,  38  Cal.  309  (1869),  (99 
Am.  Dec.  365). 

In  Schaake  v.  Eagle  Automatic 
Can  Co.,  135  Cal.  472  (1902),  (63  Pac. 
Rep.  1025,  67  Pac.  Rep.  759)  the  Cali- 
fornia Supreme  Court  followed  the 
earlier  decisions  in  that  State  and 
held  that  a  transfer  bj'  a  subsisting 
corporation  of  all  its  property  to 
another  corporation  for  the  sole 
consideration  of  the  issue  of  stock 
of  the  vendee  corporation  directly 
to  the  stockholders  of  the  vendor 
company  was,  in  effect,  the  attempted 
distribution  of  the  assets  of  the 
latter  corporation  among  its  stock- 
holders in  violation  of  the  section  of 
the  California  Code  (Civil  Code  §  309) 
providing  that  no  distribution  of 
the  capital  of  a  corporation,  other 
than  dividends  from  profits,  shall  be 
made  except  upon  the  dissolution  of 
the  corporation. 


CHAP.  Xl] 


SALES  OF  CORPORATE  PROPERTY 


§  122 


By  unanimous  consent,  however,  a  corporation  may  make  a 
donation  of  its  property.  If  creditors  are  provided  for  and 
stockholders  are  satisfied,  no  one  else  can  complain.  Under 
like  conditions,  a  corporation,  exchanging  its  property  for 
stock  in  another  corporation,  may  enter  into  a  valid  agreement 
that  such  stock,  instead  of  being  delivered  to  it  —  the  corpo- 
ration —  shall  be  directly  divided  among  its  stockholders  pro 
rata.  This  amounts  to  a  liquidation  of  the  corporation's 
affairs  by  unanimous  consent,  but,  in  the  absence  of  a  con- 
trolling statute,  there  is  no  legal  objection  to  it:  and,  between 
the  parties,  it  is  a  contract,  upon  a  valid  consideration,  for 
the  benefit  of  a  third  party  —  the  stockholders  —  which  gen- 
erally, under  modern  codes,  gives  such  party  a  right  of  action 
upon  it.'     When  such  an  express  agreement  is  made,  there- 


Where  the  property  of  a  corpora- 
tion was  transferred  to  another  cor- 
poration in  consideration  of  the  de- 
livery to  the  president  of  the  trans- 
ferring corporation  in  trust  for  its 
stockholders  of  shares  of  stock  of 
the  transferee  corporation,  it  was 
held  that  as  the  former  corporation 
was  entitled  to  such  stock  as  between 
it  and  its  stockholders,  it  was  a 
necessary  party  to  a  suit  to  compel 
the  president  to  account. 

Knickerbocker  v.  Conger,  110 
App.  Div.  125  (1905),  (97  N.  Y. 
Supp.   127). 

Where  the  property  of  a  corpora- 
tion has  been  sold  and  conveyed, 
the  fact  that  the  purchaser  then  re- 
quires an  a.ssignment  of  all  the  shares 
of  the  vendor  corporation  does  not 
make  the  transaction  a  sale  of  stock 
instead  of  property;  and  the  vendor 
corporation,  and  not  its  stockholders, 
is  entitled  to  the  consideration  for 
the  sale. 

Pendery  v.  Carlcton,  S7  Vcd.,  41 
(1898). 

In  Hoist  r.  Sydney,  etc.  Coal,  etc. 
Co.,  69  L.  T.  Rep.  132  (1893),  a  cor- 
poration bj'  its  articles  of  association 
was  authorized  to  sell  or  dispose  of 
all  or  any  part  of  its  assets  for  cash  or 


for  the  stock  or  obligations  of  an- 
other corporation.  It  agreed  to 
sell  all  its  property  in  consideration 
partly  of  a  sum  in  cash,  and  partly 
of  the  procuring  by  the  purchasing 
company  of  a  waiver  from  its  (the 
the  vendor  company's)  stockholders 
of  their  right  to  participate  in  the 
cash  sum  received.  It  was  held  that 
the  proposed  sale  was  not  witliin 
the  powers  of  the  vendor  corpora- 
tion, the  Court  saying:  "I  think 
that  the  sale  or  disposition  con- 
templated by  the  memorandum  of 
association  is  one  under  which  the 
whole  consideration  given  by  the 
jiurchaser,  whether  that  considera- 
tion consists  of  cash,  shares  or  obli- 
gations, will  come  into  the  hands  of 
the  company,  so  as  to  be  tlealt  with 
by  the  members  or  directors  of  that 
company,  or  the  liquidator,  if  the 
comjiany  is  being  wound  up." 

'  In  Anthony  i-.  American  Gluco.se 
Co.,  146  X.  Y.  407  (1895),  (41  N.  E. 
Rep.  23),  a  new  corporation  having 
been  organized  by  the  transfer  to  it 
of  the  property  of  several  corpora- 
tions, upon  an  agreement  that  pay- 
ment for  the  transfer  shoulil  be  maile 
by  apportioning  to  the  original  stock- 
holders the  whole  of  the  stock  of  the 

235 


§  122a 


INTERCORPORATE    RELATIONS 


[part  II 


fore,  the  stockholders  may  maintain  an  action  directly  against 
the  purchasing  corporation  to  compel  the  delivery  of  the  stock 
to  them,  but,  without  such  agreement,  an  action  can  be  main- 
tained only  by  and  for  tlie  corporation  itself. 

§  122a.  Effect  of  Execution  of  Ultra  Vires  Contract  for  Ex- 
change of  Property  for  Stock.  —  While  it  may  be  beyond  the 
powers  of  a  corporation  to  make  a  conveyance  of  all  its  property 
to  another  corporation  in  consideration  of  the  issue  to  it  of  stock 
of  the  latter,  yet  if  the  transfer  has  been  made  and  the  con- 
tract fully  executed,  the  corporation  itself  cannot  maintain 
an  action  to  set  aside  the  transfer  and  recover  back  the  prop- 
erty.* 


new  corporation  not  reserved  for 
the  use  of  the  treasury,  certain  stock- 
holders in  one  of  the  original  cor- 
porations brought  an  action  against 
the  new  corporation  for  a  delivery 
of  its  stock  to  them,  and  it  was  held 
that  the  action  was  maintainable 
against  the  new  corporation,  and 
that  such  stockholders  were  not  to 
be  turned  over  for  relief  to  their 
original  corporation  after  all  its 
functions  had  ceased,  although  it 
might  not  be  wholly  dead  —  it  ap- 
pearing that  the  new  corporation 
owed  a  contract  duty  directly  to  the 
individual  corporators  and  not  to 
their  corporate  entities. 

The  Court  said  (p.  413):  "We 
have,  of  late,  refused  to  be  always 
and  utterly  trammelled  by  the  logic 
derived  from  corporate  existence 
where  it  only  serves  to  distort  or 
hide  the  truth,  and  I  think  we  should 
not  hesitate  in  this  case  to  reject 
the  purely  technical  defence  at- 
tempted. For  nothing  is  plainer  than 
that  the  transfer  of  the  property 
and  business  of  the  five  original  com- 
panies to  the  new  company  to  be 
organized  was  upon  an  agreement 
between  the  corporators  of  them  all 
that  payment  for  the  transfer  should 
be  made  by  apjiortioning  to  the  orig- 
inal stockholders  the  whole  of  the 
stock   of   tlie   new  company,   not   re- 

236 


served  for  the  use  of  the  treasury. 
That  agreement  is  not  denied  by 
anybody,  and  every  word  and  every 
act  of  all  the  companies,  and  of  each 
and  all  of  the  corporators,  have 
proceeded  upon  that  assumption. 
The  companies,  as  corporate  entities, 
could  not,  alone  and  without  the 
consent  of  their  constituent  members, 
make  a  transfer  which  was  intended 
to  end  their  whole  practical  business 
existence,  and  it  was  agreed  by  such 
companies  when  they  made  the 
written  contract  among  themselves 
that  the  refusal  of  any  one  corpo- 
rator, in  any  one  companj^  to  give 
his  consent  to  the  transfer  should 
turn  the  proposed  sale  into  a  mere 
lease.  The  authority  of  the  cor- 
porations to  sell  and  make  a  valid 
agreement  of  sale  to  which  the  new 
company  could  become  a  party,  was 
upon  the  explicit  and  understood 
condition  that  the  new  stock  should 
be  issued  in  exchange  for  the  old 
stock  to  the  several  corporators,  and 
the  necessary  consent  of  the  stock- 
holders was  given  upon  that  express 
condition."  See  also  Hatch  v.  Amer- 
ican Union  Tel.  Co.,  9  Abb.  N.  C. 
(N.  Y.)  223  (1881);  Wilson  v.  ^olian 
Co.  64  App.  Div.  (N.  Y.)  337  (1901), 
(72  N.  Y.  Supp.  150). 

'  Miners'   Ditch  Co.  v.  Zellerbach, 
37  Cal.  543  (1869),  (99  Am.  Dec.  300). 


CHAP.  Xl] 


SALES  OF  CORPORATE  PROPERTY 


§123 


§  122b.  Remedies  of  Dissenting  Stockholders  in  Case  of 
Exchange  of  Property  for  Stock. — The  legal  and  equitable 
principles  governing  tlie  remedies  of  dissenting  stockholders 
in  the  case  of  invaUd  and  unfair  sales  determine  the  remedies 
of  stockholders  who  object  to  the  exchange  of  the  assets  of 
their  corporation  for  stock  in  another  corporation.  These 
principles  have  already  been  fully  examined  and  further  con- 
sideration is  believed  to  be  unnecessar}'.  The  same  is  true 
with  respect  to  the  procedure  in  stockholders'  actions  and  the 
defences  thereto.^ 

III.    Riglits  and   Remedies  of  Creditors. 

§  123.  Liability  of  Purchasing  Corporation  for  Debts  of  Ven- 
dor Company.  Assumption  of  Obligations.  —  A  corporation 
in  selling  its  entire  property,  with  the  approval  of  all  or  a  major- 
ity of  its  stockholders, — as  the  occasion  may  require. — is 
governed  by  the  same  general  principles  of  law  applicable  to 


An  excliange  of  the  property  of 
one  corporation  for  stock  in  another 
which  has  been  fully  executed  can- 
not be  rescinded  by  the  former  cor- 
poration, or  at  the  suit  of  a  stock- 
holder suitig  in  its  right,  on  the  ground 
that  it  was  lUtra  vires. 

Metcalf  V.  American  School  Fur- 
niture Co.,  122  Fed.  115  (1903). 
See  also  Wentworth  v.  Braun,  78 
App.  Div.  (N.  Y.)  634  (79  N.  Y. 
Supp.  489). 

In  Savings  &  Tru.st  Co.,  v.  Bear 
Valley  Irr.  Co.,  112  Fed.  693  (1902) 
the  Court  said  (p.  701):  "Property 
delivered  under  a  void  deed  or  con- 
tract may  be  reco%'ered,  or  compen- 
sation therefor  enforced,  when,  in 
order  to  maintain  such  recovery, 
it  is  not  necessary  to  have  recourse 
to  the  contract  and  is  permitted  only 
becau.se  of  the  desire  of  the  courts 
to  do  justice,  as  far  as  possible,  to 
the  party  who  has  made  payment 
or  delivered  property  under  a  void 
agreement,  and  which  in  justice 
he  ought  to  recover.   .  .  .      But  when 


property  is  delivered  and  the  con- 
sideration therefor  paid,  under  and 
in  pursuance  of  a  void  contract : 
when,  in  other  words,  the  agreement 
is  no  longer  executory  but  has  been 
executed,  —  the  courts  leave  the 
parties  precisely  where  the}"  have 
placed  themselves." 

See  also  City  of  Spokane  v.  Am- 
sterdamscli  Trustees,  22  Wash.  172 
(1900),  (60  Pac.  Rep.  141);  Goodwin 
r.  Bodcaw  Lumber  Co.,  109  La.  10.50 
(1902),  (34  So.  Rep.  74). 

For  consideration  of  the  effect  of 
ultra  vires  sales  of  the  franchises  anil 
property  of  gMfl.>fi-i)ublic  corpora- 
tions see  Cumberland  Tel.,  etc.  Co. 
V.  City  of  Evansville,  127  Fed.  187 
(1903).  See  also  post,  ch.  XXII; 
"  Ultra  Vires  and  Voidable  Railroad 
Leases." 

'  See  ante,  §  114:  "Remedies  of 
Dissenting  Stockholders  in  Case  of 
Im'alid  or  Unfair  Salci" ;  §  115: 
"Procedure  ?/(  Stockholders'  Actions" ; 
§  116;  "Defences  to  Stockholders' 
Actions.     Estoppel.     Laches." 

237 


§  123 


INTERCORPORATE   RELATIONS 


[part  II 


natural  persons.  It  cannot  transfer  its  property  in  fraud  of 
its  creditors.  It  may  not  so  dispose  of  all  its  assets  as  to  leave 
nothing  for  its  creditors,  and  if  it  attempts  such  transfer  the 
creditors  may  follow  the  property.  But  it  may,  in  good  faith, 
for  a  valuable  consideration,  sell  its  entire  property  to  another 
corporation,  and  the  purchaser  will  take  the  property  free 
from  all  incumbrances,  except  specific  liens  and  equitable 
liens  of  which  it  has  notice,  and  will  not  be  liable  in  any  way 
for  the  debts  of  the  vendor  company.^  The  purchase  price 
takes  the  place  of  the  property  sold,  as  respects  creditors,  and 
they  have  no  rights  of  action,  legal  or  equitable,  against  the 
purchaser  or  the  property. 

The  doctrine  that  the  property  of  a  corporation  is  a  trust 
fund  for  the  payment  of  its  debts  does  not  prevent  its  transfer 
in  good  faith  for  a  valuable  consideration.^  As  said  by  Mr. 
Justice  Field  in  Fogg  v.  Blair:^  "  That  doctrine  only  means 
that  the  property  must  first  be  appropriated  to  the  payment 
of  the  debts  of  the  company  before  any  portion  can  be  dis- 


'  United  States:  Gray  v.  National 
Steamship  Co.,  115  U.  S.  116  (1885), 
(5  Sup.  Ct.  Rep.  116). 

Arkansas:  Sappington  v.  Little 
Rock,  etc.  R.  Co.,  37  Ark.  23  (1881). 

District  of  Columbia :  Capital 
Tract.  Co.  v.  Offut,  17  App.  D.  C.  292 
(1900). 

Illinois :  Bruf ett  v.  Great  Western 
R.  Co.,  25  111.  353  (1861). 

Iowa:  Warfield  v.  Marshall,  etc. 
Co.,  72  Iowa,  666  (1887),  (34  N.  W. 
Rep.  467,  2  Am.  St.  Rep.  263). 

Kentucky:  Chesapeake,  etc.  R. 
Co.  V.  Griest,  85  Ky.  619  (1887), 
(4  S.  W.  Rep.  323,  30  Am.  &  Eng.  R. 
Cas.   149). 

Missouri:  Hagemann  v.  Southern 
El.  Co.,  202  Mo.  249  (1907),  (100  S.  W. 
Rep.  1081);  Barrie  v.  United  Rys. 
Co.,  125  Mo.  App.  96  (1907),  (102 
S.  W.  Rep.  1078);  Powell  v.  North 
Missouri  R.  Co.,  42  Mo.  63  (1867). 

Nebraska :  Campbell  v.  Farmers', 
etc.  Bank,  49  Neb.  143  (1896),  (68 
N.  W.  Rep.  344). 

Tennessee:   First  National  Bank  v. 

238 


North  Alabama,  etc.  Co.,  91  Tenn.  12 
(1891),  (18  S.  W.  Rep.  400). 

Texas:  Abilene  Cotton  Oil  Co., 
(Tex.  Civ.  App.  1907),  91  S.  W. 
Rep.  607. 

Wisconsin :  Pennison  v.  Chicago, 
etc.  R.  Co.,  93  Wis.  344  (1896),  (67 
N.  W.  Rep.  70). 

As  to  equitable  liens  see  Union 
Pacific  R.  Co.  V.  McAlpine,  129  I'.  S. 
305  (1889),  (9  Sup.  Ct.  Rep.  286). 

A  corporation  buying  all  the 
property  of  another  corporation  an<l 
assuming  its  name  is  not  identical 
with  it.  Huggins  v.  Milwaukee  Brew- 
ing Co.,  10  Wash.  579  (1895),  (.39 
Pac.  Rep.  152).  Compare,  however. 
Island  City  Savings  Bank  v.  Schat- 
tchen,  67  Tex.  420  (1887),  (3  S.  W. 
Rep.  733) ;  Lehigh  Mining,  etc.  Co. 
V.  Kelly,  64  Fed.  401  (1894). 

-  Barrie  v.  LTnited  Rys.  Co.  125 
Mo.  App.  96  (1907),  (102  S.  W.  Rep. 
1078),  citing  this  section. 

»  Fogg  V.  Blair,  133  U.  S.  541 
(1890),  (10  Sup.  Ct.  Rep.  338). 


CHAP.  Xl] 


SALES  OF  CORPORATE  PROPERTY 


123 


tributed  by  the  stockholders;  it  does  not  mean  that  the  prop- 
erty is  so  affected  by  the  indebtedness  of  the  company  that 
it  cannot  be  sold,  transferred  or  mortgaged  to  bona  fide  pur- 
chasers for  a  valuable  consideration,  except  subject  to  the  lia- 
bility of  being  appropriated  to  pay  that  indebtedness.  Such 
a  doctrine  has  no  existence."  ^ 


»  The  Trust  Fund  Doctrine  Con- 
cerning Corporate  Assets. 

1.    The  Doctrine.     Its  Development. 

The  doctrine  that  the  property 
of  a  corporation,  including  unpaid 
subscriptions  to  its  capital  stock, 
constitutes  a  trust  fund  for  the  pay- 
ment of  its  debts,  upon  which  cred- 
itors have  an  equitable  lien  except 
as  against  hona  fide  purchasers  for 
value,  is  stated  in  many  cases. 
Thus,  for  example,  the  New  York 
Court  of  Appeals  has  said  (Cole  v. 
Millerton  Iron  Co.,  133  N.  Y.  168 
(1892),  (30  N.  E.  Rep.  847,  28  Am. 
St.  Rep.  615)):  "The  assets  of  a  cor- 
poration are  a  trust  fund  for  the 
payment  of  its  debts  upon  which 
the  creditors  have  an  equitable  lien 
both  as  against  the  stockholders  and 
all  transferees  except  those  pur- 
chasing in  good  faith  and  for  value." 

Thi»  doctrine  originated  in  a 
dictum  of  Judge  Story  in  Wood  v. 
Dummer,  3  Mason  308,  decided  in 
1824,  and  was  followed  to  such  an 
extent  that  it  became  known  as  the 
"American  doctrine."  The  courts 
found  it  a  convenient  basis  for 
making  corporate  assets  meet  cor- 
porate liabilities.  Thus  it  was  ap- 
plied : 

(1)  To  compel  subscribers  to  pay 
in  their  stock  subscriptions  when 
required  to  pay  corporate  obliga- 
tions and  to  prevent  the  release  or 
cancellation  of  such  subscriptions. 

(2)  To  prevent  the  distribution 
of  corporate  property  among  stock- 
holders leaving  debts  vuipaid. 

(3)  To  prevent  conveyances  of 
corporate  property  to  third  persons 
without  consideration. 


(4)  To  follow  corporate  property 
into  the  hands  of  stockholders  or 
third  persons. 

(5)  To  prevent  preferences  among 
creditors  —  the  doctrine  being  that 
the  trust  fund  was  for  the  eqi'al 
benefit  of  all  creditors. 

The  following  are  among  the  more 
recent  cases  where  the  doctrine  has 
been  stated  and  applied: 

Connecticut :  Buck  v.  Ross,  68 
Conn.  31  (1896),  (35  Atl.  Rep.  763, 
57  Am.  St.  Rep.  60);  Crandall  v. 
Lincoln,  52  Conn.  73  (1884),  (52  Am. 
Rep.  560). 

Illinois:  Singer  v.  Hutchinson, 
183  111.  606  (1900),  (56  N.  E.  Rep. 
388,  75  Am.  St.  Rep.  133).  Also 
Coleman  v.  Howe,  154  111.  458(1895), 
(39  N.  E.  Rep.  725,  45  Am.  St. 
Rep.  133);  Clapp  v.  Peterson,  104 
111.  26  (1882). 

Maine:  In  re  Brockway  Mfg. 
Co.,  89  Me.  121  (1896),  (35  Atl.  Rep. 
1012,  56  Am.  St.  Rep.  401). 

N^eiv  Jersey:  Wetherbee  v.  Baker, 
35  N.  J.  Eq.  501  (1882). 

N^cw  York:  Kurd  v.  New  York 
etc.  Laundry  Co.  167  N.  Y.  89 
(1901),  (60  N.  E.  Rep.  327);  Bartlett 
V.    Drew,   57   N.   Y.   587    (1874). 

North  Carolina:  Marshall  Foun- 
dry Co.  V.  Killain,  99  N.  C.  501  (6  S. 
]•:.  Rep.  680,  6  Am.  St.  Rep.  539). 

Ohio:  Rouse  v.  Merchants'  Nat. 
liank.,  46  Ohio  St.  493  (1889),  (22 
N.  E.  Re]).  293,  15  Am.  St.  Rep.  644, 
5  L.  R.  .\.  378). 

Tennessee:  Memphis  Barrel,  etc. 
Co.  r.  Ward.  99  Tenn.  172  (1897), 
(42  S.  W.  Rep.  13,  63  Am.  St.  Rep. 
825). 

Texas:     Lyons-Thomas    Hardware 

239 


§  123 


INTERCORPORATE    RELATIONS 


[part  II 


The  principle  that  a  purchasing  corporation  is  not  responsible 
for  the  debts  of  its  vendor  does  not,  in  any  way,   interfere 


Co.  V.  Perry  Stove  Mfg.  Co.,  86  Tex. 
143  (1893),  (24  S.  W.  Rep.  16,  22  L. 
R.  A.  802). 

2.     Objections  to  the  Doctrine. 

The  trust  fund  doctrine  cannot 
be  justified  upon  principle.  The 
relation  of  a  solvent  corporation  to 
its  creditors  is  simply  that  of  a  debtor. 
There  is  no  element  of  trusteeship 
about  it.  It  holds  and  may  dispose 
of  its  property  like  an  individual. 
Its  power  of  disposition  is  wholly 
inconsistent  with  the  existence  of  a 
trust.  As  said  by  the  Circuit  Court 
of  Appeals  for  the  Eight  Circuit  in 
New  Hampshire  Sav.  Bank  v.  Richey, 
121  Fed.  956  (1903):  "It  is  now  well 
settled  that  no  such  relation  as  that 
of  trustee  and  cestui  que  trust  exists 
between  a  corporation  and  its  gen- 
eral creditors.  So  long  as  a  corpora- 
tion is  solvent  and  remains  in  con- 
trol of  its  property  and  assets,  it 
may  deal  therewith  and  dispose  of 
the  same  like  an  individual,  subject 
only  to  such  limitations  upon  its 
powers  as  may  have  been  imposed 
by  its  charter.  The  general  cred- 
itors of  a  corporation  are  not,  like 
the  beneficiaries  in  a  trust,  the  equit- 
able owners  of  the  corporate  prop- 
erty, nor  have  they  any  greater  in- 
terest therein  than  the  creditors  of 
natural  persons  have  in  the  property 
of  their  debtors.  Creditors  of  both 
kinds  are  entitled  to  insist  that  their 
debtors  shall  not  make  a  voluntary 
or  otherwise  fraudulent  conveyance 
of  their  property;  but  beyond  this, 
in  the  absence  of  an  express  lien 
created  by  contract,  they  have  no 
interest,  legal  or  equitable,  in  their 
debtor's  property,  or  right  to  control 
that  free  disposition  of  the  same 
which  is  incident  to  ownership." 

Upon  principle  it  is  equally  dif- 
ficult to  see  how  an  insolvent  corpo- 
ration  stands   in    any   trust    relation 

240 


to  its  creditors.  A  trust  implies 
two  estates  —  legal  and  equitable 
—  one  vested  in  a  trustee,  the  other 
belonging  to  a  beneficiary.  But  a 
corporation  has  and  must  have  both 
the  legal  and  equitable  title.  Sol- 
vent or  insolvent,  all  the  decisions 
admit  that  it  niay  convey  good  title 
to  a  bona  fide  purchaser  for  value. 
Its  power  is  wholly  inconsistent  with 
a  trust.  It  seems  clear,  therefore, 
that  corporate  property  is  not  held 
in  trust  in  any  proper  sense  of  the 
term.  And  if  the  trust  only  relates 
to  the  administration  of  the  affairs 
of  a  corporation  wheru  it  is  being 
wound  up  it  has  little  effect  or  mean- 
ing. That  creditors  are  then  to  be 
paid  before  stockholders  is  a  matter 
of  legal  right  not  dependent  upon 
any  trust  fund  doctrine. 

The  existence  of  a  trust  fund  doc- 
trine is  not  necessary  for  the  pro- 
tection of  the  rights  of  creditors. 
Fraudulent  conveyances  can  be 
reached  without  its  application. 
They  are  invalid  when  made  by 
individuals  as  well  as  corpoAtions. 
Subscriptions  to  capital  stock  rest 
upon  contract  and  are  reached  in 
behalf  of  creditors  by  appropriate 
proceedings  where  the  trust  fund 
doctrine  is  not  recognized.  Re- 
leasing subscriptions  would  amount 
to  giving  away  property  in  fraud  of 
creditors.  In  fact  the  majority  of 
cases  applj'ing  the  trust  fund  doc- 
trine might  have  been  determined 
the  same  way  by  applying  the  prin- 
ciples of  law  governing  fraudulent 
and  voluntary  conveyances.  This 
is,  of  course,  not  true  where  the  trust 
fund  doctrine  has  been  applied  as  a 
basis  for  holding  preferential  con- 
veyances invalid.  But  the  weight 
of  authoritj'  supports  the  view  that 
preferences  are  not  invalid  unless 
prohibited  by  statute. 


CHAP.  Xl] 


SALES  OF  CORPORATE  PROPERTY 


§  123 


with  its  right  to  make  such  contracts  as  it  may  deem  expe- 
dient.    It  may,  as  a  part  of  the  consideration,  assume  and  agree 


3.  The  Doctrine  as  limited  by  the 
Weight  of  Authority. 

That  the  trust  fund  doctrine  has 
no  application  in  the  case  of  a  solvent 
corporation  is  practically  admitted 
by  the  Supreme  Court  of  the  United 
States  in  McDonald  v.  Williams, 
174  U.  S.  397,  401  (1898)  (19  Sup. 
Ct.  Rep.  743):  "When  a  corpora- 
tion is  solvent  the  theory  that  its 
capital  is  a  trust  fund  ujion  which 
there  is  any  lien  for  the  payment  of 
its  debts  has  in  fact  very  little  foun- 
dation. No  general  creditor  has  anj"- 
lien  upon  the  fund  under  such  cir- 
cumstances, and  the  right  of  the 
corporation  to  deal  with  its  property 
is  absolute  so  long  as  it  does  not 
violate  its  charter  or  the  law  appli- 
cable to  such  corporations."  See 
also  New  Hampshire  Sav.  Bank  v. 
Richey,  supra. 

But  the  Supreme  Court  still  clings 
to  the  doctrine  in  a  modified  form  in 
the  case  of  insolvent  corporations. 
Thus  in  Wabash,  etc.  R.  Co.  v.  Ham, 
114  U.  S.  594  (1885),  (5  Sup.  Ct.  Rep. 
1081)  it  said:  "The  property  of  a 
corporation  is  doubtless  a  trust  fund 
for  the  payment  of  its  debts  in  the 
.sense  that  when  the  corporation  is 
lawfully  dissolved  and  all  its  business 
wound  up,  or  when  it  is  insolvent, 
all  its  creditors  are  entitled  in  equity 
to  have  its  debts  paid  out  of  the 
corporate  property  before  any  distri- 
bution thereof  among  the  stock- 
holders. It  is  al.so  true  in  the  case 
if  a  corporation  as  in  that  of  a 
natural  person,  that  any  conveyance 
of  the  property  of  the  debtor,  with- 
out authority  of  law,  made  in  fraud 
of  existing  creditors,  is  void  as  against 
them." 

And  in  Ilollins  v.  Bricrfield  Coal 
etc.  Co.,  150  U.  S.  383  (1893),  (14 
Sup.  Ct.  Rep.  127)  it  was  said: 
"Whatever   of    trust    there    is    arises 


from  the  peculiar  and  diverse  equi- 
table rights  of  the  stockholders  as 
against  the  corporation  and  in  its 
property  and  their  conditional  liability 
to  its  creditors.  It  is  rather  a  trust  in 
the  administration  of  the  assets  after 
possession  by  a  court  of  equity  than 
a  trust  attaching  to  the  property'  as 
such,  for  the  direct  benefit  of  either 
creditor  or  stockholder." 

See  also  Chattanooga,  etc.  R.  Co. 
V.  Evans,  66  Fed.  809  (1895). 

In  view  of  these  decisions,  there- 
fore, it  must  be  said  that  according 
to  the  weight  of  authority  a  trust 
exists  in  the  case  of  an  insolvent 
corporation  whose  affairs  are  being 
wound  up,  in  the  sense  that  its 
effects  must  be  distributed  equally 
among  the  creditors  in  satisfaction 
of  their  claims  before  any  distribu- 
tion among  the  stockholders  can  be 
made. 

Cases  from  State  courts,  some  of 
which  follow  the  Supreme  Court,  and 
some  of  which  wholly  reject  the  trust 
fund  doctrine,  follow: 

Alabama:  O'Bear  Jewelry  Co.  v. 
Volfcr,  106  Ala.  205  (1894),  (17  So. 
Rep.  525,  54  Am.  St.  Rep.  31,  28  L. 
R.  A.  707),  overruling  earlier  deci- 
sions. 

Arkansas:  Worthen  v.  Griffith, 
59  Ark.  562  (1894),  (28  S.  W.  Rep. 
286,  43  Am.  St.  Rep.  50). 

Indiana:  Levering  v.  Bimel,  146 
Ind.  545  (1897),  (45  N.  E.  Rep.  775); 
First  Nat.  Bank  v.  Dovetail  Body, 
etc.  Co.  143  Ind.  550  (1895),  (40 
N.  E.  Rep.  810,  52  Am.  St.  Rep.  435). 

Minnesota:  Ilospes  v.  North- 
western Mfg.,  etc.  Co.,  48  Minn.  174 
(1892),  (50  N.  W.  Rep.  1117,  31  Am. 
St.  Rep.  637,  15  L.  R.  A.  470). 

Missouri:  Schufeldt  v.  Smith,  131 
Mo.  280  (1895),  (31  S.  W.  Rep. 
1039,  52  Am.  St.  Rep.  628).  See 
also   Barrie    v.    United  Rys.    Co.,  125 

241 


§123 


INTERCORPORATE    RELATIONS 


[part  II 


to  pay  the  debts  of  the  vendor  company ;  *  or,  what  is  equiva- 
lent, may  purchase  the  property  subject  to  the  payment  of  all 
the  indebtedness  of  the  vendor.^  In  either  case  the  creditors 
have  a  legal  or  equitable  right  of  action  against  the  purchaser.' 


Mo.  App.  96  (1907),  (102  S.  W.  Rep. 
1078). 

Wisconsin:  Slack  v.  Northwestern 
Nat.  Bank,  103  Wis.  57  (1899),  (79 
N.  W.  Rep.  51,  46  Am.  St.  Rep.  834). 

'  Iowa:  Benesh  v.  Mill  Owners 
Mut.,  etc.  Ins.  Co.,  103  Iowa,  465 
(1897),  (72  N.  W.  Rep.  674). 

Kansas:  Baker  v.  Harpster,  42 
Kan.  511  (1889),  (22  Pac.  Rep. 
415). 

Michigan:  Rehberg  v.  Tontine 
Surety  Co.,  131  Mich.  135  (1902) 
(91  N.  W.  Rep.  132). 

Nebraska :  Tecumseh  National 
Bank  v.  Best,  50  Neb.  518  (1897), 
(70  N.  W.  Rep.  41);  Austin  v.  Te- 
cumseh National  Bank,  49  Neb.  412 
(1896),  (68  N.  W.  Rep.  628,  35  L. 
R.  A.  444). 

New  York :  Fernschild  v.  Yueng- 
ling  Brewing  Co.,  154  N.  Y.  667 
(1898),  (49  N.  E.  Rep.  151);  Clokey 
V.  International  etc.  Co.,  28  Misc. 
326  (1899),  (59  N.  Y.  Supp.  878). 

North  Carolina :  Friedenwald  x\ 
Asheville  Tobacco  Works,  117  N.  C. 
544  (1895),  (23  S.  E.  Rep.  490). 

Tennessee :  Wall  v.  Chattanooga 
Co.,  38  S.  W.  Rep.  278  (1896); 
Planters  Ins.  Co.  v.  Wickes,  4  S.  W. 
Rep.   172  (1887). 

Where  a  corporation  transfers  all 
its  property  to  another  corporation 
and  the  consideration  passes  to 
trustees  for  the  benefit  of  the  stock- 
holders of  the  former  company  which 
is  thus  rendered  unable  to  pay  its 
debts,  it  is  held  that  the  purchasing 
corporation  is  liable  for  a  debt  of 
the  vendor  —  all  the  facts  being 
known  to  it  before  the  purchase. 

Carsten  v.  Hofins,  44  Wash.  456 
(1906),  (87  Pac.  Rep.  631). 

2  In  Chicago,  etc.  R.  Co.  v.  Lund- 
strom,  16  Neb.  254  (1884),  (20  N.  W. 

242 


Rep.  198,  49  Am.  Rep.  718),  the 
property  was  bought,  under  the  Ne- 
braska statute,  subject  to  "all  lien.s, 
incumbrances  or  indebtedness"  exist- 
ing against  the  vendor  corporation, 
and  in  Plainview  v.  Winona,  etc.  R. 
Co.,  36  Minn.  505  (1887),  (32  N.  W. 
Rep.  749),  the  purchase  was  made 
"subject  to  all  demands,  claims  and 
rights  of  action."  In  both  cases  the 
purchasing  company  was  held  liable. 
3  Such  an  assumption  of  debts 
would,  in  many  States,  give  the 
creditor  a  right  of  action  at  law  —  it 
being  a  contract,  upon  a  valid  con- 
sideration, for  the  benefit  of  a  third 
party.  But  when  an  action  at  law 
cannot  be  maintained,  equity  will 
grant  relief.  Thus  a  bond  executed 
by  one  corporation  to  another  whose 
entire  property  it  had  purchased, 
under  which  it  covenanted  to  pay 
all  the  debts  of  the  obligee,  and  to 
fulfil  all  its  obligations,  was  held  to 
create  a  direct  and  primary  liability 
upon  the  part  of  the  purchaser  in 
favor  of  a  person  who  had  a  contract 
with  the  vendor  corporation  which 
would  be  enforced  in  equity,  but  not 
at  law.  In  this  case  (Goodj^ear  Shoe 
Mach.  Co.  r.  Dancel,  119  Fed.  694 
(1902),  s.  c.  144  Fed.  679  (1906)) 
Judge  Wallace  said:  "The  complaint 
alleges  that  the  defendant  (a  Maine 
corporation)  purchased  the  letters 
patent  from  the  Goodyear  Company 
(a  Connecticut  corporation)  and  in 
an  instrument  of  assignment  to  it, 
and  in  consideration  thereof,  agreed 
to  assume  all  the  obligations  of  the 
Goodyear  Company  to  pay  the  an- 
nuit}^  provided  for  in  the  contract 
between  the  latter  and  Dancel.  This 
averment  is  admitted  by  the  answer. 
The  effect  of  this  agreement  was  to 
create   the   relation   of   principal   and 


CHAP.  Xl] 


SALES  OF  CORPORATE  PROPERTY 


§  12-t 


Such  right  of  action,  however,  is  based  entirely  upon  the  as- 
sumption chxuse  of  the  contract,  and  the  fact  that  the  purchaser 
has  agreed  to  pay  certain  debts  does  not  make  it  hable  for 
others.^ 

Whether  the  remedy  of  a  creditor  in  the  federal  courts  upon 
an  assumption  clause  in  a  contract  of  purchase  is  at  law  or  in 
equity  depends  upon  the  law  of  the  forum. -^ 

§  124.  Fraudulent  Sales. — The  general  rules  of  law  relat- 
ing to  fraudulent  conveyances  are  equally  applicable  to  cor- 
porations and  individuals.  Conveyances  in  which  actual  fraud 
appears  are,  manifestly,  void.^     Transfers,  constructively  fraud- 


surety  between  the  defendant  and 
the  Connecticut  corporation,  and  as 
between  these  parties  the  defendant 
became  primarily  liable  for  the  obli- 
gations arising  from  the  contract  of 
the  Goodyear  Comjiany  with  Danccl ; 
and  upon  the  e()uitable  doctrine  that 
a  creditor  shall  have  the  benefit  by 
subrogation  of  any  obligation  or  se- 
curity given  by  the  principal  to  the 
surety  for  the  satisfaction  of  the  debt 
the  plaintiffs,  if  this  action  had  been 
lirought  in  ef|uity,  would  have  been 
entitled  to  enforce  the  covenant  of 
the  defendant." 

In  Connecticut  a  creditor  cannot 
maintain  an  action  at  law  upon  the 
assumption  clause  in  a  contract  of 
purchase,  but  when  the  assets  of  a 
corporation  are  transferred  to  an- 
other, under  an  agreement  contain- 
ing such  a  clause,  equity  has  jurisdic- 
tion to  appoint  a  receiver  for  the 
vendee  corporation  to  enforce  such 
clause  against  the  purchasing  cor- 
poration for  the  benefit  of  the  credit- 
ors of  the  vendor  company. 

Barber  v.  International,  etc.  Co.,  73 
Conn.  587  (1901),  (48  Atl.  Rep.  758). 

In  Illinois  when  a  corporation,  in 
purchasing  the  as.sets  of  another  cor- 
poration, assumes  the  latter's  debts, 
a  creditor  of  the  vendor  may  sue  the 
vendee  at  law. 

Central  Electric  Co.  v.  Sprague 
Electric  Co.,  120  Fed.  925  (1902). 


When  one  corporation  transfers 
all  its  a.s.sets  to  another  corporation 
which  assiunes  all  indebtedness, 
bondholders  of  the  vendor  corpora- 
tion become  creditors  of  the  vendee. 
But  such  bondholders  have  no  ecjui- 
table  lien  on  the  assets  received  from 
the  vendor  corporation  (except  upon 
the  securities  pledged  to  secure  the 
bonds),  superior  to  other  creditors 
whose  claims  have  arisen  subsequent 
to  such  transfer. 

Blake  v.  Domestic  Mfg.  Co.,  38 
Atl.  Rep.  241  (N.  J.  Ch.  1897).  See 
also  Columbus,  etc.  R.  Co.  Appeals, 
109  Fed.  177  (1901). 

'  Fernschild  v.  Yuengling  Brewing 
Co.,  154  N.  Y.  667  (1S9S),  (49  N.  E. 
Rep.  151).  See  also  Hall  v.  Herter, 
83  Him  (N.  Y.),  19  (1894),  (31  N.  Y. 
Supp.  692). 

2  Central  Electric  Co.  v.  Sprague 
Electric  Co.,  120  Fed.  925  (1902)  and 
cases  cited. 

^  Where  an  in.solvent  corporation 
sold  all  its  property  to  another  cor- 
poration in  consideration  of  mortgage 
bonds  issued  by  the  purcha.sing  cor- 
poration upon  the  property  .so  con- 
veyed, without  any  provision  being 
made  for  the  payment  of  the  debts 
of  the  insolvent  corporation,  and 
thereupon  the  stockholders  of  the 
latter  divided  the  bonds  among 
themselves,  it  wa.s  held  that  the  sale 
was    a    fraudulent    conveyance    and 

243 


§  124 


INTERCORPORATE    RELATIONS 


[part    II 


ulent  when  made  by  individuals,  are  of  the  same  character 
when  made  by  corporations.  From  the  nature  of  corpora- 
tions, however,  intercorporate  sales  sometimes  present  cases 
of  constructive  fraud  of  their  own  kind. 

Where  the  assets  of  a  corporation  are  transferred  for  stock 
in  another  company,  if  the  stock  received  has  a  market  value 
and  may  fairly  be  considered  an  equivalent  for  money,  and  the 
transfer  is  made,  in  all  respects,  in  good  faith,  it  cannot  be  set 
aside  by  creditors.  The  shares  of  stock  take  the  place  of  the 
property  sold  and  are  liable  for  the  debts  of  the  corporation. 
Creditors  have  no  ground  of  complaint.  The  fund  for  their 
benefit  is  merely  changed  in  form.  But,  as  a  general  rule, 
the  transfer  of  corporate  assets  for  stock,  whether  to  a  stranger 
corporation  or  to  a  new  corporation  formed  by  the  stock- 
holders of  the  old,  will  be  treated  as  invaUd  as  to  creditors, 
and  may  be  set  aside  as  in  fraud  of  their  rights.^     A  corpora- 


would  be  set  aside  at  the  instance  of 
the  creditors  of  the  grantor  corpora- 
tion. 

Fort  Payne  Bank  v.  Alabama 
Sanitarium,  103  Ala.  358  (1893),  (15 
So.  Rep.  618). 

Where  the  president  of  a  corpora- 
tion sold  all  its  lands  to  another  cor- 
poration organized  by  him  with  no 
assets  for  no  actual  consideration, 
and  the  purchasing  corporation  there- 
upon, at  the  instance  of  the  presi- 
dent, executed  a  mortgage  upon  such 
land  to  secure  an  issue  of  bonds,  it 
w-as  held  that  the  sale  was  fraudulent 
as  against  the  creditors  of  the  vendor 
corporation. 

Bramblet  v.  Commonwealth  Land 
etc.  Co.,  (Ky.  1904),  83  S.  W.  Rep. 
599. 

'  United  States:  In  Hibernia  Ins. 
Co.  V.  St.  Louis,  etc.  Transp.  Co.,  13 
Fed.  518  (1882),  Judge  McCrary  said: 
"A  corporation,  unlike  a  natural  per- 
son, by  disposing  of  all  its  property, 
may  not  only  deprive  itself  of  the 
means  of  paying  its  debts,  but  may 
deprive  itself  of  corporate  existence 
and  place  itself  beyond  the  reach  of 
process  of  law.     At  all  events,  equity 

244 


will  not  permit  the  owners  of  one  cor- 
poration to  organize  another,  and 
transfer  from  the  former  to  the  latter 
all  the  corporate  property,  without 
paying  all  the  corporate  debts."  In 
his  concurring  opinion  in  this  case, 
Judge  Treat  said  (p.  521):  "If  the 
new  company  has  paid  the  full  value 
of  the  property  acquired,  then  it 
may  possibly  not  be  answerable;  but 
if  it  merely  issued  to  the  old  its  stock 
therefor,  why  should  it  not,  at  least 
to  the  extent  of  that  stock,  which 
represents  value  for  property  ac- 
quired, meet  the  obligations  to  which 
such  stock  should  fairly  be  held 
subject?" 

Also  Chattanooga,  etc.  R.  Co.  v. 
Evans,  66  Fed.  810  (1895);  Blair  v. 
St.  Louis,  etc.  R.  Co.,  22  Fed.  36 
(1884). 

California :  San  Francisco,  etc.  R. 
Co.  V.  Bee,  48  Cal.  398  (1874). 

N^etv  Jersey:  Couse  v.  Columbia 
Powder  Mfg.  Co.,  33  Atl.  Rep.  297 
(1895). 

Tennessee :  Where  a  new  corpora- 
tion is  organized,  through  the  efforts 
of  the  officers  of  another  corporation, 
for     the     purpose     of    acquiring     its 


CHAP.  Xl] 


SALES  OF  CORPORATE  PROPERTY 


§  124 


tion  which  pays  only  with  its  own  stock  does  not  take  as  a 
purchaser  for  value,  without  notice,  but  is  put  upon  inquiiy  as 
to  the  debts  of  the  corporation  making  the  transfer.* 

A  corporation  cannot,  directly  or  indirectly,  turn  over  its 
property  to  its  stockholders  at  the  expense  of  its  creditors. 
Upon  this  principle  a  conveyance  of  the  entire  property  of  an 
insolvent  corporation,  under  an  arrangement  whereby  the  pur- 
chase price  — in  money,  bonds  or  stock  — is  to  be  distributed 
directly  to  the  stockholders  of  the  vendor  corporation,  is  fraudu- 
lent and  void  as  to  creditors.^ 

Where  directors  of  an  insolvent  corporation  are  also  in  the 


property,  and  the  transfer  is  made 
upon  the  agreement  of  the  new  com- 
pany to  issue  to  tlie  old  a  part  of  its 
stock,  the  transaction  is  void  as 
against  the  creditors  of  the  old  cor- 
poration. Vance  v.  McNabb  Coal, 
etc.  Co.,  92  Tenn.  47  (1892),  (20  S. 
W.  Rep.  424). 

Where  a  transfer  of  the  assets  of 
one  corporation  to  another  for  stock 
in  the  latter  is  void  a  reeonvej'ance 
of  tlie  property  cannot  be  treated  as 
frandulent  as  to  creditors  of  the 
original  grantee. 

Summers  v.  Glenwood  Gold,  etc. 
Min.  Co.,  15  S.  D.  20  (1901),  (86 
N.  W.  Rep.  749). 

'  A  corporation  which  purchases 
all  the  property  of  another  company, 
knowing  that  such  company  is  insol- 
vent, under  an  arrangement  by 
which  a  large  part  of  the  purchase 
price  will  be  placed  beyond  the  reach 
of  the  creditors,  if  there  are  any,  is 
under  a  duty  to  inquire  as  to  the 
existence  of  unsecured  creditors,  and 
is  chargeable  with  all  knowledge 
which  such  an  inquiry  would  disclo.se. 
Chattanooga,  etc.  R.  Co.  v.  Evan.s, 
0(3  Fed.  810  (189.5). 

^  Where  the  stockholders  of  an 
insolvent  corporation  convey  all  its 
property  to  another  corporation  in 
consideration  of  mortgage  bonds 
issued  by  the  purcha.ser  on  the 
property,  and,  without  providing  for 


the  debts,  divide  the  bonds,  pro  rata, 
among  themselves,  such  transfer  is  a 
fraud  on  creditors.  Fort  Paj-ne  Bank 
V.  Alabama  Sanitarium,  103  Ala.  358 
(1894),  (15  So.  Rep.    618). 

A  provision,  in  the  transfer  of  the 
assets  of  one  corporation  to  another, 
that  stock  in  the  purchasing  corpora- 
tion shall  be  issued  to  the  stock- 
holders of  the  vendor  corjjoration 
renders  the  transfer  fraudulent  and 
void  as  to  creditors,  being,  in  effect,  a 
transfer  of  property  by  a  debtor  with 
a  reservation  of  an  interest  therein 
to  itself.  Montgomery  Web  Co.  v. 
Dienelt,  133  Pa.  St.  585  (1S90), 
(19  Atl.  Rep.  428;  19  Am.  St.  Rep. 
603). 

A  transfer  by  a  corporation  of  all 
its  property  to  another  corporation, 
in  consideration  of  the  assumption  of 
debts  and  the  issuance  of  stock, 
which  is  carried  out  by  the  delivery 
of  such  stock  to  intlividual  stock- 
holders of  the  grantor,  is  prima  facie 
fraudulent  a-s  to  creditors.  Couse  v. 
Columbia  Powder  Mfg.  Co.  (N.  J. 
1895),  33  Atl.  Rep.  297. 

See  also  Grenell  v.  Detroit  Ga-s  Co., 
112  Mich.  73  (1897),  (70  N.  W.  Rep. 
413);  Jones  r.  Arkansas  Mechanical 
and  Agricultural  Co.,  38  Ark.  17 
(1881);  Chattanooga,  etc.  R.  Co.  v. 
Evans,  GO  Fed.  810  (1895);  Buck- 
waiter  V.  Wliiiiple  115  Ga.  484  (1902), 
(41  S.  E.  Rep.  1010). 

245 


§  124 


INTERCORPORATE    RELATIONS 


[part  II 


directory  of  another  company,  a  convej'ance  of  all  the  assets 
of  the  one  corporation  to  the  other  —  these  directors  partici- 
pating in  the  transaction  —  has  been  held  to  be  prima  facie 
fraudulent.'     But  the  fact  that  both  corporations  have  the 


'  Where  the  directors  of  an  insol- 
vent corporation  ordered  the  con- 
veyance of  all  its  property  to  secure 
a  debt  due  from  it  to  another  cor- 
poration, at  a  meeting  in  which 
several  directors  who  voted  for  the 
resolution  authorizing  the  convey- 
ance were  also  directors  of  the  cor- 
poration for  whose  benefit  the  con- 
veyance was  made,  it  was  held  that 
the  convej^ance  so  authorized  was 
prima  facie  fraudulent  as  to  creditors, 
and  would  be  declared  void,  unless  it 
was  clearly  shown  that  it  was  fair 
and  reasonable,  and  absolutely  free 
from  fraud.  Sweeny  v.  Grape  Sugar 
Refining  Co.,  30  W.  Va.  443  (1887), 
(4  S.  E.  Rep.  431,  8  Am.  St.  Rep. 
88). 

In  Barrie  v.  United  Rys.  Co.  125 
Mo.  App.  96  (1907),  (102  S.  W.  Rep. 
1078,  1082)  the  Court  said:  "For 
the  reason  that  the  directory  and 
chief  officers  of  both  corporations 
are  practically  identical,  the  pre- 
sumption is  that  the  tripartite  agree- 
ment, as  between  the  two  corpora- 
tions, is  fraudulent,  and  hence  the 
assets  acquired  from  the  transit  com- 
pany by  the  United  Railways  Com- 
pany, under  said  agreement,  are  held 
by  the  latter  company  in  trust  for 
the  benefit  of  creditors  of  the  former. 
But  this  presumption  is  not  an  irre- 
buttable legal  presumption.  It  is  a 
presumption  of  fact  which  may  be 
overcome  by  clear  and  convincing 
proof  that  the  officers  and  directors 
acted  with  impartiality  and  absolute 
fairness,  so  that  no  advantage  was 
given  one  corporation  over  the  other 
in  the  terms  of  or  in  the  performance 
of  the  contract."  —  Citing  thi.s  work. 

The  following  extract  from  the 
opinion  in  O'Connor  Mining,  etc.  Co. 
V.   Coosa   Furnace   Co.,    95   Ala.   614, 

246 


618  (1891),  (10  So.  Rep.  290,  36 
Am.  St.  Rep.  251),  clearly  states  the 
relations  of  creditors  to  the  internal 
affairs  of  corporations:  "The  direct- 
ors of  a  corporation,  in  the  transac- 
tion of  its  business  and  the  disposi- 
tion of  its  property,  do  not  stand  in 
any  such  relation  to  the  general 
creditors  of  the  corporation  as  they 
occupy  to  the  corporation  itself  and 
to  its  stockholders.  They  are  not 
the  agents  of  such  creditors  nor  can 
they  usually  be  regarded  as  trustees 
acting  in  their  behalf.  The  creditors 
are  not  entitled  to  disaffirm  a  transfer 
of  the  property  of  the  corporation, 
made  by  its  directors  or  other  agents, 
merely  because  the  corporation  itself 
or  its  stockholders  could  have  done 
so.  When  a  disposition  of  the 
property"  of  a  corporation  is  assailed 
by  its  creditors,  they  are  not  clothed 
with  the  right  of  the  corporation  or 
of  its  stockholders  to  set  aside  the 
transaction,  regardless  of  its  fairness 
or  vmfairness,  on  the  ground  that  it 
was  entered  into  by  representatives 
of  the  corporation  who  had  put 
themselves  in  a  relation  antagonistic 
to  the  interests  of  their  principal. 
The  right  of  the  creditor  to  impeach 
the  transaction  depends  upon  its 
fraudulent  character.  The  question 
in  such  case  is,  was  the  transaction 
which  is  complained  of  entered  into 
with  the  intent  to  hinder,  delay  or 
defraud  creditors  ?  Was  the  property 
fraudulently  transferred  or  conveyed  ? 
The  mere  fact  that  the  corporation, 
in  disposing  of  its  property,  dealt 
with  persons  who  at  the  same  time 
were  charged  with  the  duty  of  rep- 
resenting its  interests,  does  not,  by 
itself,  render  the  transaction  fraudu- 
lent. 

"  Wliere  the  property  of  a  corpora- 


CHAP.  XI 


SALES  OF  CORPORATE  PROPERTY 


§  125 


same  officers  and  stockholders  does  not  necessarily  render  a 
conveyance  fraudulent  as  to  creditors.' 

§  125.  Remedies  of  Creditors.  —  There  are  several  remedies 
open  to  creditors  in  the  case  of  fraudulent  conveyances  by 
debtor  corporations. 

1.  A  creditor  may  subject  the  consideration  for  the  sale, 
money,  stocks,  bonds  or  other  property,  when  received  by 
the  vendor  corporation  — his  debtor  — to  the  payment  of  his 
debt  in  such  manner,  by  execution  sale  or  otherwise,  as  the 
statutes  may  permit.^  This  course  may  be  taken  in  every 
case,  without  regard  to  the  fraudulent  character  of  the  trans- 
action, for  corporate  property  is  always  liable  to  be  taken  for 
corporate  debts. 

2.  A  creditor,  having  established  the  validity  of  his  claim  at 
law,^  may  seek  the  aid  of  a  court  of  equity  to  follow  the  cor- 


tion  is  transferred  to  another  cor- 
poration represented  by  the  same 
directors,  the  fact  of  such  relation- 
ship is  a  circumstance  well  calculated 
to  arouse  suspicion,  and  calls  for  a 
rigid  and  severe  scrutiny  in  the 
examination  of  such  transaction 
when  it  is  assailed  by  a  creditor. 
When  such  a  relationship  is  shown  to 
exist  between  the  contracting  parties, 
clearer  and  fuller  proof  of  the  good 
faith  of  the  parties  is  necessary  than 
would  be  required  if  the  transferee 
or  grantee  had  been  a  stranger. 
When,  however,  such  examination 
is  made,  and  such  proof  is  forth- 
coming, and  the  result  is  that  no 
fraud  or  unfair  dealing  is  shown, 
and  it  appears  that  the  transaction 
was  not  vitiated  by  any  infirmity  of 
which  the  creditor  has  tlie  right  to 
complain,  then  the  transaction  must 
stand,  and  it  is  as  valid,  as  against 
the  creditor,  as  if  the  corporation  had 
dealt  with  a  stranger,  who  was  not 
involved  in  any  way  with  the  cor- 
porate representatives." 

See  also  Ranks  v.  .Tudah,  8  Conn. 
145  (1830)  ;  Levins  v.  Peoples  Grocery 
Co.  (Tenn.  1896),  38  S.  W.  Rep.  733. 

•  Cole   V.    Millerton    Iron   Co.,    133 


N.  Y.  164  (1892),  (30  N.  E.  Rep.  847, 
28  Am.  St.  Rep.  615),  affirming  59 
Hun,  217  (1891),  (13  N.  Y.  Supp. 
851). 

In  Warfield  v.  Marshall  County 
Canning  Co.,  72  Iowa,  G66  (1887),  (34 
N.  W.  Rep.  467,  2  Am.  St.  Rep.  263), 
it  was  held  that  a  sale  by  a  failing 
corporation  of  all  its  propertj'  to  an- 
other corporation,  which  agreed  to 
pay  its  obligations  to  the  full  value 
of  the  property  .sold,  would  not  be  set 
aside  as  fraudulent,  because  the  stock- 
holders of  the  first  formed  a  part  of 
stockholders  of  the  second  corpora- 
tion, there  being  no  fraudulent  pur- 
pose shown. 

See  also  Barr  v.  Bartram,  etc.  Mfg. 
Co.,  41  Conn.  506  (1874). 

2  Where  the  assets  of  a  corporation 
were  transferred  to  a  new  company, 
formed  for  the  purpose  of  acquiring 
them,  the  consideration  of  the  transfer 
being  the  issue  of  stock,  the  stock  so 
issued  to  the  old  corporation  cannot  be 
appropriated  by  shareholders  to  the 
detriment  of  creditors,  but  it  is  liable 
for  the  corporate  debts.  Vance  v. 
McNabb  Coal,  etc.  Co.,  92  Tenn.  47 
(1892),  (20  S.  W.  Rep.  424). 

'Swan   Land,   etc.   v.    Frank,    14S 

247 


§  125 


INTERCORPORATE    RELATIONS 


[part  II 


porate  property  into  the  hands  of  the  purchaser  and  apply  it, 
or  its  avails,  in  payment  of  his  judgment  debt.'  A  court  of 
equity  may  grant  this  relief,  or,  it  is  said,  may  charge  the  pur- 
chaser with  the  value  of  the  property,  upon  the  ground  already 
noticed  that  the  assets  of  a  corporation  constitute  in  equity 
a  fund  for  the  payment  of  its  debts,  and  cannot  be  diverted 


U.  S.  603  (1893),  (13  Sup.  Ct.  Rep. 
691),  citing  Nat.  Tube  Works  v. 
Ballou,  146  U.  S.  517  (1892),  (13  Sup. 
Ct.  Rep.  165);  Scott  v.  Neely,  140 
U.  S.  106  (1891),  (11  Sup.  Ct.  Rep. 
712);  Taylor  v.  Bowker,  111  U.  S. 
110  (1884),  (4  Sup.  Ct.  Rep.  397). 
But  see  Blanc  v.  Paymaster  Min.  Co., 
95  Cal.  524  (1892),  (30  Pac.  Rep.  765, 
29  Am.  St.  Rep.  149). 

*  In  Ewing  v.  Composite  Brake 
Shoe  Co.,  169  Mass.  73  (1897),  (47 
N.  E.  Rep.  241),  Judge  Lathrop  said: 
"It  is  obvious,  however,  that  where 
a  new  corporation  is  formed,  the 
creditors  of  the  old  corporation  do 
not,  without  something  further  being 
done,  become  creditors  of  the  new 
corporation.  They  have  an  equitable 
right  to  follow  the  assets  of  the  old 
corporation;  but  they  cannot  main- 
tain an  action  at  law  against  the  new 
corporation,  for  there  is  no  privity  of 
contract.  To  render  the  new  corpora- 
tion liable  there  must  be  a  new  con- 
tract made,  such  as  will  amount  to  a 
novation." 

While  a  reorganized  corporation 
may  not  be  liable  for  the  debts  of  the 
original  corporation,  the  property  ac- 
quired from  it  may  be  reached  by  its 
creditors  in  the  hands  of  a  reorganized 
corporation.  Marshall  v.  Western 
North  Carolina  R.  Co.,  92  N.  C.  322 
(1885). 

In  Hurd  v.  New  Vork,  etc.  Laun- 
dry Co.,  167  N.  Y.  89  (1901),  (60 
N.  E.  Rep.  327)  the  New  York  Court 
of  Appeals,  basing  its  decision  upon 
the  "trust  fund  doctrine,"  held  that 
when  the  rights  of  creditors  have 
intervened,  a  corporation  has  no 
right  to  convey  its  assets  to  another 

248 


corporation  in  consideration  of  the 
issue  of  stock  of  the  latter  to  its 
stockholders;  that  the  creditors  of 
the  vendor  corporation  had  a  right 
to  rely  upon  those  assets  for  the  pay- 
ment of  their  debts  and  had  an  equi- 
table lien  thereon. 

In  Vicksburg,  etc.  Telephone  Co. 
V.  Citizens  Telephone  Co.  79  Miss. 
341  (1901),  (30  So.  Rep.  725,  89  Am. 
St.  Rep.  656),  where  one  corporation 
had  transferred  all  its  property  to 
another  without  consideration  pass- 
ing to  the  vendor  corporation  which 
then  ceased  to  do  business,  the  Court, 
in  holding  that  the  property  might 
be  followed  in  equity,  said  (p.  354) : 
"We  think  the  same  principle  which 
applies  in  favor  of  the  simple  contract 
creditor  against  a  consolidated  cor- 
poration, enabling  him  to  subject,  in 
the  hands  of  that  consolidated  com- 
pany property  of  a  constituent  cor- 
poration received  by  the  consolidated 
company  (such  constituent  corpora- 
tion being  debtor  of  the  simple  con- 
tract creditor)  will  apply  in  cases  like 
this." 

See  also  Schleider  v.  Dielman,  44 
La.  Ann.  62  (1892),  (10  So.  Rep. 
934) ;  Brum  v.  Merchants  Ins.  Co.,  16 
Fed.  140  (1883) ;  Hibemia  Ins.  Co.  v. 
St.  Louis,  etc.  Transp.  Co.,  10  Fed. 
596  (1882),  s.  c.  13  Fed.  516  (1882); 
First  Nat.  Bank  v.  Chattanooga,  etc. 
Co.,  97  Tenn.  308  (1896),  (37  S.  W. 
Rep.  8).  Also  Montgomery,  etc.  R. 
Co.  V.  Branch,  59  Ala.  139  (1877), 
considered  in  Central  R.,  etc.  Co.  v. 
Pettus,  113  U.  S.  116  (1885),  (5  Sup. 
Ct.  Rep.  387).  And  see  Mc Williams 
V.  City  of  New  York,  134  Fed.  1015 
(1904);    Barber  V.  International,  etc. 


CHAP.  Xl] 


SALES  OF  CORPORATE  PROPERTY 


§125 


therefrom  and  nothing  left.'  Judgment  creditors  may  also 
be  entitled  to  the  aid  of  a  receiver  in  following  corporate  assets.^ 
3.  Upon  the  same  principle,  a  creditor  may  charge  stock- 
holders who  have  received  shares  of  stock  or  other  property 
forming  the  consideration  for  a  sale  of  corporate  assets,  as 
trustees  for  his  benefit.^     The  property  belongs  in  equity  to 


Co.,  73  Conn.  587  (1901),  (48  Atl.  Rep. 
758). 

'Grenell  v.  Detroit  Gas  Co.,  112 
Mich.  73  (1897),  (70  N.  W.  Rep.  413): 
"A  corporation  cannot  sell  all  its 
property  and  take  in  payment  stock 
in  a  new  corporation  under  an  arrange- 
ment that  ha.s  the  effect  of  distribut- 
ing the  assets  of  the  vendor  among  its 
stockholders  to  the  exclusion  and 
prejudice  of  its  creditors;  and  a 
company  making  such  a  purchase, 
in  consideration  of  the  issue  of 
its  own  stock  to  such  stockholders, 
takes  the  property  subject  to  the 
rights  of  creditors.  Such  an  arrange- 
ment is  a  diversion  of  the  trust 
fund." 

Where  the  majority  stockholder 
of  a  corporation  purchased  a  large 
amount  of  the  remaining  stock  and 
arranged  with  the  other  .stockholders 
that  the  assets  of  the  corporation 
should  be  convej-ed  to  a  new  corpora- 
tion, the  stock  of  which  should  be 
issued  to  the  .stockholders  of  the  old 
corporation,  it  was  held  that  the 
transaction  amounted  to  an  absorp- 
tion of  the  old  by  the  new  corpora- 
tion, and  that  the  latter  was  responsi- 
ble for  the  debts  of  the  former,  and 
would  not  be  heard  to  say  that  the 
assets  which  it  took  over  were  of  no 
value. 

Camden  Interstate  R.  Co.  r.  Lee, 
(Ky.  1905),  84  S.  W.  Rep.  332. 

2  Barclay  v.  (Quicksilver  Min.  Co., 
6  Lans.  (N.  Y.)  25  (1872),  (9  .\bb.  Pr. 
.V.  s.  283).  See  also  Alexander  i>. 
Relfe,  74  Mo.  495  (1881).  Couse  v. 
Columbia  Powder  Mfg.  Co.  (N.  J. 
1895),  33  Atl.   Rep.    297. 

^  Where  the  a.s.scts  of  a  corporation 


are  transferred  to  another  company 
and  the  proceeds  are  divided  among 
its  stockholders,  in  proportion  to  the 
•amount  of  their  stock,  they  are 
trustees  for  creditors  as  to  the  amount 
received,  the  transaction  being,  in 
effect,  a  distribution  of  such  assets 
by  the  company  to  its  own  stock- 
holders. 

Hill  V.  Gruell,  42  111.  App.  411 
(1891).  See  also  Panhandle  Nat. 
Bank  v.  Emery,  78  Te.\-.  498  (1890), 
(15  S.  W.  Rep.  23);  McKu.sick  v. 
Seymour,  48  Minn.  172  (1892),  (50 
N.  W.  Rep.  IIIG). 

Where  the  stockholders  of  a  cor- 
poration received  from  another  cor- 
poration an  agreed  price  per  share 
for  their  stock  and  thereupon,  with- 
out further  consideration,  conveyed 
the  entire  assets  of  their  corporation 
to  the  corporation  which  had  pur- 
cha.sed  their  shares,  it  was  held  that 
the  stockholders  held  the  moneys 
paid  them  —  constituting  the  con- 
sideration of  the  sale  —  as  a  trust 
fund  for  the  payment  of  the  debts 
of  the  vendor  corporation.  It  wa.s 
further  held  that  the  purchasing  cor- 
poration had  j)aid  full  value  for  the 
property  received  and  was  not  re- 
sponsible for  such  debts. 

Hagemann  v.  Southern  El.  Co., 
202  Mo.  249  (1907),  (100  S.  W.  Rep. 
1081). 

But  with  respect  to  the  last  con- 
clusion compare  cases  cited  in  notes 
to  §  124,  ante. 

Where,  upon  a  sale  of  the  entire 
projierty  of  a  corporation  to  another 
company  for  its  bonds,  an  arrange- 
ment is  made  whereby  the  bonds  are 
divided    directly    among    its    stock- 

249 


§  125 


INTERCORPORATE   RELATIONS 


[part  II 


the  corporation  to  be  held  for  the  benefit  of  its  creditors.  It 
constitutes  the  purchase  price  for  the  sale  of  the  property  and 
when  stockholders  divert  it  to  themselves  they  appropriate 
•corporate  assets  and  are  chargeable  therefor. 

4.  A  creditor  may  institute  an  action  at  law  against  his 
debtor — the  vendor  corporation — and,  where  attachments 
are  permitted,  may  attach  the  corporate  property  so  trans- 
ferred as  being  still  the  property  of  his  debtor,  or  may  levy 
execution  thereon  after  judgment.^  This  action  is  predicated 
upon  the  principle  that  a  transfer  in  fraud  of  creditors  is  void 
as  to  them. 

5.  A  creditor  may  hold  the  purchasing  corporation  directly 
responsible  when,  in  taking  over  the  property,  it  assumes  the 
debts  of  the  vendor.^ 

Laches  may  bar  a  creditor  from  seeking  relief  in  equity.' 


holders,  such  an  arrangement  is  void 
as  to  the  creditors,  and  the  bonds 
belong  to  them.  Fort  Payne  Bank 
V.  Alabama  Sanitarium,  103  Ala.  358 
(1893),  (15  So.  Rep.  618);  Chatta- 
nooga, etc.  R.  Co.  V.  Evans,  66  Fed. 
809  (1895). 

^  The  property  of  a  corporation, 
transferred  to  a  new  corporation  for 
its  stock,  may  still  be  attached  by  the 
creditors  of  the  old  company.  Mc- 
Vicker  v.  American  Opera  Co.,  40 
Fed.   861   (1889). 

A  judgment  creditor  may  levy 
upon  and  sell  upon  execution  prop- 
erty so  transferred. 

Montgomery  Web  Co.  v.  Dienelt, 
133  Pa.  St.  585  (1890),  (19  Atl.  Rep. 
428,  19  Am.  St.  Rep.  663).  See 
also  Prentice  v.  United  States,  etc. 
Steamship  Co.,  78  Fed.  106  (1897); 
Buckwalter  v.  Whipple,  115  Ga.  484 
(1902),  (41  S.  E.  Rep.  1010). 

^  See  ante,  §  123:  "Liability  of 
Purchasing  Corporation  for  Debts  of 
Vendor  Company  —  Assumption  of 
Obligations." 

Where  an  insolvent  corporation 
sold  its  property  to  another  corpora- 
tion for  bonds  of  the  purchasing  cor- 
poration,   one    of    the    conditions    of 

250 


the  sale  being  a  guaranty  that  all 
claims  against  the  vendor  corpora- 
tion and  its  property  should  be  dis- 
charged before  the  payment  of  t^e 
purchase  price,  it  was  held  that  such 
guaranty  was  personal  to  the  pur- 
chasing corporation,  and  not  enforce- 
able for  the  benefit  of  the  vendor 
corporation's  creditors. 

Randall  v.  Detroit,  etc.  R.  Co., 
134  Mich.  493  (1903),  (96  N.  W.  Rep. 
567). 

Where  one  corporation  transfers 
all  its  property  and  assets  to  another 
company  in  consideration  of  stock  of 
the  latter  being  issued  to  the  stock- 
holders of  the  former,  it  is  held  that 
the  latter  corporation  holds  the 
property  so  received  as  trustee  for 
the  creditors  of  the  old  corporation, 
and  may  be  compelled  to  account 
therefor. 

Wilson  V.  yEolian  Co.,  64  App.  Div. 
(N.  Y.)  337  (1901),  (72  N.  Y.  Supp. 
150). 

'  Townsend  v.  St.  Louis,  etc. 
Mining  Co.,  159  U.  S.  21  (1894), 
(15  Sup.  Ct.  Rep.  997);  Vaughn  v. 
Comet,  etc.  Co.,  21  Colo.  54  (1895), 
(39  Pac.  Rep.  422). 


CHAP.  Xl]  SALES  OF  CORPORATE  PROPERTY  §  120 

Thus  a  delay  of  a  year  during  which  the  purchasing  corporation 
went  on  investing  money  with  respect  to  the  property  conveyed, 
and  incurring  UabiUties,  has  been  held  to  debar  a  creditor 
from  equitable  relief.^ 

Creditors  are  only  interested  in  sales  of  corporate  property 
with  respect  to  their  several  claims.  Consequently,  where 
an  exchange  of  corporate  property  for  stock  in  another  cor- 
poration is  approved  by  all  the  stockholders,  a  court,  at  the 
instance  of  a  creditor,  will  only  disturb  the  transfer  so  far  as 
is  necessary  to  satisfy, the  creditors'  demand,  leaving  it  other- 
wise in  the  condition  in  which  the  stockholders  had  a  legal  right 
to  place  it.- 

§  126.  Priority  of  Purchaser's  Mortgage  over  Claims  of 
Vendor's  Creditors.  —  Upon  the  principle  that  the  assets  of  a 
corporation  are  a  trust  fund  for  the  payment  of  its  debts,  it  is 
sometimes  said  that  creditors  have  an  equitable  lien  thereon 
which  they  may  enforce  against  transferees.  But,  as  already 
shown,  the  expression  can  be  so  used  only  in  a  figurative  sense. 
Creditors  have  no  lien  before  judgment,  and  after  judgment 
only  when  given  by  statute.  They  may  follow  property  into 
the  hands  of  a  purchaser  when  transferred,  actually  or  con- 
structively, in  fraud  of  their  rights,  because,  in  such  a  case, 
equity  will  disregard  forms  and  treat  the  property  as  being 
held  by  the  purchasing  company  for  their  benefit.  So  equity 
will  disregard  or  set  aside  a  mortgage  made  by  the  purchaser 
of  the  property  so  acquired  where  the  mortgagee  takes  with 
knowledge  of  the  whole  transaction.' 

Where,  however,  the  purchaser  mortgages  the  property  for 

*  Hamilton     v.     Menominee    Falls  mortgage  to  secure  an  issue  of  bonds, 

Quarry  Co.,  lOG  Wis.  352  (1900),  (81  covering  its  own   property  and  that 

N.  W.  Rep.  876).     See  also  Anthony  thus  acquired,   it  was  held  that  the 

V.  Campbell,  112  Fed.  212  (1901).  mortgage    should    be    set    aside,    at 

^  Wilson  V.   .^olian   Co.,   64    Aj)p.  least  as  to  bondholders  who  did  not 

Div.   (N.   Y.)   337  (1901),  (72   N.   Y.  stand  as  bo7m  fide  purchasers.     Cole 

Supp.    150),   affirmed   170   N.   Y.   618  v.  Millerton  Iron  Co.,  133  N.  Y.  164 

(1902),  (63  N.  E.  Rep.  1123^.  (1892),  (30  N.  E.  Rep.  847,  28  Am. 

^  Where  a  transfer  by  a  corpora-  St.  Rep.  615). 
tion   to   another   company,    with   the  Where  a  sale  is  set  aside  as  ^dtra 

same  stockholders,  of  all  its  propertj'  vires    a  mortgage   by   the   vendee   is 

was    without    consideration,     except  void.    Knoxville  v.  Knoxville,  etc.  R. 

the    assumption    of    debts,    and    the  Co.,  22  Fed.  758  (1884). 
transferee    immediately    executed    a 

251 


§  127 


INTERCORPORATE    RELATIONS 


[part  H 


a  present  consideration  and  the  mortgagee  acts  in  good  faith, 
the  mortgage  takes  precedence  of  claims  of  creditors  who  have 
not  acquired  a  statutory  hen,  by  judgment  or  attachment, 
prior  to  its  execution.^  This  conclusion  is  not  inequitable. 
It  merely  gives  the  same  priority  to  a  bona  fide  mortgage  made 
by  a  purchaser  that  such  a  mortgage  would  have  had  if  made 
by  the  debtor,  the  selling  corporation.  Questions  as  to  follow- 
ing the  avails  of  a  mortgage  do  not  affect  its  validity. 

Notice  of  the  existence  of  a  creditor's  claim  does  not,  stand- 
ing alone,  alter  the  position  of  a  mortgagee.^  Knowledge 
of  the  fraudulent  character  of  the  transfer,  as  well  as  of  the 
claim,  must  be  shown. 

IV.   Sales  of  Property  of  Quasi-public   Corporations. 

§  127.  Indispensable  Property  cannot  be  alienated  or  taken 
on    Execution    without    Statutory    Authority.  —  Private    cor- 

and  created  no  lien  upon  the  propertj'' 
of  the  company,  nor  any  restriction 
upon  the  companies'  right  to  use  it 
for  any  lawful  purpose.  The  bonds 
were  given  to  raise  the  necessary 
funds  to  complete  the  road  of  the 
company  and  the  mortgage  was 
executed  to  secure  their  payment. 
They  were  negotiable  instruments, 
and,  in  the  hands  of  the  purchasers, 
cannot  be  impeached  for  any  neglect 
of  the  company  issuing  them  to  pay 
the  demands  of  other  creditors. 
We  are  unable  to  perceive  any  ground 
upon  which  their  priority  over  the 
claim  of  the  appellant  can  be,  in  any 
way,  impaired.  We  do  not  question 
the  general  doctrine,  invoked  by  the 
appellant,  that  the  property  of  a 
railroad  company  is  a  trust  fund  for 
the  payment  of  its  debts,  but  do  not 
perceive  any  place  for  its  application 
here." 

Compare  this  opinion  with  those  of 
the  circuit  judges  in  the  same  ca.se  sub 
nom.  Blair  v.  St.  Louis,  etc.  R.  Co., 
27  Fed.  176  (1886)  (Brewer,  J.), 
25  Fed.  684  (1885)  (Brewer,  J.), 
24  Fed.  148  (1885)  (Treat,  J.),  and 
22  Fed.  36  (1884)  (Treat,  J.). 


>  In  Fogg  V.  Blair,  133  U.  S.  538 
(1890),  (10  Sup.  Ct.  Rep.  338),  Jus- 
tice Field  said:  "The  property  of  a 
railroad  company  is  not  held  under 
any  such  trust  to  apply  it  to  the  pay- 
ment of  its  debts  as  to  restrict  its 
use  for  any  other  lawful  purpose,  it 
matters  not  how  meritorious  the 
demand  of  the  creditor  maj'  be.  He 
must  obtain  a  lien  upon  the  property 
of  the  company,  or  security  in  some 
other  form,  or  he  will  have  to  take 
his  chances  with  all  other  creditors 
to  obtain  payment  in  the  ordinary 
course  of  legal  proceedings  for  the 
collection  of  debts." 

See  also  Lebeck  v.  Fort  Payne 
Bank,  115  Ala.  447  (1897),  (22  So. 
Rep.  75,  67  Am.  St.  Rep.  51). 

^  In  Fogg  V.  Blair,  supra,  Justice 
Field  also  said  (p.  540):  "There  is  no 
evidence  in  the  record  before  us  that 
the  parties  who  took  the  bonds 
issued  by  the  St.  Louis,  Hannibal 
and  Keokuk  Railroad  Co.  had  any 
notice,  actual  or  constructive,  of 
the  demand  of  the  complainant. 
But  if  they  had,  it  would  not  have 
affected  their  rights.  That  demand 
■was   not   theu   reduced   to   judgment 

252 


CHAP.  Xl] 


SALES  OF  CORPORATE  PROPERTY 


127 


porations,  owing  no  public  duties,  have  power,  as  already 
shown,  to  sell  all  their  property.*  Limitations,  for  the  protec- 
tion of  creditors  and  minority  stockholders,  may  be  placed 
upon  the  exercise  of  the  power,  but  its  existence  as  between 
the  corporation  and  the  State  is  unquestionable. 

Quasi-puhYic  corporations  —  railroad,  canal,  telegraph,  gas 
and  other  public  utility  companies  —  stand  in  an  essentiall}- 
different  position.  These  companies  enjoy  franchises  granted 
by  the  State,  in  consideration  of  the  assumption  of  obligations 
to  the  public.  As  a  corollary  to  the  conclusion  elsewhere 
shown  to  be  established  that  corporate  franchises  cannot  be 
transferred  without  authority  from  the  State,  it  follows  that 
corporate  property  necessary  for  the  performance  of  public 
duties  or,  as  sometimes  stated,  essential  to  the  exercise  of 
corporate  franchises,  cannot  be  sold  or  disposed  of  without 
such  authority.^  Upon  the  same  principle,  it  also  follows  that 
such  essential  property  is  not  subject  to  sale  on  execution, 
unless   the   levy  is   authorized   by   statute.^    The   underlying 


*  Ante,  §  108:  "Power  to  purchase 
and  sell  Generally." 

^  United  States:  Central  Transp. 
Co.  V.  Pullman  Car  Co.,  139  U.  S.  24 
(1891),  (11  Sup.  Ct.  Rep.  478);  York, 
etc.  R.  Co.  V.  Winans,  17  How.  (U.  S.) 
30  (1854).  See  also  Briscoe  v.  South- 
ern, etc.  R.  Co.,  40  Fed.  280  (1889). 

In  Cumberland  Telephone,  etc. 
Co.  V.  City  of  Evansville  127  Fed. 
194  (1903)  the  Court  said:  "The 
Evansville  Telephone  E.xchange  was 
authorized  and  empowered  to  estab- 
lish and  maintain  its  telephone 
system,  not  to  sell  it ;  to  accomplish 
the  object  of  its  incorporation,  not 
to  defeat  it;  to  acquire  the  mearus  to 
enable  it  to  perform  its  duties  to  the 
public  as  a  corporation,  not  to 
disable  it.self  from  performing  those 
duties.  The  attempted  sale  of  all 
its  property  and  franchises  was 
tdtra  vires,  and  contrary  to  public 
policy,  and,  therefore,  null  and  void." 

Georgia :  Singleton  v.  South- 
western R.  Co.,  70  Ga.  4(54  (1883), 
(48  Am.  Rep.  574). 


New  Hampshire:  Richards  v. 
Merrimack,  etc.  R.  Co.,  44  N.  H.  127 
(18G2). 

New  Jersey :  Black  v.  Delaware,  etc. 
Canal  Co.,  22  N.  J.  Eq.  399  (1871). 

Pennsylvania :  Foster  v.  Fowler, 
60  Pa.  St.  27  (1868). 

Texas:  Missouri  Pac.  R.  Co.  v. 
Owens,  1  Tex.  Civ.  Cas.  App.  §  385 
(1883) ;  Gulf,  etc.  R.  Co.  v.  Morri.s,  67 
Tex.  692  (1887),  (4  S.  W.  Rep.  156). 
See  al.so  cases  cited  in  the  following 
note  which  illustrate  the  same  prin- 
ciple. 

*  United  States :  East  Alabama  R. 
Co.  V.  Doe,  114  U.  S.  340,  (1885),  (5 
Sup.  Ct.  Rep.  869) ;  Gue  v.  Tide  Water 
Canal  Co.,  24  How.  2.57  (1860). 

Indiana:  Louisville,  etc.  R.  Co.  v. 
Boncy,  117  Ind.  501  (1888),  (20  N.  E. 
Rep.  432,  3  L.  R.  A.  435);  Indian- 
apolis R.  Co.  V.  State,  105  Ind.  37 
(1885),  (4  N.  E.  Rep.  316). 

Kentucky :  Louisville  Water  Co.  v. 
Hamilton,  81   Ky.  517  (1883). 

North  Carolina :  State  r.  Rives, 
5  Ired.  297  (1844). 

253 


§  128 


INTERCORPORATE     RELATIONS 


[part  II 


principle  is  that  property,  necessary  to  enable  a  corporation  to 
fulfil  its  obligations  to  the  State,  is  impressed  with  a  trust  in 
favor  of  the  public.^ 

But  this  underlying  principle  is  inapplicable  to  a  sale  by  a 
guasi-public  corporation  of  all  its  property  to  a  municipal 
corporation,  for  municipal  service,  provided  the  latter  have 
authority  to  purchase.  The  trust  in  favor  of  the  public  is  not 
broken  by  a  transfer  to  the  public.^ 

§  128.  Test  of  Indispensability.  — In  applying  the  rule  that 
the  property  of  a  gw as i-public  corporation,  necessary  for  the 
performance  of  its  public  duties,  cannot,  in  the  absence  of 
statutory  authority,  be  alienated  or  taken  on  execution,  the 
courts  have  sometimes  drawn  the  line  of  indispensability  be- 
tween the  real  and  the  personal  property  of  the  corporation  — 
holding  that  the  latter  can,  and  that  the  former  cannot,  be 
sold  or  taken.     Thus,  in   Coe  v.   Columbus,  etc.   R.   Co.^  the 


Ohio :  Coe  v.  Columbus,  etc.  R. 
Co.,  10  Ohio  St.  372  (1859),  (75  Am. 
Dec.  518). 

Pennsylvania:  Youngman  ?•.  El- 
mira,  etc.  R.  Co.,  65  Pa.  St.  278,  286 
(1870) ;  Western  Pennsylvania  R. 
Co.  V.  Johnston,  59  Pa.  St.  290  (1869) ; 
Plymouth  R.  Co.  v.  Colwell,  39  Pa. 
St.  337  (1861);  Ammant  v.  New 
Alexandria  Turnpike  Co.,  13  Serg. 
&  R.  210  (1825),  (15  Am.  Dec.  593); 
Leedam  v.  PljTnouth  R.  Co.,  5  W. 
&  S.  265  (1843). 

Tennessee:  Baxter  i\  Nashville, 
etc.  Turnpike  Co.,  10  Lea,  488  (1882). 

Texas :  City  of  Palestine  v.  Barnes, 
50  Tex.  538  (1878). 

J  2  Morawetz   Priv.   Corp.    §    1125. 

2  Cit3'  of  Indianapolis  v.  Con- 
sumers' Gas  Trust  Co.,  144  Fed.  643 
(1906):  "In  none  of  the  citations, 
State  or  general,  are  there  any 
rea.sons  stated  that  seem  inconsistent 
with  the  proposition  that  a  corpora- 
tion, engaged  in  a  service  of  public 
utility,  may  contract  for  a  sale  to  the 
municipality  of  all  the  property 
therein,  either  through  a  condition 
accepted  in  the  franchise  from  the 
city,  or  through  subsequent  arrange- 

2.54 


ment.  The  question  whether  mu- 
nicipal ownership  is  favorable  to  the 
public  interest,  is  neither  involved 
in,  nor  open  to,  judicial  inquiry. 
As.suming  that  such  ownership  is 
authorized,  and  is  contemplated  or 
demanded  by  the  municipalitj',  we 
are  convinced  that  this  proviso, 
treated  alone  as  a  contract  of  sale 
on  the  part  of  the  gas  company,  is 
not  within  the  inhibition  of  the  rule 
■ — -  not  Ultra  vires.  The  public  policy 
which  is  mentioned  in  the  cases  cited, 
as  opposed  to  an  implication  of  charter 
power  to  turn  over  its  property  to 
another  and  'abnegate  the  perform- 
ance of  its  duties  to  the  public,' 
lias  no  application  to  the  transfer 
to  the  public  —  the  municipality  — 
of  property  used  in  public  service." 

A  statute  authorizing  a  city  to 
purchase  a  water  or  lighting  plant 
authorizes  as  well  the  corporation 
owning  such  plant  to  sell,  although 
it  is  thereby  rendered  unable  to 
perform  its  public  duties. 

Connor  r.  City  of  Marshfield,  128 
Wis.  280  (1906), (107  N.  W.  Rep.  639). 

^  Coe  V.  Columbus,  etc.  R.  Co.,  10 
Ohio   St.   379    (1859),    (75  Am.    Dec. 


CHAP.  Xl]         SALES  OF  CORPORATE  PROPERTY  §  129 

Supreme  Court  of  Ohio  said:  "  The  Hne  can  be  clearly  drawn 
between  the  interest  in  real  estate  and  the  franchise  connected 
therewith,  and  the  movable  things  emplo\^ed  in  the  use  of  the 
franchise."  Upon  this  principle,  it  has  been  held  that  the 
road-bed  and  fixtures  of  a  railroad  company/  the  road  of  a 
turnpike  company/  the  canal  and  locks  of  a  canal  company  ' 
and  the  plant  of  a  water  company  ^  cannot  be  seized  upon 
execution;  while,  on  the  other  hand,  it  has  been  held  that  the 
rolling  stock  of  a  railroad  ^  and  the  ferry  boat  of  a  ferry  com- 
pany ®  can  be  taken. 

This  test  of  indispensability  is  illogical.  The  rolling  stock 
of  a  railroad  is  as  essential  to  its  use  and  operation  as  the 
road-bed,  and  neither  is  more  necessary  than  the  other.  The 
foundation  of  the  rule  being  the  indispensability  of  the  prop- 
erty, the  assumption  that  real  estate  is  more  necessar>'  than 
personal  property  begs  the  question.  The  true  test  should  be 
whether  the  property,  real  or  personal,  is  necessary,  in  a  rea- 
sonable sense,  for  the  performance  of  the  public  duties  of  the 
corporation.^  This  subject  is,  however,  at  the  present  time, 
a  matter  of  statutory  regulation  in  nearly  all  the  States. 

§  129.  Sales  of  Surplus  Property.  — Indispensable  property, 
in  the  absence  of  statutory  authority,  cannot  be  sold.  Con- 
versely, surplus  property  —  property  which  is  not  indispens- 

518).     Compare,     however,      Central  ^  Gue  v.  Tide  Water  Canal  Co.,  24 

Transp.  Co.  v.  Pullman  Car  Co.,  139  How.    (U.    S.)    257    (1860);     Susque- 

U.   S.   24   (1891),    (11    Sup.   Ct.    Rep.  hanna  Canal   Co.    v.    Bonham,    9   W. 

478).  &  S.  (Pa.)  27  (1845). 

'  Coe  V.  Columbus,  etc.  R.  Co.,  10  ■*  Louisville  Water  Co.  v.  Ham- 
Ohio  St.  372  (1859),  (75  Am.  Dec.  ilton,  81  Ky.  517  (1883). 
.518);  Youngman  r.  Elmira,  etc.  R.  *  Louisville,  etc.  R.  Co.  v.  Boney, 
Co.,  65  Pa.  St.  278,  286(1870);  West-  117  Ind.  501  (1888),  (20  N.  E.  Rep. 
ern,  etc.  R.  Co.  v.  Johnstown,  59  Pa.  432,  3  L.  R.  A.  435);  Boston,  etc. 
St.  290  (1869);  Leedam  r.  Plymouth  R.  Co.  v.  Gilmore,  37  N.  H.  410 
R.  Co.,  5  W.  &.  S.  (Pa.)  265  (1843).  (1858),    (72  Am.   Dec.   336);    Coe  v. 

A  portion  of  a  railroad  which  has  Columbus,   etc.    R.   Co.,    10  Ohio  St. 

been  abandoned  is  subject  to  levy  of  372  (1859),  (75  Am.  Dec.  518). 

execution.     Benedict     r.     Heineberg,  "  Lathrop    v.    Middleton,    23    Cal. 

43  Vt.  231  (1870).  257  (1803),  (83  Am.  Dec.  112). 

^  Ammant      r.      Now      Alexandria  '  See   an   able   and   comprehensive 

Turnpike    Co.,    13    Serg.    &    R.    210  note  to  Brunswick,  etc.  Co.  v.  United 

(1825),    (15  Am.   Dec.   593);    Baxter  States  Ga.s  Co.,  35  Am.  St.  Rep.  390. 

r.    Na-shville,    etc.    Turnpike   Co.,    10  Also  Short's  Railway  Bonds  &  Mort- 

Lea  (Tenn.),  488  (1882).  gages,  p.  165. 

255 


§    129a  INTERCORPORATE    RELATIONS  [I'ART    II 

able — in  the  absence  of  statutory  prohn)ition,  may  be  sold.  A 
^imsz-public  corporation  is  vested  with  full  jus  disponendi  over 
all  its  property,  real  and  personal,  which  is  not  necessary  to 
enable  it  to  carry  on  the  lousiness  for  which  it  was  chartered 
or  to  fulfil  its  public  obligations.^ 

In  Hendee  v.  Pinkerton,^  Judge  Foster  said:  "  We  entertain 
no  doubt  that  the  .  .  .  Company  could  lawfully  sell  and  con- 
vey the  lands  embraced  in  this  bill.  They  were  not  acquired 
to  enable  the  corporation  to  carry  on  the  business  which  it 
was  chartered  to  do  for  the  benefit  of  the  public,  nor  needed 
or  used  for  that  purpose.  Their  alienation  in  no  wise  impaired 
or  affected  the  usefulness  of  the  company  as  a  railroad,  or  its 
ability  to  exercise  any  of  its  corporate  franchises.  In  the 
absence  of  any  express  or  implied  legislative  prohibition,  this 
corporation  possessed  all  the  ordinary  rights  of  ownership 
over  these  lands,  and  could  convey  them  away  absolutely  or 
mortgage  them  to  secure  any  valid  indebtedness." 

§  129a.  Ultra  vires  Sales  of  Property  of  Private  and  Quasi- 
Public  Corporations.  —  The  question  of  the  want  of  power  of 
corporations  to  enter  into  intercorporate  relations  has  generally 
arisen  in  the  case  of  railroad  leases,  in  the  examination  of  which 
the  underlying  principles  are  fully  considered.^     It  is,  therefore 

'  Branch  v.   Jesup,   106  U.   S.   468  essential  to  the  exercise  of  its  fran- 

(1882),  (1  Sup.  Ct.  Rep.  495).  chises  cannot  be  sold  is  inapplicable 

Town  lots,  held  by  a  railroad  com-  to    property   wliich    has   not   become 

pany,  do  not  pass  by  a  sale  of  a  rail-  a  part  of  the  corporation's  structure 

road  "with  its  corporate  privileges  and  for  which  it  has  no  immediate  use. 
and    appurtenances"    unless    directly  Johnson  Co.  r.  Miller,  174  Pa.  St. 

appurtenant  to   the  railroad  and  in-  605  (1896),  (34  Atl.  Rep.  316,  52  Am. 

dispensably  necessary   to    the  enjoj'-  St.  Rep.  833). 

ment    of    its    franchises.     Shamokin  In  this  case  steel  rails  not  required 
Valley  R.  Co.  v.  Livermore,  47  Pa.  St.  for    construction    work    were    levied 
465  (1864),  (86  Am.  Dec.  552).     Com-  upon  by  creditors  of  a  railway  com- 
pare Piatt  V.  Union  Pacific  R.  Co.,  99  pany. 
U.  S.  48  (1878).                                                      Where    a    railroad    company    sells 

See  also  Yates  v.  Van  De  Bogert,  a    terminal    switch    to    the   owner   of 

56  N.  Y.  530  (1874):    "The  company  tlie    land    upon    which    it    is    laid,  it 

acquired  title  in  fee  under  that  deed.  violates    no    public    duty.     Oman    i'. 

When  the  land  was  no  longer  neces-  Bedford-Bowling     Green     Stone     Co. 

sary  for  the  purposes  of  the  corpora-  134  Fed.  64  (1905). 
tion  it  had  a  right  to  sell  and  convey  -  Hendee    v.    Pinkerton,    14    Allen 

the  same."  (Mass.^,  386  (1867). 

The   rule    that   the   property  of   a  ^  See  post,  Ch.  XXII:   "  Ultra  inres 

quasi-puhlic     corporation    reasonably  and  Voidable  Railroad  Leases." 

256 


CHAP.  XI ] 


SALES  OF .CORPORATE  PROPERTY 


§  129a 


only  necessary  here  to  apply  those  principles  to  the  subject 
of  corporate  sales. 

These  propositions  may  be  regarded  as  established: 

(1)  An  ultra  vires  contract  unexecuted  by  either  party  is 
void,  and  affords  no  right  of  action  at  law  for  damages,  nor  in 
equity  for  specific  performance. 

(2)  An  vltra  vires  contract  executed  on  both  sides  cannot 
be  questioned  in  the  courts,  and  the  parties  will  be  left  in  the 
possession  of  money  or  property  acquired  thereunder. 

It  follows  then  that  an  vltra  vires  contract  of  sale  while  execu- 
is  wholly  unenforceable.  ^     But   when  the  contract  has 


tory 

*  Alabama:  Simmons  !'.  Troy  Iron 
Works,  92  Ala.  427  (1890),  (9  So. 
Rep.  160) ;  Long  v.  Georgia  Pacific  R. 
Co.  91  Ala.  519  (1890),  (8  So.  Rep.  706, 
24  Am.  St.  Rep.  931). 

MicJiiqan:  Day  v.  Spiral  Springs 
Buggy  Co.,  .57  Mich.  146  (188.5),  (23 
N.  W.  Rep.  628,  58  Am.  Rep.  352). 

Mississippi :  Greenville  Compress, 
etc.  Co.  V.  Pliinters  Compress,  etc. 
Co.,  70  Mis.s.  669  (1893)  (13  So.  Rep. 
879,  35  Am.  St.  Rep.  681). 

Missouri:  Iloagland  v.  Hannibal, 
etc.  R.  Co.  ,39  Mo.  451  (1867). 

New  Hampshire:  Downing  v.  Mt. 
Washington  R.  Co.,  40  N.  H.  234 
(1860):  "The  power  of  buying  and 
selling  real  and  personal  property 
for  the  legitimate  purpo.ses  of  the 
corporation,  and  the  power  of  con- 
tracting generally  for  the  same  pur- 
poses, within  the  limits  prescribed 
by  the  charter,  being  granted,  we 
understand  the  principle  to  be,  that 
their  purchases,  sales,  and  contracts 
generally,  will  be  presumed  to  be 
made  within  the  legitimate  scope  and 
purpose  of  the  corporation,  until 
the  contrary  appears,  and  that  the 
burden  of  showing  that  any  contract 
of  a  corporation  is  beyond  its  legiti- 
mate powers,  rests  on  the  party  who 
objects  to  it.  If  a  corporation  at- 
tempt to  enforce  a  contract  made 
with  them  in  a  case  beyond  the  legit- 
imate limits  of  their  corporate  power, 
that  fact  being  shown,  will  ordinarily 


constitute  a  perfect  defence.  And 
if  a  suit  is  brought  upon  a  contract 
alleged  to  be  made  by  the  corporation, 
but  which  is  shown  to  be  beyond  its 
corporate  power  to  enter  into,  the 
contract  will  be  regarded  as  void, 
and  the  corporation  may  avail  them- 
selves of  that  defence." 

New  York :  Nassau  Bank  v.  .Tones, 
95  N.  Y.  123  (1884),  (47  Am.  Rep.  14) : 
"While  executed  contracts  made  by 
corporations  in  excess  of  their  legal 
powers  have,  in  some  cases,  been 
upheld  by  the  courts  and  the  parties 
have  been  precluded  from  setting 
up  as  a  defence  to  actions  brought  by 
corporations  their  want  of  power  to 
enter  into  such  contracts,  this  doc- 
trine has  never  been  applied  to  a 
mere  executory  contract,  which  is 
sought  to  be  made  the  foundation 
of  an  action  either  for  or  against  such 
corporation." 

Ohio:  Coppin  v.  Greenlcs,  etc.  Co. 
38  Ohio  St.  275  (1882),  (43  Am. 
Rep.  425). 

Wisconsin :  Northwestern  Union 
Packet  Co.  v.  Shaw,  37  Wis.  655 
(1875),  (19  Am.  Rep.  781). 

England:  Ashbury  Railway  Car- 
riage, etc.  Co.  V.  Riche,  L.  R.  7  II.  L. 
653.  In  this  case  it  was  also  held 
that  an  ultra  vires  contract  made  by 
directors  couUl  not  be  ratified  by  the 
stockholders  —  that  the  ratification 
was  as  void  as  the  contract. 

257 


§  129a 


INTERCORPORATE   RET.ATION8 


[part  H 


been  executed  by  the  conveyance  of  the  corporate  property 
and  the  payment  of  the  purchase  price,  the  title  vests  in  the 
purchaser  and  the  corporation  cannot  disaffirm  and  recover 
back  the  property.*  And,  conversely,  a  conveyance  to  a  cor- 
poration of  property  beyond  its  power  to  acquire,  but  for  which 
it  has  fully  paid  the  price,  passes  the  title  to  the  corporation 
and  it  can  hold  the  property  and  sell  it  and  give  good  title. 
Only  the  State,  in  direct  proceedings,  can  question  the  validity 
of  the  transaction.^ 

But  while  the  decisions  are  uniform  with  respect  to  ultra 
vires  contracts  which  have  been  executed  by  both  parties  and 
by  neither  party,  they  are  widely  at  variance  regarding  such 
contracts  when  executed  upon  one  side  only.     Thus,  where  a 


'  The  question  whether  a  corpora- 
tion in  selling  its  property  acted 
ultra  vires  will  not  be  considered  when 
it  has  received  the  purchase  price. 
Especially  is  this  true  when  the  pur- 
chaser has  mortgaged  the   property. 

City  of  Spokane  v.  Amsterdamsch 
Trustees  Kantoor,  22  Wash,  172 
(1900),  (60  Pac.  Rep.   141). 

When  an  xdtra  vires  contract  of 
sale  has  been  executed  by  the  deliv- 
ery of  the  deed  and  full  payment 
of  the  purchase  money,  a  court  of 
equity  will  not  annul  the  sale  or 
grant  other  relief. 

Long  V.  Georgia  Pacific  R.  Co., 
91  Ala.  519  (1890),  (8  So.  Rep.  706, 
24  Am.  St.  Rep.  931). 

See  also  Lancaster  v.  Amsterdam 
Impt.  Co.,  140  N.  Y.  576  (1894),  (35 
N.  E.  Rep.  967);  Mallett  v.  Simpson, 
94  N.  C.  37  (1886),  (55  Am.  Rep.  594). 
And  see  cases  cited  in  next  note. 

*  Rogers  v.  Nashville  etc.  R.  Co., 
91  Fed.  317  (1898):  "If  the  contract 
was  in  fieri,  it  might  be  open  to 
a  stockholder  upon  a  bill  properly 
framed  to  restrain  his  company's 
officers  from  completing  such  an 
alleged  transaction.  But  that  is 
not  this  case.  This  is  an  executed 
transaction.  The  title  has  vested. 
.  .  .     LTntil  the  State  shall   institute 

258 


proceedings  for  the  forfeiture  of  the 
charter  or  for  the  purpose  of  defeating 
the   title,   it  is   a  sound  legal   title." 

See  also: 

United  States :  Blair  v.  City  of 
Chicago,  201  U.  S.  400  (1906),  (26 
Sup.  Ct.  Rep.  427). 

Alabama :  South  and  North  Ala- 
bama R.  Co.  V.  Highland  Ave.,  etc. 
R.  Co.,  119  Ala.  105  (1898),  (24  So. 
Rep.  114);  Long  v.  Georgia  Pacific 
R.  Co.,  91  Ala.  519,  522  (1890),  (8  So. 
Rep.  706,  24  Am.  St.  Rep.  931). 

Illinois:  Hamsher  v.  Hamsher, 
132  111.  273  (1890),  (23  N.  E.  Rep. 
1123,  8  L.  R.  A.  556);  Hough  v. 
Cook  County  Land  Co.,  73  111.  23 
(1874). 

Massachusetts :  Nantasket  Beach 
S.  S.  Co.  V.  Shea,  182  Mass.  147  (1902), 
(65  N.  E.  Rep.  57). 

New  York:  Holmes,  etc.  Mfg.  Co. 
V.  Holmes,  etc.  Metal  Co.,  127  N.  Y. 
252  (1891),  (27  N.  E.  Rep.  831, 
24  Am.  St.  Rep.  448). 

North  Carolina :  Mallett  v.  Simp- 
son, 94  N.  C.  37  (1886),  (55  Am. 
Rep.  594). 

Ohio:  Walsh  v.  Barton,  24  Ohio 
St.  28  (1873). 

Virginia:  Fayette  Land  Co.  v. 
Louisville,  etc.  R.  Co.  93  Va.  274 
(1896),  (24  S.  E.  Rep.  1016). 


CHAP.  Xl]         SALES  OF  CORPORATE  PROPERTY  §  129a 

corporation  acting  beyond  its  powers  has  received  a  conveyance 
of  property  without  paying  the  price,  or  has  conveyed  its  prop- 
erty without  receiving  the  consideration,  justice  manifestly 
requires  that  reUef  in  some  form  should  be  granted.  The 
theory  upon  which  relief  should  be  granted  and  its  form  present 
the  difficult  questions. 

Upon  the  one  hand,  it  is  said  that  as  the  corporation  is  in- 
capable of  making  the  contract  and  it  is  wholly  void,  execution 
upon  one  side  cannot  give  it  validity,  and  that  the  corporation 
cannot  be  estopped  from  pleading  its  want  of  power  because 
all  persons  dealing  with  it  are  bound  to  know  the  limitations 
of  its  charter.  Consequently,  it  is  held  that  no  action  can  be 
maintained  upon  the  void  contract,  and  that  the  party  who 
has  performed  can  only  obtain  relief  by  disaffirming  the  sale 
and  suing  to  recover  back  the  price  paid  or  the  property  or  its 
value.^ 

On  the  other  hand,  many  courts  hold  that  where  a  contract 
is  merely  ultra  vires  and  not  otherwise  illegal,  the  corporation 
is  estopped  to  set  up  the  defence  of  ultra  vires  to  a  suit  for  the 
recovery  of  the  agreed  price,  and  that  such  defence  cannot 
be  pleaded  against  it."  This  conclusion  while  just  is  illogical. 
It  makes  the  measure  of  the  power  of  a  corporation,  not  its 
charter,  but  that  which  it  attempts  to  do. 

The  strict  doctrine  that  an  ultra  vires  contract  of  sale  is  abso- 

»  See  extract  from  decision  of  the  0-55     (1875),     (19     Am.     Rep.     7S1) ; 

Supreme  Court  of  the  United  States  Chewaca    Lime   Work.s   v.   Dismukcs, 

in    Central    Transp.    Co.    v.    Pullman  87  Ala.  344  (1889),  (6  So.   Rep.   122, 

Car   Co.,    139   U.    S.    59    (1891),    (11  5  L.  R.  A.  100). 

Sup.   Ct.   Rep.   478)    i>rinted   in   note  '  See    cases    citeil    in    notes  to    § 

to   §  239,   post:    "Distinction  hetircen  244,   poi>t. 

Ultra  Vires  and  Irrcgvlnr  Leases."  The  New  York  Court   of  Appeals 

See  also    post,   §    241  :     " Deliver ij  has  led    in    stating   the  more  liberal 

of     Possession     under     Ultra      Vires  tloctrinc.     It    has    been    followed    by 

Lease";     post,    §    242:    "Right     anJ  the  courts  of  New  Jersey,  Michigan, 

Duty  of  Disaffirmance" ;  post,  §  42.3:  Pennsylvania,  and  other  States.    For 

"Recovery     of    Property     after     Dis-  cases  of  sales  see  Dewey  r.  Toledo,  etc. 

affi.r>nnnce."  R.  Co.,  91  Mich.  351  (1S92),  (51  N.  "W. 

The  strict   doctrine   stated   in   the  Rep.  10G3)  ;    Wright  r.  Pijie  Line  Co., 

text  is  also  that  of  the  English  courts  101  Pa.  .St.  204  (1882),  (47  Am.  Rep. 

and  those  of  Alabama,  Maine,  Ohio,  701);    Whitney  Arms  Co.  v.  Barlow, 

Tennessee,  and  several  other  States.  G3    N.   Y.   02   (1875),    (20   Am.    Rep. 

For  cases  of  sales  see   Northwestern  50-1). 
Union  Packet  Co.  v.  Shaw,  37  Wis. 

259 


§     129a  INTERCORPORATE    RELATIONS  [PART    II 

lutely  unenforceable  is  undoubtedly  applicable  in  the  case  of- 
sales  by  quasi-puhVic  corporations  because  these  sales  are  not 
only  beyond  the  power  of  the  corporation  but  are  contrary  to 
public  policy.  In  the  case  of  strictly  private  corporations, 
however,  it  is  believed  that  the  weight  of  authority  at  the 
present  time  supports  the  more  liberal  doctrine.  In  a  recent 
case  ^  the  Supreme  Court  of  the  United  States  quoted  as  "  in- 
trinsically sound  "  the  following  language  of  the  New  York 
Court  of  Appeals  ^:  "  It  is  now  well  settled  that  a  corporation 
cannot  avail  itself  of  the  defence  of  ultra  vires  when  the  con- 
tract has  been  in  good  faith  fully  performed  by  the  other  party 
and  the  corporation  has  had  the  benefit  of  the  performance 
and  of  the  contract.  As  has  been  said,  corporations,  like 
natural  persons,  have  power  and  capacity  to  do  wrong.  They 
may  in  their  contracts  and  dealings  break  over  the  restraints 
imposed  upon  them  by  their  charters;  and  when  they  do  so 
their  exemption  from  liability  cannot  be  claimed  upon  the  mere 
ground  that  they  have  no  attributes  nor  faculties  which  render 
it  possible  for  them  thus  to  act.  While  they  have  no  right  to 
violate  their  charters,  yet  they  have  capacity  to  do  so,  and  are 
bound  by  their  acts  where  a  repudiation  of  them  would  result 
in  manifest  wrong  to  innocent  parties,  and  especially  where 
the  offender  alleges  its  own  wrong  to  avoid  a  just  responsibility. 
It  may  be  that  while  a  contract  remains  unexecuted  upon 
both  sides,  a  corporation  is  not  estopped  to  say  in  its  defence 
that  it  had  not  the  power  to  make  trie  contract  sought  to  be 
enforced,  yet  when  it  becomes  executed  by  the  other  party, 
it  is  estopped  from  asserting  its  own  wrong  and  cannot  be 
excused  from  payment  upon  the  plea  that  the  contract  was 
beyond  its  power." 

'Eastern    Building,   etc.   Ass'n    v.  sound"   would    indicate    that    it    ap- 

Williamson,  189  U.  S.  122,  129  (1902),  proved  the  doctrine  stated,  although 

(23   Rup.   Ct.   Hep.   527).     AV'hile  the  it    is    not    in    line    with   some    of   its 

Supreme  Conrt,  in  this  case,  was  con-  own  earlier  decisions, 
sidering  the  law  of  New  York  upon  ^  Vought   v.  Eastern  Building,  etc. 

the    subject,     its     reference     to     the  Ass'n,  172  N.  Y.  508  (1902),  (65  N.  E. 

language     quoted     as     "intrinsically  Rep.  496,  92  Am.  St.  Rep.  761). 


260 


CHAP.    XIlJ  SALES    OF   CORPORATE    FRANCHISES  §    130 


CHAPTER    XII 


SALES    OF    CORPORATE    FRANCHISES 

I.     Transferability  of  Franchises 

§  130.  Nature  of  a  Franchise. 

§  131.  Franchise  of  Corporate  Existence. 

§  132.  Transferability  of  Franchise  of  Corporate  Existence. 

§  133.  Franchises  of  Corporations. 

§  134.  Transferability  of  Franchises  of  Corporations. 

II.     Legislative  Authority  for  Sale  of  Franchises 

§  135.    Legislative  Authority  essential  to  Alienation  of  Franchises. 

§  136.    Unauthorized  Sale  of  Franchises  —  Ultra  vires. 

§  137.    Unauthorized  Sale  of  Franchises  —  Against  Public  Policy. 

§  138.    Unauthorized  Sale  of  Franchises  —  Unlawful  Delegation  of  Powers. 

§  139.    Legislative  Authority  essential  to  Purchase  of  Franchises. 

§  139  a.    Ultra  Vires  Sales  of  Franclii.ses. 

I.    Transfer  ability  of  Franchises 

§  130.  Nature  of  a  Franchise.  —  In  Bank  of  Augusta  v. 
Earle  ^  Chief  Justice  Taney  defined  franchises  as  "  special 
privileges  conferred  by  government  upon  individuals  and 
which  do  not  belong  to  citizens  of  the  country  generally,  of 
common  right."  ^  This  definition  is  unexceptionable.  The 
essential  prerequisites  to  the  existence  of  a  franchise  are, 
therefore : 

'  Bank  of  Augusta  v.  Earle,  13  Pet.  grantee,  as  the  consideration  therefor, 

(U.  S.)  595  (1839).  a  duty  to  the  public  to  see  that  they 

2  Fietsam    v.    Hay,     122    111.    294  are  jjroperly  used." 
(1887),  (13  N.  E.  Rep.  501,  3  Am.  St.  Chancellor  Kent  says  that   "  fran- 

Rep.   493)  :    "The   word  franchise  is  chises    are    privileges    conferred    by 

often  used  in  the  sense  of  privileges  grants     from    the    government     and 

generally,  but  in  its  more  appropriate  vested    in     private     individuals."     3 

and  legal  sense  the  term  is  confined  Kent's  Com.  458.     Sec  also  Boiuner's 

to  such   rights  and   privileges  as  are  Law     Diet.      "Franchise."     Chicago, 

conferred   upnn  corporate   bodies   by  etc.    R.    Co.    v.    Dunbar,    95    111.    571 

legislative  grant."  (1880),  (1  \m.  &  Eng.  R.  Cas.  214). 

St.  Louis,  etc.  R.  Co.  v.  Ral.sley,  IS  Franchises  are  "branches  of  the  king's 

III.  Ai)p.  82  (1885):    "  Franchises  are  prerogative,    subsisting   in    a   subject 

rights  and  privileges  acquired  only  by  by  grant  from  the  crown."     3  Cruise 

special  grant  from  the  public  througli  Dig.  278. 
the  legislature,  which  impose  upon  the 

261 


§  131 


INTERCORPORATE    RELATIONS 


[part   II 


1.  A  grant  from  the  sovereign  authority:  for  there  can  be 
no  franchise  which  is  not  derived  from  a  law  of  the  State. ^ 

2.  A  special  privilege:  for  that  which  belongs  to  citizens 
generally  can  never  be  a  franchise.^ 

3.  A  right  conferred  upon  private  individuals  (or  corpo- 
rations): for  privileges  granted  to  public  bodies  are  not  fran- 
chises.' 

Franchises  relating  to  corporations  are  of  two  kinds :  * 

1.  The  franchise  to  be  a  corporation,  conferred  upon  the 
corporators. 

2.  The  franchises  of  the  corporation,  conferred  upon  the 
corporation. 

§  131.  Franchise  of  Corporate  Existence. — The  legislature 
in  granting  a  special  charter  of  incorporation  confers  upon  the 
persons  named  therein  —  the  corporators  —  the  privilege  of 
forming  and  being  a  corporation.  This  privilege  may  be  termed 
the  franchise  of  corporate  existence.^    It  is  true  that  the  State, 


'  Woods  V.  Lawrence  County, 
1  Black  (U.  S.),  409  (1861)  :  "A  fran- 
chise is  a  pri^dlege  conferred,  in  the 
United  States,  by  the  immediate  or 
antecedent  legislation  of  an  act  of  in- 
corporation, with  conditions  ex- 
pressed, or  necessarily  inferential  from 
its  language,  as  to  tlie  manner  of 
its  existence  and   for  its  enjoyment." 

Bank  of  Augusta  v.  Earle,  13  Pet. 
U.  S.  595  (1839):  "It  is  essential  to 
the  character  of  a  franchise  that  it 
should  be  a  grant  from  the  sovereign 
authority,  and  in  this  country  no 
franchise  can  be  held  which  is  not 
derived  from  a  law  of  the  State." 
See  also  Wilmington  Water  Power 
Co.  V.  Evans,  166  111.  556  (1897),  (46 
N.  E.  Rep.  1083). 

2  In  California  ^'.  Central  Pac.  R. 
Co.,  127  U.  S.  40  (1888),  (8  Sup.  Ct. 
Rep.  1073),  it  was  said  :  "Generalized, 
and  divested  of  the  special  form 
which  it  assumes  under  a  monarchical 
government  based  on  feudal  tradi- 
tions, a  franchise  is  a  right,  pri\'ilege, 
or  power  of  public  concern,  which 
ought  not  to  be  exercised  by  private 

262 


indi\dduals  at  their  mere  will  and 
pleasure,  but  should  be  reserved  for 
public  control  and  administration, 
either  by  the  government  directly,  or 
by  public  agents  acting  under  such 
conditions  and  regulations  as  the 
government  may  impose  in  the  pubhc 
interest  and  for  the  public  security." 

See  also  Abbott  v.  Omaha  Smelt- 
ing, etc.  Co.,  4  Neb.  420  (1876); 
Bridgeport  v.  New  York,  etc.  R.  Co., 
36  Conn.  255  (1869). 

3  3  Kent's  Com.  458. 

*  In  Fietsam  v.  Hay,  122  111.  293 
(1887),  (13  N.  E.  Rep.  501,  3  Am.  St. 
Rep.  493),  the  word  "franchise"  was 
said  to  include  "the  right  or  pri\dlege 
of  being  a  corporation,  and  of  doing 
such  things,  and  such  things  only,  as 
are  authorized  bj^  the  corporation's 
charter. " 

5  Paul  V.  Virginia,  8  Wall.  (U.  S.) 
168  (1868).  See  also  State  v.  Western 
Irrigating  Canal  Co.,  40  Kan.  99 
(1888),  (19  Pac.  Rep.  349,  10  Am.  St. 
Rep.  166),  where  the  Supreme  Court 
of  Kansas,  following  2  Morawetz  Priv. 
Corp.  §  923,  said:    "The  word  'fran- 


CHAP.  XIl] 


SALES  OF  CORPORATE  FRANCHISES 


§  131 


in  enacting  general  incorporation  laws,  confers  a  similar  privi- 
lege upon  those  who  comply  with  the  provisions  of  such  laws, 
but  this  privilege  can  hardly  be  termed  a  franchise.  It  is  not 
a  special  privilege. 

The  franchise  to  be  a  corporation  belongs  to  the  stockholders 
and  not  to  the  corporation.  The  grantees  of  the  charter  are, 
primarily,  the  corporators,  and  the  franchise  is  vested  in  them, 
their  associates  and  successors.  The  corporation  when  formed 
may  itself  take,  under  the  charter,  special  rights  and  privileges 
—  also  termed  franchises  —  necessary  to  carry  into  effect 
the  objects  for  which  it  was  formed,  but  the  franchise  to  be  a 
corporation  remains  in  the  stockholders.^  "  A  corporation 
is  itself  a  franchise  belonging  to  the  members  of  the  corpora- 
tion: and  a  corporation  being  itself  a  franchise  may  hold  other 
franchises,  as  rights  and  franchises  of  the  corporation."  ^     Mr. 


chise'  is  generally  used  to  designate  a 
right,  or  pri\'ilege,  conferred  by  law. 
What  is  called  the  franchise  of  form- 
ing a  corporation  is  really  but  an  ex- 
emption from  the  general  rule  of  the 
common  law  prohibiting  the  forma- 
tion of  corporations.  All  persons  in 
this  State  have  now  the  right  of  form- 
ing corporate  associations  upon  com- 
plying with  the  simple  formalities 
prescribed  by  the  statute.  The  right 
of  forming  a  corporation  and  of  act- 
ing in  a  corporate  capacitj',  under  the 
general  incorporation  laws,  can  be 
called  a  franchise  only  in  the  sense  in 
which  the  right  of  forming  a  limited 
partnership,  or  of  executing  a  con- 
veyance of  land  by  deetl,  is  a  fran- 
chise." 

In  Young  v.  Webster  City,  etc.  R. 
Co.,  75  Iowa,  143  (1888),  (39  N.  W. 
Rep.  234),  it  was  said  :  "The  corpora- 
tion itself  is  not  a  franchise  but  it  is 
the  attributes  of  the  corporation  which 
compri.se  the  franchises  thereof,  —  its 
special  powers  and  rights."  Compare 
Knoup  V.  Piqua  Branch  of  State  Bank, 
1  Ohio  St.  614  (18.53). 

'  Fietsam  v.  Hay,  122  111.  293 
(1887),  (13  N.  E.  Rep.  501,  3  Am.  St. 
Rep.  449)  :  ".\  franchise  or  the  right 


to  be  and  act  as  an  artificial  body  is 
vested  in  the  individuals  who  com- 
pose the  corporation  and  not  in  the 
corporation  itself." 

In  Central  Trust  Co.  v.  Western 
North  Carolina  R.  Co.,  89  Fed.  24 
(1898),  Judge  Simonton  said:  "This 
new  person,  creature  of  the  law,  and 
existing  through  the  grace  of  and  at 
the  will  of  the  sovereign,  was  then 
clothed  with  certain  powers,  and 
granted  certain  privileges.  These  are 
its  franchises.  First,  the  franchise  of 
existence  as  a  corporation,  —  its  life 
and  its  being.  This  is  inseparable 
from  it.  When  it  parts  with  this 
franchise,  it  parts  with  its  life.  But, 
with  respect  to  the  other  franchises 
with  which  it  has  been  clothed,  —  the 
right  and  privilege  to  act  as  a  common 
carrier,  to  carry  passengers  and  goods, 
to  charge  tolls,  to  operate  a  railroad, 
—  these  it  enjoys  as  an  indi\idual 
could,  and  thej'  are  not  inseparable 
from  its  exi.stence.  They  are  its 
property.  A  frandiise  to  be  a  cor- 
poration is  distinct  from  a  franchise, 
as  a  corporation,  to  maintain  and 
operate  a  railroad." 

2  Pierce  v.  Emery,  32  N.  II.  507 
(185G). 

2G3 


§  132 


INTERCORPORATE    RELATIONS 


[part    II 


Justice  Matthews,  in  Memphis,  etc.  R,  Co.  v.  Commissioners,^ 
pointed  out  the  distinction  between  the  franchise  to  be  a  cor- 
poration and  the  franchises  of  the  corporation:  "  The  essential 
properties  of  corporate  existence  are  quite  distinct  from  the 
franchises  of  the  corporation.  The  franchise  of  being  a  cor- 
poration belongs  to  the  corporators,  while  the  powers  and 
privileges,  vested  in  and  to  be  exercised  by  the  corporate  body, 
as  such,  are  the  franchises  of  the  corporation."  ^ 

§  132.  Transferability  of  Franchise  of  Corporate  Existence.  — 
As  the  franchise  of  corporate  existence  belongs  to  the  stock- 
holders of  a  corporation,  they  may,  practically,  transfer  it  by 
the  sale  of  their  shares  of  stock;  and,  in  a  sense,  the  sale  of  a 
single  share  amounts  yro  ianto  to  a  transfer  of  an  interest  in 
this  primary  franchise.  The  purchasers,  however,  merely 
become  stockholders  in  the  same  corporation  in  place  of  the 
vendors  —  the  corporate  identity  remains  unchanged. 

The  franchise  to  be  a  corporation,  as  a  franchise,  in  its  nature 
is  incommunicable  by  act  of  the  parties.^     Neither  the  corpo- 


'  Memphis,  etc.  R.  Co.  v.  Commis- 
sioners, 112  U.  S.  619  (1884),  (5  Sup. 
Ct.  Rep.  299).  See  also  New  Orleans, 
etc.  R.  Co.  V.  Delamore,  114  U.  S.  501 
(1885),  (5  Sup.  Ct.  Rep.  1009). 

^Wright  V.  Milwaukee,  etc.  R.  Co., 
25  Wis.  53  (1869)  :  "The  distinction 
between  the  franchise  of  constructing 
and  operating  a  railroad,  and  the  fran- 
chise of  being  a  corporation,  and  of 
contracting,  suing  and  being  sued  as 
such,  is  well  established." 

The  franchise  to  be  a  corporation  is 
not,  strictly,  a  corporate  franchise  at 
all.  Meyer  v.  Johnston,  53  Ala.  237 
(1875). 

For  consideration  of  the  distinc- 
tion between  the  franchise  of  cor- 
porate existence  and  the  franchises  of 
the  corporation  see  State  v.  East  Fifth 
St.  R.  Co.,  140  Mo.  539  (1897),  (41 
S.  W.  Rep.  955,  62  Am.  St.  Rep.  742, 
38  L.  R.  A.  218). 

'  Memphis,  etc.  R.  Co.  r.  Commis- 
sioners, 112  U.  S.  619  (1884),  (5  Sup. 
Ct.  Rep.  299)  :  "  The  franchise  of  be- 
coming and  being  a  corporation,  in  its 

264 


nature,  is  incommunicable  by  the  act 
of  the  parties  and  incapable  of  passing 
bj'  assignment." 

Commonwealth  v.  Smith,  10  Allen 
(Mass.),  455  (1865),  (87  Am.  Dec.  672) 
per  Hoar,  J. :  "The  franchise  to  be  a 
corporation  clearly  cannot  be  trans- 
ferred by  any  corporate  body,  of  its 
own  will.  Such  a  franchise  is  not,  in 
its  own  nature,  transmissible." 

A  corporation  carmot  "sell  or  con- 
vey its  corporate  name,  or  its  right  to 
maintain  and  defend  judicial  proceed- 
ings or  to  make  and  use  a  common 
seal."  State  v.  Western  Irrigating 
Canal  Co.,  40  Kan.  96  (1888),  (19  Pac. 
Rep.  349,   10  Am.  St.  Rep.   166). 

See  also  New  Orleans,  etc.  R.  Co.  v. 
Delamore,  114  U.  S.  501  (1885),  (5 
Sup.  Ct.  Rep.  1009);  Welsh  v.  Old 
Dominion  Mining,  etc.  Co.,  56  Hun 
(N.  Y.),  650  (1890),  (10  N.  Y.  Supp. 
174) ;  Ragan  v.  .Aiken,  9  Lea  (Tenn.), 
609  (1882),  (42  Am.  Rep.  684,  9  Am. 
&  Eng.  R.  Cas.  201);  Atkinson  v. 
Marietta,  etc.  R.  Co.,  17  Ohio  St.  21 
(1864). 


CHAP.    XIl]  SALES    OF   CORPORATE    FRANCHISES  §    133 

ration  nor  the  stockholders  can  usurp  the  functions  of  the 
legislature  and  confer  upon  others  the  privilege  of  forming 
a  corporation.  As  said  by  Mr.  Justice  Curtis,  at  circuit,  in 
Hall  V.  Sullivan  R.  Co.:^  "  The  franchise  to  be  a  corporation 
is,  therefore,  not  a  subject  of  sale  and  transfer,  unless  the  law, 
by  some  positive  provision,  has  made  it  so,  and  pointed  out 
the  modes  in  which  such  sale  and  transfer  may  be  effected." 

Even  where  a  positive  statutory  provision  appears  authoriz- 
ing a  corporation  to  transfer  its  charter  or  franchise  to  be  a 
corporation,  the  real  transaction  is  in  no  sense  a  sale  or  con- 
veyance. The  so-called  transferee  takes  nothing  from  the 
deed  of  transfer  and  eveiything  from  the  legislative  grant  of 
power.  The  act  of  the  corporators  or  stockholders  in  trans- 
ferring —  in  form  —  their  corporate  franchise,  in  legal  effect 
is  a  surrender  of  their  charter.  The  legislative  authorization 
amounts  to  a  grant  of  a  new  charter  —  in  similar  terms  — 
to  the  transferees,  taking  effect  upon  the  abandonment  of 
the  old.  "  The  vital  part  of  the  transaction,  and  that  without 
which  it  would  be  a  nullity,  is  the  law  under  which  the  transfer 
is  made."  ^ 

§  133.  Franchises  of  Corporations.  —  The  legislature,  in 
conferring  a  charter  of  incorporation  upon  persons  about  to 
engage  in  an  enterprise  involving  the  assumption  of  obliga- 
tions to  the  public,  generally  grants  such  special  rights  as 
may  be  necessary  to  enable  the  corporation,  so  created,  to  carry 
into  effect  the  objects  of  its  creation.  These  special  privileges 
constitute  the  franchises  of  the  corporation.^     Thus,  in  years 

Compare  Miller  v.  Rutland,  etc.  R.  ^  In   Society  for  Sa\-ings  v.   Coite, 

Co.,  36  Vt.  452  (1863) ;   Bank  of  Mid-  6  Wall.  (U.  S.)  606  (1867).  Mr.  Jus- 

dlebury    v.    Edgerton,     30    Vt.     182  tice  Clifford  said:    "Corporate  fran- 

(IS.'iS);    Shapley  v.  Atlantic,  etc.  R.  chise.s  are  legal  estates  vested  in  the 

Co.,  .55  Me.  395  (186S).  corporation  itself  a.s  soon  as  it  is  in 

'  Hall  V.  Sullivan  R.  Co.,  21   Law  esse.     They     are     not     mere     naked 

Rep.    13S    (1857),    (1    Brunncr    Coll.  powers   granted    to    the   corporation, 

Cas.  613,  11  Fed.  Cas.  257).  but  powers  coupled  with  an  intercut, 

*  State  V.  Sherman,  22  Ohio  St.  428  which  ^■est  in  the  corporation  upon  the 

(1872),  approved  in  Memphis,  etc.  R.  possession  of  its  franchises,  and  what- 

Co.  V.  Commissioners,  112  U.  S.  609,  ever  may  be  thought  of  th.e  corpora- 

619   (1884),    (5   Sup.   Ct.    Rep.   299).  tors,    it    cannot    be    denied    that    the 

C'o7npare  Abbott  r.  New  York,  etc.  R.  corporation  itself  has  a  legal  interest 

Co.,  145  Mass.  453  (1SS8),  (15  N.  E.  in  such  franchises." 

Rep.  91).  A  franchise  of  a  corporation  may 

265 


§133 


INTERCORPORATE   RELATIONS 


[part  II 


past,  legislatures  have  granted  to  innumerable  corporations 
franchises  to  build  bridges,  construct  turnpike  roads,  dig  and 
operate  canals,  maintain  ferries,  and  collect  tolls  thereon;  ^ 
and,  in  the  present,  franchises  are  granted  in  constantly  in- 
creasing numbers  for  the  occupancy  of  the  public  streets  and 
highways  by  the  various  public  utility  corporations.^ 

A  railroad  company  is  also  an  example  —  the  most  con- 
spicuous —  of  a  corporation  exercising  corporate  franchises. 
"  The  franchises  of  a  railroad  corporation,"  said  Mr.  Justice 
Field  in  Morgan  v.  Louisiana,^  "  are  rights  or  privileges  which 
are  essential  to  the  operations  of  the  corporation,  and  without 
which  its  roads  and  works  would  be  of  little  value;    such  as 


be  defined  as  a  right  of  a  corporation 
to  exercise  powers  and  privileges 
vested  in  it  by  its  charter.  Spring 
Valley  Water  Works  v.  Schottler,  62 
Call.  69  (1882). 

'  That  the  right  to  collect  tolls 
upon  bridges,  turnpike  roads,  etc.,  is 
a  franchise,  see  Turnpike  Road  Co.  v. 
Campbell,  44  Cal.  89  (1872) ;  Blake  v. 
Winona,  etc.  R.  Co.,  19  Minn.  418 
(1872),  (18  Am.  Rep.  345) ;  Sellers  v. 
Union  Lumbering  Co.,  39  Wis.  525 
(1876). 

-  That  the  right  to  lay  gas  pipes  in 
the  streets  of  a  city  is  a  franchise 
derivable  from  the  State,  see  New 
Orleans  Gas  Light  Co.  v.  Louisiana 
Light,  etc.  Co.,  115  U.  S.  650  (1885), 
(6  Sup.  Ct.  Rep.  252) ;  Jersey  City  Gas 
Co.  V.  Dwight,  29  N.  J.  Eq.  242 
(1878) ;  State  v.  Cincinnati  Gas  Light, 
etc.  Co.,  18  Ohio  St.  262  (1868).  See 
also  Chicago  Mun.  Gas  Light  Co.  v. 
Lake,  130  111.  42  (1889),  (22  N.  E. 
Rep.  616.  Co?nparr,  howe^-er,  State 
V.  Mut.  Gas  Light  Co.,  38  Mich.  154 
(1878) ;  Commonwealth  v.  Lowell  Gas 
Light  Co.,  12  Allen  (Mass.),  75 
(1866). 

The  right  to  lay  water-pipes  and 
collect  water-rates  is  a  franchise. 
Spring  Valley  Water  Works  v. 
Schottler,  62  Cal.  69  (1882) ;  Stater. 
Portage  City  Water  Co.,  107  Wis.  441 
(1900),  (S3  N.  W.  Rep.  697). 

266 


The  right  to  occupy  city  streets 
with  wires  and  appliances  for  the 
transmission  of  electricity  for  tele- 
phone or  electric  light  service  is  a 
franchise. 

Cumberland  Telephone,  etc.  Co.  v. 
City  of  Evansville,  127  Fed.  186 
(1903)  ;  Purnell  v.  McLane,  98  Md. 
589  (1903),  (56  Atl.  Rep.  543).  Com- 
pare Commercial  Electric  Light,  etc. 
Co.  V.  City  of  Tacoma,  17  Wash.  661 
(1897),  (50  Pac.  Rep.  592). 

It  seems  that  corporations  organ- 
ized to  furnish  heat  to  buildings, 
through  pipes  laid  in  city  streets,  are 
not  g«as7-public  corporations  to  the 
extent  that  they  are  subject  to  the 
general  principles  of  law  applicable  to 
that  class  of  corporations  in  the  dis- 
position of  their  privileges  and 
property.  Evans  v.  Bo.ston  Heating 
Co.,  157  Mass.  37  (1892),  (31  N.  E. 
Rep.  698).  See  also  as  to  irrigating 
companies.  State  v.  Western  Irrigat- 
ing Canal  Co.,  40  Kan.  96  (1888),  (19 
Pac.  Rep.  349.  10  Am.  St.  Rep.  166). 

3  Morgan  v.  Louisiana,  93  U.  S.  223 
(1876).  See  also  Lawrence  v.  Mor- 
gan's, etc.  Steamship  Co.,  39  I^a.  Ann. 
427  (1887),  (2  So.  Rep.  69,  4  Am.  St. 
Rep.  265),  where  railroad  companies 
were  s.aid  to  have  the  right  to  appro- 
priate land  for  several  purposes  other 
than  those  .stated  in  Morgan  v. 
Louisiana,  supra. 


CHAP.    XIl]  SALES   OF   CORPORATE   FRANCHISES  §    133 

the  franchise  to  run  cars,  to  take  tolls,  to  appropriate  earth 
and  gravel  for  the  bed  of  its  road,  or  water  for  its  engines,  and 
the  Hke." 

The  franchise  of  a  railroad  company  may  also  be  defined  as 
the  right,  by  virtue  of  the  power  of  eminent  domain,  to  con- 
struct, maintain,  and  operate  a  railroad  upon  the  route  desig- 
nated in  its  charter,  and  to  take  tolls  for  the  transportation 
of  persons  and  property  thereon.^ 

The  franchise  of  a  street  railway  or  other  public  utility  cor- 
poration to  occupy  the  streets  of  a  city  must  proceed  primarily 
from  the  sovereign  power  —  the  State.  If  the  legislature 
authorize  municipal  corporations  to  grant  the  privilege,  it  is 
held  in  a  series  of  decisions  that  the  effect  of  the  legislation 
is  to  confer  the  franchise  upon  the  municipality  which  may 
issue  a  license,  or  make  a  contract,  for  its  exercise.  These  de- 
cisions are  based  upon  the  theory  that  there  can  be  no  delega- 
tion of  the  power  to  grant  franchises  —  a  part  of  the  power 
to  make  laws.  On  the  other  hand  it  is  held,  upon  the  more 
convincing  reasoning,  that  the  State  may  grant  a  franchise 
acting  through  the  agency  of  a  municipal  corporation  —  that 
whether  granted  directly  or  indirectly  the  right  emanates  from 
the  same  source,  the  sovereign  power.^     "  An  act  done  by  the 

'  Colt  V.  Barnes,  64  Ala.  IDS  (187«) ;  I-.  R.  A.  218) ;    Lincoln  St.  R.  Co.  v. 

Coe  V.  Columbus,  etc.  R.  Co.,  10  Ohio  City  of  Lincoln,  61  Neb.  109  (1901), 

St.  372  (1859),  (75  Am.  Dec.  518).  (84    N.    W.    Rep.    802);     Milhau    v. 

'Delegation     of     power     to     grant  Sharp,  27  N.  Y.  611  (1863),  (84  .\ni. 

franchises.  Dec.   314) ;    Da\'is  v.   New   York,    14 

(a)    The    right    to    construct    and  N.  Y.  506  (1856),  (67  Am.  Dec.  186)  ; 

operate    a    street    railway    in    a    city  People  v.  Kerr,  37  Barb.  357  (1862); 

anfl  to  take  tolls  from  persons  travel-  Wright  v.  Milwaukee  Electric  R.  Co., 

ling  thereon,  is  a  franchise  which  the  95  Wis.  29  (1897),  (69  N.  W.  791,  GO 

sovereign  power  alone  can  grant.  Am.  St.  Rep.  74,  36  I^.  R.  A.  47). 

People's  Pass.  R.  Co.  v.  Memphis  For  cases  holding  that  rights  con- 
City  R.  Co.,  10  Wall  (U.  S.)  38  (1869).  ferred  upon  corporations  to  occupy 
Denver  etc.  R.  Co.  v.  Denver  City  R.  city  streets  with  gas  and  water-pipes, 
Co.  2  Colo.  673  (1875);  State  v.  and  telephone  and  electric  light  wires, 
.Jacksonville  R.  Co.,  29  Fla.  590  conduits  and  appliances  are  franchi.ses 
(1892),  (10  So.  Rep.  590);  Metro-  derivable  from  the  State  alone,  see 
politan  City  R.  Co.  v.  Chicago  ^^'est  preceding  notes  to  this  section. 
Division  R.  Co.  87  111.  317  (1877);  (h)  In  People's  Pass.  R.  Co.  v. 
Chicago  City  R.  Co.  v.  People.  73  111.  Menijihis  City  R.  Co.  10  Wall.  (U.  S.) 
541  (1874);  Stater.  Fast  Fifth  St.  R.  38  (1S69),  the  Supreme  Court  said: 
Co.,  140  Mo.  5.39  (1897\  (41  S.  W.  "Power  to  make  laws  is  vested  in 
Rep.   955,  62   Am.  St.    Rep.  742,    38  the  legislature  under  the  constitution 

207 


§  133 


INTERCORPORATE    RELATIONS 


[part  II 


State  through  its  duly  authorized  agent  is  an  act  done  by  the 
State  itself."  ^  Where,  however,  the  right  granted  by  the 
municipality  amounts  to  a  valid  contract,  as  distinguished 
from  a  revocable  license,  the  distinction,  if  any,  between  it  and 
a  franchise  is  of  little  practical  importance. 

A  franchise  of  a  corporation  is  to  be  distinguished  from  a 
privilege  —  in  the  nature  of  an  exemption  —  granted  to  its 
members  or  employees.     The  grant  of  the  former  constitutes 


of  tbe  State,  and  it  is  very  doubtful 
whether  the  legislative  department 
can  delegate  to  any  body  or  authority 
the  power  to  grant  such  a  franchise, 
as  the  exercise  of  that  power  involves 
a  high  trust  created  and  conferrefl  for 
the  benefit  of  those  who  granted  it, 
and  as  the  trust  is  confided  to  the 
legislature  it  must  remain  where  it  is 
vested  until  the  constitution  of  the 
State  is  changed." 

Following  this  decision  it  has  been 
held  in  several  important  cases  that 
where  nnmicipalities  are  authorized 
to  grant  to  public  service  corporations 
the  right  to  occupy  their  streets,  the 
right  so  granted  is  a  license,  or  if 
irrevocable  a  contract,  and  not  a 
franchise. 

Metropolitan  City  R.  Co.  v.  Chicago 
West  Division  R.  Co.,  87  111.  317 
(1877);  Chicago  City  R.  Co.  v. 
People,  73  111.  541  (1874);  Cain  v. 
City  of  Wyoming,  104  111.  App.  538 
(1902) ;  Lincoln  St.  R.  Co.  v.  City  of 
Lincoln,  61  Neb.  109  (1901),  (84 
N.  W.  Rep.  802) ;  Denver  City,  etc. 
R.  Co.  V.  Denver  aty  R.  Co.,  2  Colo. 
673  (1875).  See  also  Lasher  v. 
People,  183  111.  226,  233  (1899),  (55 
N.  E.  Rep.  663,  75  Am.  St.  Rep.  103, 
47  L.  R.  A.  802)  ;  State  v.  Jackson- 
ville R.  Co.,  29  Fla.  590  (1892),  (10 
So.   Rep.  .590). 

(c)  Notwithstanding  the  intima- 
tion in  People's  Pass.  R.  Co.  v.  Mem- 
phis City  R.  Co.,  supra,  that  the  State 
could  not  delegate  its  power  to  grant 
franchises,  the  Supreme  Court  in  a 
later  case  (New  Orleans  Gas  Co.  i'. 

268 


Louisiana  Light  Co.,  115  U.  S.,  659 
(1885),  (6  Sup.  Ct.  Rep.  252)),  said  : 
"The  right  to  dig  up  the  streets  and 
other  public  ways  and  place  therein 
pipes  and  mains  for  the  distribution 
of  gas  for  public  and  private  use  is  a 
franchise,  the  privilege  of  exercising 
which  could  only  be  granted  by  the 
State  or  by  the  municipal  govern- 
ment of  that  city  acting  under  legis- 
lative authority." 

In  line  with  this  decision  are  a 
series  of  cases  holding  that  a  franchise 
may  be  granted  to  a  public  utility 
corporation  through  the  instrumen- 
tality of  a  municipality  —  that  such 
a  privilege  though  passing  indirectly 
to  the  corporation  is  still  strictly  a 
legislative  grant. 

State  V.  East  Fifth  St.  R.  Co.,  140 
Mo.  539  (1897),  (41  S.  W.  Rep.  955, 
62  Am.  St.  Rep.  742,  38  L.  R.  A.  218) ; 
Purnell  v.  McLane,  98  'Md.  589  (1903), 
(56  Atl.  Rep.  830)  ;  Wright  v.  Mil- 
waukee Electric  R.,  etc.  Co.,  95  Wis. 
29  (1897),  (69  N.  W.  Rep.  791,  60  Am. 
St.  Rep.  74,  36  L.  R.  A.  47) ;  State  r. 
Portage  City  Water  Co.,  107  Wis.  441 
(1900;i,  (83  N.  W.  Rep.  697);  Port 
of  Mobile  v.  Louis\-ille,  etc.  R.  Co.,  84 
Ala.  115  (1887),  (4  So.  Rep.  106,  5 
Am.  St.  Rep.  342)  ;  Turnpike  Road 
Co.  V.  Campbell,  44  Cal.  89  (1872). 
See  al.so  Cumberlantl  Telephone,  etc. 
Co.  V.  City  of  Evans\-ille,  127  Fed.  187 
(1903). 

1  Port  of  Mobile  r.  Louis\-ille,  etc. 
R.  Co.,  84  Ala.  115  (1887),  (4  So.  Rep. 
106,  5  Am.  St.  Rep.  .342). 


CHAP.  XIl] 


SALES  OF  CORPORATE  FRANCHISES 


§  133 


a  contract  with  the  State  within  the  protection  of  the  consti- 
tutional provision,  while  the  latter  ma}'  be  revoked  at  any 
time.* 

The  grant  of  a  franchise,  unless  expressly  so  stated,  is  not  a 
contract  on  the  part  of  the  State  that  it  will  grant  no  similar 
franchises  to  other  corporations.  That  charters  do  not  con- 
fer exclusive  privileges,  unless  so  expressed,  was  definitely 
settled  by  the  Supreme  Court  of  the  United  States  in  the  cele- 
brated Charles  River  Bridge  case.^ 

The  franchises  of  a  corporation  are  also  to  be  distinguished 
from  its  powers.  The  former  are  special  privileges;  the  latter 
are  rights  possessed  by  natural  persons  generally,  and  are 
acquired  by  a  corporation  in  order  to  transact  business.^ 


'  It  is  the  better  view  that  statutes 
exempting  employees  of  corpora- 
tions from  militia  duty,  jury  duty, 
road  duty,  etc.,  confer  personal 
privileges  upon  the  employees  and 
may  be  rejjealed  by  the  legislature 
at  any  time  without  regard  to  the 
existence  of  a  reserved  power  to  repeal. 
Neeley  v.  State,  4  Lea  (Tenn.),  316 
(1880).  The  contrary  is,  however, 
held  in  Johnson  v.  State,  88  Ala.  170 
(1889),  (7  So.  Rep.  2.5.3). 

^  Charles  River  Bridge  v.  Warren 
Bridge,  11  Pet.  (U.  S.)  420  (1837). 
See  also  Thompson  v.  New  York,  etc. 
R.  Co.,  3  Sandf.  Ch.  (N.  Y.)  62  (1846). 
Compare  New  Jersey  Southern  R. 
Co.  V.  Long  Branch  Commrs.,  39 
N.  J.  L.  28  (1876). 

That  the  franchises  of  a  corpora- 
tion m.ay  be  taken  by  the  exerci.se  of 
the  power  of  eminent  domain,  .sec 
West  River  Bridge  Co.  v.  Dix,  6  How. 
(U.  S.)  507  (1848). 

'  State  V.  Minnesota  Thresher 
Mfg.  Co.,  40  Minn.  213  (1880),  (41 
N.  W.  Rep.  1020,  3  L.  R.  A.  510), 
where  the  Court  said:  "The  kinds  of 
business  which  corporations  organ- 
ized either  under  title  2,  c.  34  (of 
Gen.  Stat.  1878),  or  under  the  Act 
of  1 873,  are  authorized  to  carry  on, 
are  powers,  but  not  franchises,  be- 
cause it  is    a    right  possessed  by  all 


citizens  who  choose  to  engage  in  it, 
without  any  legislative  grant.  The 
only  franchise  which  such  corpora- 
tions po.ssess  is  the  general  franchise 
to  be  or  exist  as  a  corporate  entity. 
Hence,  if  they  engage  in  any  business 
not  authorized  by  the  statute,  it  is 
tiltra  vires,  or  in  excess  of  their  powers, 
but  not  a  usurpation  of  franchises 
not  granted,  nor  necessarily  a  mis- 
user of  those  granted." 

For  discussion  of  the  distinction 
between  the  properly  of  a  corporation 
and  its  franchises,  see  Tuckahoe 
Canal  Co.  v.  Tuckahoe,  etc.  R.  C<\, 
11  Leigh  (Va.),  42  (1840),  (36  Am. 
Dec.  374) ;  Bridgeport  v.  New  York, 
etc.  R.  Co.,  36  Conn.  255  (1869),  (4 
Am.  Rep.  63) ;  Miners'  Ditch  Co.  v. 
Zellerbach,  37  Cal.  543  (1869),  (99 
Am.  Dec.  300). 

Where  a  corporation  proposed  to 
purchase  all  the  real  estate  and  as.sets, 
including  the  franchises,  of  another 
corporation  and  this  projwsition  was 
ajCcepted  by  a  vote  of  the  stockholders 
of  the  latter  who  authorized  the 
directors  to  carry  out  the  arrange- 
ment, and  a  deed  of  the  real  estate 
and  appurtenances  was  delivered 
and  the  purchaser  was  put  into  jws- 
session  of  all  the  property,  it  was  held 
that  there  was  a  valid  transfer  of 
the  franchises. 

2G9 


§  134 


INTERCORPORATE    RELATIONS 


[part  n 


§  134.  Transferability  of  Franchises  of  Corporations,  — Con- 
versely to  the  proposition,  considered  in  another  section,  that 
a  transfer  of  corporate  franchises  without  legislative  author- 
ity is  void,^  it  follows  that  such  a  transfer  with  such  authority 
is  valid.  When  the  State  which  grants  the  franchises  of  a 
corporation  consents  to  their  alienation,  they  become  com- 
municable, in  whole  or  in  part,  in  accordance  with  the  consent 
so  given.^ 

While  franchises  are  generally  considered  to  be  incorporeal 
hereditaments  and,  therefore,  property,'  it  seems,  upon  prin- 
ciple, that  corporate  franchises  cannot  pass  directly  from 
vendor  to  purchaser  in  the  manner  of  corporate  property.  A 
franchise,  in  its  essence,  is  a  privilege  conferred  by  grant  to 


City  of  Kalamazoo  v.  Power  Co., 
124  Mich.  74  (1900),  (82  N.  W. 
Rep.  811). 

A  deed  purporting  to  convey  tlie 
property  and  franchises  of  a  corpora- 
tion may  be  valid  as  to  tlie  former 
although  invalid  as  to  the  latter. 

Klosterman  v.  Mason  County,  etc. 
R.  Co.,  8  Wash.  281,  286  (1894), 
(36  Pac.  Rep.  136);  Gloninger  v. 
Pittsburgh,  etc.  R.  Co.,  139  Pa.  St. 
13  (1890),  (21  Atl.  Rep.  211). 

1  See  next  section. 

*  East  Boston,  etc.  R.  Co.  v. 
Eastern  R.  Co.,  13  Allen  (Mass.), 
422  (1866),  per  Wells,  J.:  "The 
doctrine  that  a  railroad  corporation 
cannot  alienate  its  franchise  is  not 
founded  upon  any  technical  theory 
nor  arbitrary  rule,  but  upon  the  rea- 
sonable implication  that  such  aliena- 
tion would  be  contrary  to  the  inten- 
tion of  the  legislature  and  subversive 
of  the  purpose  for  which  the  franchise 
was  granted.  The  same  considera- 
tions apply,  only  perhaps  with  greater 
force,  to  the  subdivision  of  the  fran- 
chise by  the  transfer  of  a  part.  .  .  . 
But  an  ahenation  of  the  franchise, 
either  in  whole  or  in  part,  niay,  un- 
doubtedly be  made,  whenever  there 
is  legislative  authority  for  it,  either 
in  express  terms  or  by  reasonable 
implication." 

270 


See  also  Vermont,  etc.  R.  Co.  v. 
Vermont  Central  R.  Co.,  34  Vt.  1 
(1861);  Day  v.  Ogdensburg,  etc. 
R.  Co.,  107  N.  Y.  129  (1887),  (13  N.  E. 
Rep.  765). 

In  Matter  of  Long  Acre  Electric 
Light,  etc.  Co.,  51  Misc.  (N.  Y.)  407 
(1906),  (101  N.  Y.  Supp.  460),  af- 
firmed 188  N.  Y.  361  (1907),  (80  N.  E. 
Rep.  1101)  it  was  held  that  special 
franchises  are  transferable  as  propn 
erty  independently  of  the  life  of  the 
corporation  to  which  they  were  orig- 
inally granted. 

3  in  Enfield  Toll  Bridge  Co.  v. 
Hartford,  etc.  R.  Co.,  17  Conn.  60 
(1845),  (42  Am.  Dec.  716),  Chief 
Justice  Williams  said  in  reference 
to  a  bridge  franchise:  "What  are 
the  rights  of  the  plaintiffs?  They 
are  derived  from  the  grant  of  the 
legislature,  and  are  what  in  law  is 
known  to  be  a  franchise;  and  a 
franchise  is  an  incorporeal  heredita- 
ment, known  as  a  species  of  property, 
as  well  as  any  estate  in  lands.  It  is 
property,  which  may  be  bought  and 
sold,  which  will  descend  to  heirs, 
and  may  be  devised." 

See  also  Hall  v.  Sullivan  R.  Co.,  21 
Law  Rep.  138  (1857),  (1  Brunner  Coll. 
Cas.  613,  11  Fed.  Cas.  257).  These 
cases  are  merely  indicative  of  a  long 
line  of  decisions. 


CHAP.    XIl]  SALES    OF    CORPOKATE    FRANCHISES  §    135 

exercise  extraordinary  powers.  A  corporation  cannot  transfer 
this  right  any  more  than  a  person  can  transfer  an  office  which 
he  holds;  but  in  the  same  manner  that  the  office-holder,  when 
authorized,  might  appoint  another  to  hold  the  office,  the  cor- 
poration by  the  form  of  sale  may  delegate  to  another  corpo- 
ration the  right  to  exercise  the  special  privileges  conferred 
upon  it.^ 

This  principle  is  somewhat  analogous  to  the  principle, 
already  considered,  that  the  "  transfer  "  of  a  charter  in  reality 
means  its  surrender  and  the  grant  anew  of  a  similar  charter 
to  the'  "  transferee."  ^  But  there  is  this  fundamental  distinc- 
tion: The  exercise  of  a  power  of  appointment  in  relation  to 
the  franchises  of  a  corporation  confers  upon  the  appointee 
the  same  franchises,  while  the  grant  of  a  new  charter  confers 
similar  franchises.  This  distinction  is  of  importance  where 
constitutional  restrictions  have  intervened  between  the  grant 
of  tlie  old  and  the  grant  of  the  new  charter. 

II.    Legislative  Authority  for  Sale  of  Franchises 

§  135.  Legislative  Authority  essential  to  Alienation  of  Fran- 
chises. —  It  is  a  rule  applicable  to  all  corporations  exercising 
public  franchises  that  such  franchises  can  be  transferred  only 
by  and  with  the  consent  of  the  State  which  granted  them  — 
that  corporate  franchises  are  incommunicable  without  legis- 
lative authority. 

The  courts  have  assigned  various  reasons  for  the  existence 
of  the  rule,^  of  which  the  following  are  based  upon  principles 
fundamentally  sound : 

'  Compare  2  Morawctz  Priv.  Corp.  in  order  to  avoitl  a  cumbersome  form 

§  924.  of  expression. 

The  words  "transfer,"  "sale"  and  '^  Ante,   §   132:    "Travafernhilitii  of 

"lease"     are,     upon     the     principles  Franchise  of  Corporate  Existence." 
stated  in  the  text,  technically  incor-  ^  It  has  sometimes  been  said,  as  an 

rect    when    used    in    connection    with  adilitional   reason  to  those  stated  in 

corporate  franchises.     They  are,  how-  the  text,  that  a  franchise  is  deemed 

ever,  in  general  use  and  express  the  a  personal  trust  and,   therefore,   tliat 

idea  of   the   pa.s.sing   of   franchises —  the  State  has  the  right  to  deterwiine 

absolutely    or    for    limited    terms —  who  shall  be  tlie  recipients  of  it.      But 

from     one     corporation     to     another  as  pointed  out  in  an  editorial  note  to 

with  sufficient  accuracy.     They  will,  Hrunswick  Cias   Light   Co.   v.   United 

therefore,  be  employed  in  this  treatise  (Jas,   etc.   Co.,   35   Am    St.    Rep.   .39:{ 

271 


136 


INTERCORPORATE    RELATIONS 


[part  II 


1.  The  charter  of  a  corporation  is  the  measure  of  its  powers. 
Unless  authority  to  transfer  its  franchises  is  expressly  granted, 
such  an  act  is  ultra  vires. 

2.  The  transfer  by  a  corporation  of  its  franchises  —  dis- 
abling it  from  the  performance  of  its  public  duties  — is  ayainst 
public  policy. 

3.  A  corporation  exercising  public  franchises  is  an  agent  of 
the  State  and,  without  the  consent  of  the  State,  cannot  dele- 
gate its  powers. 

§  136.  Unauthorized  Sale  of  Franchises  —  Ultra  Vires.  — 
The  power  to  sell  its  franchises  is  not  to  be  implied  from  the 
usual  grant  of  powers  to  a  gwasi-public  corporation  but  must 
be  expressly  conferred.  Any  exercise  of  the  power  without  the 
sanction  of  the  legislature  is  ultra  vires.^  The  principle  has 
thus  been  stated  by  the  Supreme  Court  of  Pennsylvania:  "  A 
corporation,  unless  specially  restricted  by  its  charter  or  some 


(1893)  :  "The  theory  of  a  personal 
confidence  reposed  in  the  original 
corporators  rests  on  a  purely  arbi- 
trary foundation,  .  .  .  and  the  legis- 
lation wliich  has  in  most,  if  not  all, 
the  States  of  the  Union  provided  for 
a  free  transfer  of  franchises,  as  the 
result  of  the  mortgage  thereof,  and 
even  for  the  incorporation  of  the 
entirely  uncertain  body  of  persons 
■wlio  may  purchase  at  the  foreclosure 
sale,  shows  very  conclusively  that, 
in  the  opinion  of  the  people  of  this 
country,  the  grounds  of  public  policy 
upon  which  this  restriction  of  the 
power  of  transfer  is  to  be  sustained 
must  be  sought  in  other  directions." 

Transfers  of  franchises  have  also, 
under  certain  conditions,  been  held 
illegal  as  tending  to  create  monopo- 
lies. See  Part  V.,  post:  "Combina- 
tions of  Corporations." 

'  United  States :  Branch  v.  Jesup, 
106  U.  S.  468  (1882),  (1  Sup.  Ct.  Rep. 
495) ;  Cumberland  Telephone,  etc. 
Co.  V.  City  of  Evansville,  127  Fed.  186 
(1903) ;  Mackintosh  v.  Flint,  etc.  R. 
Co.,  34  Fed.  582  (1888). 

Maryland :  State  v.  Consolidation 
Coal  Co.,  46  Md.  1  (1876). 

272 


Nebraska:  Clarke  v.  Omaha,  etc. 
R.  Co.,  4  Neb.  458  (1876). 

New  York:  Troy,  etc.  R.  Co.  v. 
Boston,  etc.  R.  Co.,  86  N.  Y.  107 
(1881). 

Ohio:  Coe  v.  Columbus,  etc.  R. 
Co.,  10  Ohio  St.  372  (1859),  (75  Am. 
Dec.  518). 

Pennsylvania:  Pittsburgh,  etc.  R. 
Co.  V.  Bedford  R.  Co.,  81|  Pa.  St.  104 
(1871). 

Texas.  East  Line,  etc.  R.  Co.  v. 
State,  75  Tex.  434  (1889),  (12  S.  W. 
Rep.  690). 

The  general  rule  that  any  transfer 
of  corporate  franchises,  without  legis- 
lative authority,  is  ultra  vires  is  sup- 
ported by  numerous  decisions.  Those 
especially  relating  to  sales  of  franchises 
are  cited  in  the  above  note  and  are 
further  considered  in  §  143,  post: 
"Statutory  Authority  essential  to  Sale 
of  Railroad."  Csises  illustrating  the 
same  principle  as  applied  to  leases  of 
railroads  are  collected  in  note  to 
§  177,  post;  as  applied  to  a  transfer 
through  consolidation,  in  §  17,  ante; 
as  applied  to  mortgages  of  franchises 
in  note  to  §  149,  "Short's  Railway 
Bonds  and  Mortgages." 


CHAP.    XIl] 


SALES    OF   CORPORATE    FRANCHISES 


§137 


statute  has  general  power  to  dispose  of  its  property,  the  whole 
or  part,  but  it  has  no  right  to  sell  or  assign  its  franchises,  either 
in  whole  or  in  part,  unless  specially  authorized  by  law."  * 

§  137.  Unauthorized  Sale  of  Franchises  —  Against  Public 
Policy.  — Franchises  are  conferred  upon  corporations  to  en- 
able them  to  provide  facilities  of  benefit  to  the  pubUc.  The 
consideration  for  the  grant  is  the  discharge  by  the  corporation 
of  its  public  duties;  and  public  policy  forbids  a  corporation, 
without  legislative  authority,  to  sell  its  franchises  to  another 
corporation  and  thus  render  itself  incapable  of  performing 
those   duties.^     Mr.   Justice  Campbell,   in    York,   etc.    R.    Co. 


1  Pittsburgh,  etc.  R.  Co.  v.  Bed- 
ford R.  Co.,  81^  Pa.  St.  104  (1871). 
The  extract  quoted  i.s  subject  to  the 
criticism  that  it  ignores  the  principle 
that  the  property  of  a  giiasi-pubUc 
corporation  —  so  far  as  it  is  indispen- 
sable —  cannot  be  disposed  of. 

2  United  States:  York,  etc.  R.  Co. 
V.  Winans,  17  How.  (U.  S.)  30  (1854) ; 
Cumberland  Telephone,  etc.  Co.  v. 
City  of  Evans\'ille,  127  Fed.  187 
(1903). 

Georgia:  Georgia  R.  etc.  Co.  v. 
lUas,  127  Ga.  187  (1906),  (56  S.  E. 
Rep.  313) ;  Singleton  v.  Southwestern 
R.  Co.,  70  Ga.  464  (1883). 

Massachusetts :  Richardson  v.  Sib- 
ley, 11  Alien,  65  (1865),  (87  .\m.  Dec. 
700). 

Illinois:  Peoria,  etc.  R.  Co.  w.  Coal 
Valley  R.  Co.,  68  111.  489  (1873)  : 
Hays  V.  Illinois,  etc.  R.  Co.,  61  111. 
422  (1871). 

Nebraska:  Cholette  v.  Omaha,  etc. 
R.  Co.,  26  Neb.  159  (1889),  (41  N.  W. 
Rep.  1106,  4  L.  R.  A.  135). 

New  Hampshire :  Pierce  v.  Emery, 
32  \.  H.  484  (18.56). 

Ohio:  Railroad  Co.  v.  Hinsdale,  4.5 
Ohio  St.  556  (1888),  (15  N.  E.  Rep. 
665). 

Tennessee:  Frazier  v.  Railway  Co., 
88  Tenn.  138  (1889),  (12  S.  W.  Rep. 
537). 

Texas:  East  Line,  etc.  R.  Co.  v. 
Rushing,  69  Tc.k.  306  (1887),  (6  S.  ^^'. 


Rep.  834) ;  Gulf,  etc.  R.  Co.  v.  Morris, 
67  Tex.  692  (1887),  (4  S.  W.  Rep. 
156). 

Virginia :  Naglee  v.  Alexandria, 
etc.  R.  Co.,  83  Va.  707  (1887),  (3  S.  E. 
Rep.  369,  5  Am.  St.  Rep.  308). 

See  also  ante,  §  18:  "Consolida- 
tion of  Quasi-public  Corporations 
-without  Legislative  Authority  against 
Public  Policy";  post,  §143:  "Statu- 
tory Authority  essential  to  Sale  of 
Railroad";  post,  §  177:  "Lease  of 
Railroad  invalid  without  Legislative 
Authority." 

In  Threadgill  v.  Pumphrey,  87 
Tex.  573  (1895),  (30  S.  W.  Rep.  356), 
however,  the  Court  said  with  respect 
to  corporations  organized  under  gen- 
eral laws,  although  engaged  in  the 
performance  of  gua-si-public  functions  : 
"There  is  no  personal  trust  involved 
in  the  grant  of  corporate  powers  untler 
a  general  law  of  incorporation  which 
authorizes  all  the  citizens  of  the  State 
to  create  a  corporation  for  any  one  of 
certain  specified  objects,  b}'  merel}'  fil- 
ing articles  of  incorporation  with  the 
Secretary  of  State  ;  and  we  do  not  .see 
vihy  the  public  interests  may  not  be 
as  well  subserved  by  the  purchasers 
of  the  property  of  the  corporation  as 
by  the  corporation  it.sclf,  when  it 
becomes  confessedlj-  unable  or  unwill- 
ing to  pay  its  debts." 

For  other  cases  apparently  con- 
trary    to     the     rule     that      especial 

273 


§    138  INTERCORPORATE    RELATIONS  [PART   II 

V.  Winans,^  thus  stated  the  reason  of  the  rule:  "  Important 
franchises  were  conferred  upon  the  corporation  to  enable  it 
to  provide  facilities  for  communication  and  intercourse  re- 
quired for  the  public  convenience.  Corporate  management 
and  control  over  these  were  prescribed,  and  corporate  respon- 
sibility for  their  insufficiency  provided,  as  a  remuneration 
to  the  community  for  their  grant.  The  corporation  cannot 
absolve  itself  from  the  performance  of  its  obligations  with- 
out the  consent  of  the  legislature."  ^ 

§  138.  Unauthorized  Sale  of  Franchises  —  Unlawful  Delega- 
tion of  Powers.  —  A  grant  of  franchises  by  the  State  consti- 
tutes the  grantee,  in  a  sense,  an  agent  of  the  State  in  their 
exercise,  and,  upon  an  elementaiy  principle  of  the  law  of  agency, 
delegatus  non  delegare,  the  corporation  —  the  agent  —  cannot 
sell  its  franchises  to  another  corporation  without  the  consent 
of  the  State  —  the  principal.  It  is  immaterial  that  the  intend- 
ing purchaser  agrees  to  fulfil  all  the  public  obligations  of  the 
grantee.^  The  State  has  the  right  to  select  the  persons  who 
shall  enjoy  the  franchises  it  grants,  as  well  as  those  who  shall 
fulfil  the  obligations  due  it. 

While  this  reason  for  the  doctrine  that  there  is  no  implied 
power  to  transfer  franchises  is  sound  in  principle,  and  has  often 
been  stated  by  the  English  courts,  it  is  generally  given  as  an 
additional  reason  to  that  of  idtra  vires  or  the  rule  of  public 
policy,  already  considered.  Thus,  in  Winch  v.  Birkenhead, 
etc.    R.    Co.,*  Vice-Chancellor   Parker,   while   referring   to   an 

legislative    authoritj'    is    essential    to  inapplicable    where    the    transfer    is 

the  alienation  of  franchises  see  State  to   the   public,   i.e.   to  the   municipal 

V.   Topeka   Water   Co.,    61    Kan.    547  corporation  for  public  service. 
(1900),  (60  Pac.  Rep.  337);  Michigan  City  of  Indianapohs  v.  Consumers' 

Telephone  Co.  v.  City  of  St.  Joseph,  Gas  Trust  Co.,  144  Fed.  640  (1906). 
121  Mich.  502  (1899),  (80  N.  W.  Rep.  ^  Xroy  v.  Rutland  R.  Co.,  17  Barb. 

383,  80  Am.  St.  Rep.  520,  47  L.  R.  A.  (N.  Y.)  581   (1854) ;    Beman  v.  Ruf- 

87).     See  also  Matter  of  Long  Acre  ford,     1     Sim.     (n.    s.)     569     (1851); 

Electric    Light,    etc.   Co.,    188    N.    Y.  Winch  v.  Birkenhead,  etc.  R.  Co.,  5 

361  (1907),  (80  N.  E.  Rep.  1101).      •  De   Gex   &   S.   562   (1852),    (13  Eng. 

'  York,  etc.  R.  Co.  v.  Winans,   17  L.    &  Eq.  506) ;    Great  Northern  R. 

How.  (U.  S.)  30  (1854).  Co.    v.    Eastern    Counties    R.    Co.,    9 

2  But  the  rule  that  a  ^wasz-public  Hare,  306  (1851),  (12  Eng.  L.  &  Eq. 

corporation  cannot,  without  the  con-  Rep.  224). 

sent  of  the  legislature,  convey  away  *  Winch  v.  Birkenhead,  etc.  R.  Co., 

its  franchises  and  thus  absolve  itself  5  De  Gex  &  S.  562  (1852),  (13  Eng. 

from  its  obligations  to  the  public,  is  L.  &  Eq.  506). 

274 


CHAP.    XIl]  SALES    OF   CORPORATE   FRANCHISES  §    139 

agreement  for  "  working  a  line  "  as  a  delegation  of  powers,  also 
said  that  the  agreement  was  that  the  company  should  "  part 
with  certain  statutory  powers  which  they  have  no  authority 
to  part  with,  and  moreover,  that  they  were  to  part  with  them 
to  a  body  who,  by  their  constitution,  cannot  accept  them." 

The  rule  that  a  corporation  has  no  implied  power  to  delegate 
its  franchises  is  essentially  different  from  the  rule  that  it  has 
no  power  to  delegate  the  performance  of  its  public  duties^ 
although  both  produce  the  same  result.  A  corporation,  upon 
principles  of  the  law  of  agency,  cannot  delegate  its  powers  and 
franchises.  A  corporation,  as  a  party  to  a  contract  with  the 
State,  cannot,  for  reasons  of  public  policy,  transfer  its  fran- 
chises to  others  and  absolve  itself  from  its  obligations  to  the 
public  assumed  in  consideration  of  their  grant. 

§  139.  Legislative  Authority  essential  to  Purchase  of  Fran- 
chises. —  The  same  principles  of  law  which  forbid  a  corpora- 
tion parting  with  its  franchises,  without  the  consent  of  the 
State  which  granted  them,  prevent  a  corporation,  without 
legislative  authority,  from  acquiring  franchises  granted  to 
another  corporation.*  A  corporation  has  no  implied  power 
to  purchase  corporate  franchises  and  its  acceptance  of  a  con- 
veyance of  franchises,  without  authority,  would  be  ultra  vires. 

It  is  essential  to  the  validity  of  a  contract  transferring  fran- 
chises that  both  parties  should  be  expressl}'  authorized  to  enter 
into  it.  As  said  by  the  Supreme  Court  of  the  United  States  in 
Louisville,  etc.   R.   Co.  v.    Kentucky:  ^  "  It  is  a  fundamental 

'  Louisville,  etc.  R.  Co.  ?•.  Ken-  Gulf,  etc.  R.  Co.  v.  Morris,  67  Tex. 
tucky,  161  U.  S.  691  (1896),  (16  Sup.  692  (1887),  (4  S.  W.  Rep.  156).  See 
Ct.  Rep.  714) ;  St.  Louis,  etc.  R.  Co.  also  Rogers  v.  Nashville,  etc.  R.  Co., 
V.  Terre  Haute,  etc.  R.  Co.,  145  U.  S.  91  Fed.  299  (1898). 
393  (1892),  (12  Sup.  Ct.  Rep.  953);  It  has,  however,  been  held  that 
Cent  ralTransp.  Co.  V.  Pullman  Car  Co.,  authority  given  to  one  corporation 
139  U.  S.  24  (1891),  (11  Sup.  Ct.  Rep.  to  purchase  the  franchises  of  a  spcci- 
478) ;  Pittsburgh,  etc.  R.  Co.  r.  fiod  corporation  gives  the  latter 
Keokuk,  etc.  Bridge  Co.,  131  U.  S.  authority  to  sell.  New  York,  etc. 
371  (1889),  (9  Sup.  Ct.  Rep.  770);  R.  Co.  v.  New  York,  etc.  R.  Co.,  52 
Oregon  R.,  etc.  Co.  v.  Oregonian  R.  Conn.  274  (1884). 
Co.,  130  U.  S.  1  (1889),  (9  Sup.  Ct.  ^  Louisville,  etc.  R.  Co.  v.  Ken- 
Rep.  409);  Pennsylvania  Co.  v.  St.  tucky,  161  U.  S.  692  (1896),  (16  Sup. 
Louis,  etc.  R.  Co.,  118  U.S.  310(1886),  Ct.  Rep.  714).  See  also  post,  §  144: 
(6  Sup.  Ct.  Rep.  1094) ;  Camden,  etc.  "Seller  7nust  have  Authority  to  sell, 
R.  Co.  i\  May's  Landing  R.  Co.,  48  and  Buyer  to  buy." 
-X.  J.  L.  530  (1886),  (7  Atl.  Rep.  523) ; 

275 


§    139  INTERCORPORATE   RELATIONS  [PART   II 

principle  in  the  law  of  contracts  that,  to  make  a  valid  agree- 
ment, there  must  be  a  meeting  of  minds,  and,  obviously,  if 
there  be  a  disability  on  the  part  of  either  party  to  enter  into 
the  proposed  contract  there  can  be  no  valid  agreement."  So 
upon  principles  of  public  policy,  one  corporation,  unless  per- 
mitted by  the  State,  cannot  assume  and  attempt  to  perform 
the  duties  imposed  upon  another  corporation. 

"  A  corporation  having  no  authority  under  its  own  charter 
to  acquire  and  exercise  the  rights,  powers  and  franchises  of 
another  corporation,  or  to  carry  on  the  business  of  such  other 
corporation,  does  not  succeed  to  such  rights,  powers,  and 
franchises  by  purchasing  the  property  of  the  other  company, 
though  it  be  the  whole  of  such  property  employed  by  that 
company  in  carrying  on  the  business  it  was  chartered  to  engage 
in."  ' 

It  has  been  held  that  a  sale  of  the  special  franchises  of  an 
insolvent  corporation  by  its  receiver  to  an  individual  vests  in 
the  purchaser  all  the  rights  conferred  by  the  original  grant, 
and  that  a  subsequent  sale  thereof  to  another  individual  has 
the  same  ef!"ect.^  It  would  seem,  however,  upon  principle, 
that  the  franchises  in  question  —  the  right  to  operate  electrical 
conductors  in  the  streets  of  a  city  —  involved  the  performance 
of  public  duties  beyond  the  powers  of  an  individual.^ 

>  Southern  R.  Co.  v.  Mitchell,   139  expressions  may  be  found  which  would 

Ala.  629  (1904),  (.37  So.  Rep.  85).  seem   to  support  the  broad  doctrine 

^  Matter  of  Long  Acre  Electric  that  such  a  transfer  by  a  corporation 
Light,  etc.  Co.,  188  N.  Y.  361  to  ah  individual  is  absolutely  void 
(1907),  (80  N.  E.  Rep.  1101).  In  this  and  of  no  more  force  than  if  it  had 
case  the  Court  said  (p.  366)  :  never  been  made.  But  whatever 
"It  seems  to  me  to  be  very  clear  maj^  have  been  the  law  originally  on 
that  the  transfer  to  Minturn  under  this  question,  such  a  doctrine  has 
his  purchase  at  the  receiver's  sale  long  been  practically  ignored  in  this 
vested  him  with  all  the  rights  con-  State.  The  text-books  also  recognize 
ferred  by  the  original  franchise.  It  the  fact  that  the  drift  of  authority 
cannot  be  disputed  that  a  franchise  has  been  in  the  direction  of  sanction- 
to  operate  electrical  conductors  in  ing  transfers  such  as  were  made  in 
the  streets  is  property,  taxable,  alien-  this  case.  Many  of  the  cases  where 
able,  subject  to  levj'  and  sale  under  the  courts  have  recognized  and  sane- 
execution  and  to  condemnation  under  tioned  such  transfers  do  not  appear 
theexerciseof  the  power  of  eminent  do-  to  have  been  based  on  any  special 
main.  .  .  ."  (p. 368)  "There  can  be  no  statute  authorizing  it." 
doubt  that  in  some  of  the  text-books,  as  -'See  Stewart's  Appeal,  56  Pa.  St. 
well  as  in  some  of  the  adjudged  cases,  41J  (1867). 

276 


CHAP.    XIIl]         CONTRACT    OF   SALE    AND    ITS   EXECUTION  §    139a 

§  139a.  Ultra  Vires  Sales  of  Franchises.  —  The  legal  prin- 
ciples governing  attempted  ultra  vires  transfers  of  franchises 
by  sale,  the  effect  of  their  execution,  and  the  rights  and  duties 
of  the  parties,  are  similar  to  those  governing  such  transfers 
by  lease  and  are  elsewhere  fully  considered.* 


Article  II 
SALES    OF    RAILROADS 


CHAPTER    XIII 


CONTRACT    OF    SALE    AND    ITS    EXECUTION 


I.    Nature  of  Sale  of  Railroad 

§  140.     Conventional  and  Judicial  Sales  of  Railroads  distinguished. 
§  141.     Distinction  between  Relation  of  Vendor  and  Vendee  and  Other  Inter- 
corporate Relations. 
§  142.     Distinction  between  Sale  of  Railroad  and  Sale  of  Franchises. 

IT.    Grants  of  Power  to  sell  and  purchase  Railroads 

§  14.3.     Statutory  Authority  e.ssential  to  Sale  of  Railroad. 
§  144.      Seller  must  have  Authority  to  sell  and  Buyer  to  buy. 
§  145.     What  Railroads  may  be  the  Subject  of  Sale.     Statutory  Provisions. 
§  146.      Construction  of  Statutes. 

§  147.     Constitutional  and  Statutory  Prohibitions  of  Purchase  of  Competing 
or  Parallel  Lines. 

III.    Authorization  and  Execution  of  Contract  of  Sale 

§  148.  Statutory  Requisites. 

§  149.  Assent  of  Stockholders.     Whether  Approval  of  Majority  is  sufficient. 

§  150.  Acquiescence  of  Stockholders. 

§  151.  Rights  and  Remedies  of  Dis.senting  Stockholders. 

•  See  post,  ch.  XXII,  "Ultra  vires  executed  by  the  dehvery  of  the  con- 
ami  Voidable  Railroad  Leases."  See  veyance  and  payment  of  the  pur- 
also  ante,  ^  129&:  "  Ultra  vires  Sales  of  chase  price.  Lea-ses  are  continuing 
Property  of  Quasi-public  and  Private  contracts  both  as  to  rent  and  occu- 
Corporations."  This  distinction  be-  pancy  arid  are  executory  in  respect  ol 
tween  sales  and  leases  must,  how-  future  performance, 
ever,   be   borne  in   mind :    Sales  are 

277 


§    141  INTERCORPORATE    RELATION'S  [PART   H 


I.    Nature  of  Sale  of  Railroad 

§  140.  Conventional  and  Judicial  Sales  of  Railroads  distin- 
guished. —  Sales  of  railroads  by  one  corporation  to  another 
have  been,  perhaps,  the  least  common  form  of  intercorporate 
relations.  A  conjunction  of  interests  has  usually  been  obtained 
by  consolidation,  lease,  or  by  the  purchase  of  controlling  stock 
interests.  Sales  of  railroads  in  foreclosure  proceedings  have, 
on  the  other  hand,  frequently  taken  place.  The  numerous 
railroad  reorganizations  in  the  past  ten  years  have,  in  nearly 
eveiy  case,  required  a  sale  of  the  railroad  and  franchises. 
There  have  also  been  instances  of  the  sale  of  railroads  upon 
execution. 

Conventional  sales  of  railroads  involve  relations  between 
corporations.  Judicial  sales  involve  relations  between  a  cor- 
poration and  its  creditors.  The  former  fall  within,  the  latter 
without,  the  scope  of  this  treatise.^ 

§  141.  Distinction  between  Relation  of  Vendor  and  Vendee 
and  Other  Intercorporate  Relations. — A  sale  has  already  been 
distinguished  from  a  consolidation  in  that  the  element  of  sue- 
cession  to  rights  and  liabilities  is  present  in  the  latter  and  ab- 
sent in  the  former.^  The  same  distinction  exists  between  a 
sale  of  a  railroad  and  the  form  of  reorganization  wherein  the 
stockholders  of  a  railroad  compam^  turn  over  its  property  and 
franchises  to  another  corporation,  generally  formed  for  the 
purpose,  in  exchange  for  its  shares,  and  divide  them  directly, 
or  through  a  distribution,  pro  rata  among  the  stockholders.^ 

'  A  railroad  company  is  a  quasi-  of  principles  —  is,  therefore,  be- 
public  corporation.  The  rules  gov-  lieved  to  be  desirable, 
erning  the  sales  of  property  of  that  ^  Ante,  §  13:  "Distinction  between 
class  of  corporations,  considered  in  Coyisolidation  and  Sale." 
§§  127-129,  ante,  apply  to  railroad  ^  The  term  "reorganization"  is 
companies.  A  railroad  company  ex-  more  commonly,  and  perhaps  more 
ercises  franchises,  and  in  their  dispo-  exactly,  applied  to  an  arrangement 
sition  is  controlled  by  the  principles  between  the  stockholders  and  credit- 
examined  in  the  last  chapter.  Sales  ors  of  an  insolvent  corporation  to 
of  railroads,  however,  often  involve  form  a  new  corporation  to  take  over 
questions  peculiarly  applicable  to  the  assets  of  the  old  upon  foreclosure 
them,  and  there  are  many  statutes  sale.  Reorganizations  in  the  manner 
especially  relating  to  them.  A  sepa-  stated  in  the  text  have,  however, 
rate  examination  of  the  subject  —  frequently  been  made.  See  3  Cook 
although    invohing    some    repetition  on  Corp.  §  884. 

278 


CHAP.    XIIl]  CONTRACT    OF    SALE    AND    ITS    EXECUTION  §    142 

In  case  of  a  sale  for  a  valuable  consideration  and  free  from 
fraud,  the  purchasing  corporation  takes  the  property  free 
from  charges,  except  specific  liens  and  equities  of  which  it  has 
notice,  and  is  not  liable  for  the  debts  of  the  vendor.^  In  the 
case  of  such  a  reorganization,  however,  the  corporation  taking 
the  property  in  exchange  for  its  shares  will  be  treated  as  the 
successor  of  the  old  corporation,  and,  at  least  to  the  value  of 
the  property  received,  will  be  held  responsible  for  its  debts.^ 

The  distinction  between  sales  of  railroads  and  railroad 
leases,  trackage  contracts,  pools  and  other  agreements,  is  self- 
evident. 

§  142.  Distinction  between  Sale  of  Railroad  and  Sale  of 
Franchises.  —  The  franchises  of  a  railroad  company  are  special 
privileges  conferred  by  legislative  grant.  The  railroad  of  a 
railroad  company  is  property  which  may  have  been  acquired 
by  the  exercise  of  its  franchises.^ 

The  franchises  are  inalienable,  without  legislative  authority, 
because  a  railroad  company  cannot  delegate  its  powers  and 
shift  its  obligations."*  The  railroad  is  inalienable,  without  like 
authority,  because  it  is  impressed  Avith  a  trust  in  favor  of  the 
public.^ 

A  sale  of  the  franchises  of  the  railroad  company  alone  would 
not  carry  its  property.^     A  sale  of  a  railroad,  without  men- 

^  Ante,   §    123:    "Liability  of  Pur-  a  public  stream,  Tsnth  a  right  to  de- 

chasing     Corporation     for     Debts     of  niarul  tolls  or  ferriage;    or  to  build  a 

Vendor  Company."  mill  upon  a  public  river,  and  receive 

^  Ante,  §  125:    " Remedies  of  Cred-  tolls     for     grinding,     etc.     But     the 

itors."  franchise  consists   in  the  incorporeal 

3  Tuckahoe  Canal  Co.  v.  Tuckahoe,  right ;    the  property  acquired  is  not 

etc.  R.  Co.,  11  Leigh  (Va.),  75  (1840) :  the  franchise.     A  bank  has  a  right  to 

"Now,  I  take  a  franchise  to  be  (1)  an  purchase    a    banking    house;      when 

incorporeal  hereditament;    and  (2)  a  purchased,   is   the  Iiouse  a  franchise? 

privilege  of  authority  vested  in  cer-  Surely  not,  for  it  is  corporeal,  whereas 

tain   persons  by  grant  of  the  sover-  a  franchise  is  incorporeal." 

eign  (v\'ith  us,  by  special  statute),  to  *  See    ante,    ch.    XII.,   subdiv.   II. : 

exercise  powers,  or  to  do  and  perform  "Legislative     Authority    for     Sale    of 

acts  which,  without  such  grant,  they  Franchises." 

could  not  do  or  perform.     Thus,  it  is  *  See  ante,    §    127:    "Indispensable 

a  franchise  to  be  a  corporation,  with  Property  cannot  be  alienated  or  taken 

power  to  sue  and  be  sued,  and  to  hold  on   Execution  without  Legislative  Au- 

property  as  a  corporate  body.     So  it  thority." 

is    a  franchise   to    be   empowered    to  "  That  a  franchise  docs  not  include 

build  a  bridge,  or  keep  a  ferry,  over  property     gained     by     the     exercise 

279 


§    143  INTERCORPORATE    RELATIONS  [PART    II 

tioning  franchises,  would  carry  those  franchises  necessary  for 
its  operation.* 

II.    Grants  of  Power  to  sell  and  purchase  Railroads 

§  143.    Statutory  Authority  essential  to  Sale  of  Railroad.  — 

As  already  shown,  a  sale  by  a  q' if  as  i-public  corporation  of  its 
franchises,  or  of  property  necessaiy  for  the  performance  of  its 
public  duties,  is  invalid  without  legislative  authority.^  A  rail- 
road company  can  sell  its  franchises  and  indispensable  prop- 
erty only  when  such  sale  is  sanctioned  by  statute.^ 

Mr.  Justice  Bradley  in  Branch  v.  Jesup  *  clearly  stated  the 


thereof,  see  Bridgeport  ?•.  New  York, 
etc.  R.  Co.,  3(5  Conn.  255  (1869). 

'  See  post,  §  157  :  "Essential  Fran- 
chises pass  upon  Sale  of  Railroad." 
Contra,  Arthur  v.  Commercial  and 
Railroad  Bank,  17  Miss.  394  (1848). 

^  See  ante,  §§  17,  18  ("consolida- 
tion"); ante,  §§  127-129  ("indispen- 
sable property");  ante,  §§  135-139 
("  franchises")  ;  post,  §  177  ("  leases"). 

^  United  States:  Branch  v.  Jesup, 
106  U.  S.  468  (1882),  (1  Sup.  Ct.  Rep. 
495,  9  Am.  &  Eng.  R.  Cas.  21.5)  ;  Mack- 
intosh V.  Flint,  etc.  R.  Co.,  34  Fed.  582 
(1888). 

Georgia:  Singleton  v.  Southwestern 
R.  Co.,  70  Ga.  464  (1883),  (48  Am.  Rep. 
574). 

Maryland:  State  v.  Consolidation 
Coal  Co.,  46  Md.  1   (1876). 

Massachusetts :  Richardson  v.  Sib- 
ley, 11  Allen  (Mass.),  67  (1865),  (87 
Am.  Dec.  700):  "A  corporation, 
created  for  the  very  purpose  of  con- 
structing, owning  and  managing 
a  railroad,  for  the  accommodation 
and  benefit  of  the  public,  cannot,  with- 
out distinct  legislative  authority, 
make  any  alienation,  absolute  or 
conditional,  either  of  the  general 
franchise  to  be  a  corporation,  or  of 
the  subordinate  franchise  to  manage 
and  carry  on  its  corporate  business, 
without  which  its  franchise  to  be  a 
corporation  can  have  little  more  than 
a  nominal  existence." 

280 


Nebraska:  Clarke  v.  Omaha,  etc. 
R.  Co.,  5  Neb.  314  (1877). 

New  York:  Troy,  etc.  R.  Co.  v. 
Boston,  etc.  R.  Co.,  86  N.  Y.  117 
(1881)  :  "It  is  well  settled  that,  un- 
less authorized  thereto  by  statute,  a 
railroad  corporation,  organized  under 
our  General  Railroad  Act,  has  no 
authority  to  transfer  or  lease  its 
road." 

Ohio:  Coe  v.  Columbus,  etc.  R. 
Co.,  10  Ohio  St.  377  (1859)  :  "In  the 
case  of  a  railroad  corporation,  its 
franchises  and  corporate  rights  are 
not  alienable,  without  express  statu- 
tory authority." 

Also  Railroad  Co.  v.  Hinsdale,  45 
Ohio  St.  556  (1888),  (15  N.  E.  Rep. 
665). 

Pennsylvania:  Pittsburgh,  etc.  R. 
Co.  V.  Bedford  R.  Co.,  81|  Pa.  St.  104 
(1871). 

Tennessee:  Frazier  v.  Railway  Co., 
88  Tenn.  138  (1889),  (12  S.  W.  Rep. 
537). 

Texas:  East  Line,  etc.  R.  Co.  v. 
Rushing,  69  Tex.  306  (1887),  (6  S.  W. 
Rop.  834);  Gulf,  etc.  R.  Co.  v.  Morris, 
67  Tex.  692  (1887),  (4  S.  W.  Rep.  156). 
As  to  legislative  ratification  of 
iniauthorized  sale  of  a  railroad,  see 
Wood  V.  Macon,  etc.  R.  Co.,  68  Ga. 
539  (18S2). 

■•  Branch  v.  Jesup,  106  U.  S.  468 
(1882),  (1  Sup.  Ct.  Rep.  495,  9  Am. 
&  Eng.  R.  Cas.  215). 


CHAP.    XJIl]         CONTRACT    OF    SALE    AND   ITS    EXECUTION  §    144 

rule  and  the  reasons  therefor:  "  As  a  general  rule,  it  is  true, 
a  railroad  company,  with  only  the  ordinary  power  to  construct 
and  operate  its  road,  cannot  dispose  of  it  to  another  company. 
Legislative  aid  is  necessary  to  that  end.  .  .  .  Generally  the 
power  to  sell  and  dispose  has  reference  only  to  transactions  in 
the  ordinary  course  of  business  incident  to  a  railroad  com- 
pany; and  does  not  extend  to  the  sale  of  the  railroad  itself, 
or  of  the  franchises  connected  therewith.  Outlying  lands,  not 
needed  for  railroad  uses,  may  be  sold.  Machinery  and  other 
personal  property  may  be  sold.  But  the  road  and  franchises 
are  generally  inalienable;  and  they  are  so  not  only  Ijecause 
they  are  acquired  by  legislative  grant,  or  in  the  exercise  of 
special  authority  given,  for  the  specific  purposes  of  the  incor- 
porating act,  but  because  they  are  essential  to  the  fulfilment 
of  those  purposes;  and  it  would  be  a  dereliction  of  the  duty 
owed  by  the  corporation  to  the  State  and  to  the  public  to  part 
with  them."  * 

Questions  as  to  what  constitutes  indispensable,  and  what 
surplus,  property  are  considered  elsewhere.^ 

§  144.  Seller  must  have  Authority  to  sell  and  Buyer  to  buy. 
—  From  the  princii)le  that  legislative  authority  is  as  necessary 
to  accept  a  conveyance  of  franchises  as  it  is  to  make  a  grant,^ 
it  follows  that  both  vendor  and  vendee  corporation  must  be 
authorized  by  statute  to  enter  into  a  contract  for  the  purchase 
and  sale  of  a  railroad.^  As  said  by  the  Supreme  Court  of  Texas 
in  Edst  Line,  etc.  R.  Co.  v.  State:  ^  "  To  authorize  such  a  trans- 

'  Statutes  authorizing  f/?/fl.sn'-public  '  East  I,ine,  etc.  R.  Co.  v.  State,  7.5 

corporations    to    sell    their    franchises  T(  x.  434  (1889),  (12  S.  W.  Rep.  690) ; 

and  property  are  within  the  constitu-  ICast  Line,  etc.  R.  Co.  v.  Rushing,  09 

tional  powers  of  the  legislature.     Ha^-  Tex.    306     (1887),    (6     S.    W.     Rep. 

ing  power  to  create  the  corporation,  it  834). 

has  power  to  authorize   the  transfer  A  railroad  company  cannot  trans- 

of    its    franchi.ses    and    a.ssets.     See  fer  its  franchi.se.s  to  a  private  person 

Claw  V.  Van  Loan,  4  Hun  (N.  Y.),  184  so  as  to  enable  him  to  build  a  railroad 

(1875).  and  operate  it   for  his  own  benefit. 

2  See    ante,     128:    "Trstof    Iruh's-  Stewart's  Appi>al,   56   Pa.   St.   413 

-pensahility" :  ante,   §    129:    "Sales  of  (1867);    Fanning  v.  O.sborne,   102  N. 

Surplua  Propert;/."     Also  pout,  §  172:  Y.  441  (1886),  (7  N.  E.  Rep.  .307). 

"Leases  of  Surplus  Propertij."  '  East  Line,  etc.  R.  Co.  v.  State,  75 

^  Ante,   §     139:     "Leqislativc    .\u-  Tex.    4.34    (1889),    (12    S.    W.    Rep. 

thority  essential  to  Purehase  of  Fran-  690). 
chises." 

281 


§145 


INTERCORPORATE    RELATIONS 


.[part   II 


action  it  must  appear  that  one  corporation  iiad  power  to  sell 
and  tlie  other  to  buy." 

Authority  granted  to  one  railroad  company  to  purchase  the 
railroad  and  franchises  of  a  specified  corporation  gives  the  latter 
authority  to  sell.^ 

§  145.  What  Railroads  may  be  the  Subject  of  Sale.  Statu- 
tory Provisions.  —  Statutes  of  the  different  States  authorizing 
sales  of  railroads  are  collected  in  the  subjoined  note.^ 


'  New  York,  etc.  R.  Co.  v.  New 
York,  etc.  R.  Co.,  52  Conn.  274  (1884). 

2  Alabama.     C-ode  1896  (as 

amended  by  Laws  1S9S-1S99),  § 
1169:  "Whenever  all  of  the  capital 
stock  of  a  railroad  corporation,  char- 
tered under  the  laws  of  this  State, 
is  owned  by  a  railroad  corporation 
chartered  by  the  laws  of  another 
State,"  the  domestic  corporation 
"may  sell  and  convey  to  the  cor- 
poration owning  its  stock  all  of  its 
property,"  franchises,  etc. 

lb.  Foreign  railroad  corporations 
operating  domestic  railroad  may 
purchase  or  leaxe  any  other  domestic 
railroad  connecting  with  its  own. 

lb.  §  1170:  "Any  railroad  corpora- 
tion ...  of  this  or  any  other  State, 
may  lease  or  purchase  any  part  or  all 
of  any  railroad  constructed  by  another 
corporation  ...  if  the  lines  of  such 
roads  are  continuous  or  connected." 

lb.  §  1172:  "A  corporation  .  .  . 
has  authority,  for  the  purpose  of 
extending  its  line,  or  forming  a  con- 
nection, to  acquire,  hold  and  operate 
a  railroad  without  the  State." 

Arizona.  R.  S.  1901,  par.  864,  §  1 : 
"Any  railroad  company  .  .  .  maj' pur- 
chase or  lease  the  railroad"  franchises, 
etc.,  "of  any  railroad  company  of  this 
Territory  or  any  other  Territory  or 
State.  .  .  .  No  purchase  or  lease" 
shall  be  made  "unless  the  line  of  rail- 
road so  purchased  or  leased  .  .  .  shall, 
when  constructed,  form  ...  a  branch 
of,  or  a  continuous  line  with,  the  rail- 
road of  such  purchasing  or  leasing 
company  either  by  direct  connection 

282 


therewith,  or  through  an  intermediate 
line  or  lines." 

lb.  Any  railroad  company  may 
sell  or  lease  its  railroad,  franchises, 
etc.,  to  any  railroad  company,  or- 
ganized under  the  laws  of  Arizona,  or 
of  any  other  Territory  or  State.  The 
lines  must  be  continuous,  either 
directly,  or  by  means  of  intermediate 
line  or  lines. 

Arkansas.  Kirby's  Dig.  1904,  § 
6742:  "Any  railroad  company  of  this 
State  .  .  .  may  sell  or  l^ase  its  road, 
property  and  franchises  to  any 
other  railroad  company  ...  of  any 
other  State  .  .  .  whose  line  of  rail- 
road shall  so  connect  with  the  leased 
or  purchased  road  by  bridge,  ferry  or 
otherwise,  as  to  practically  form  a 
continuous  line  of  railroad ;  and  any 
railroad  of  this  State  may  buy  or 
lease,  or  otherwise  acquire,  any  rail- 
road or  railroads,  with  all  property, 
.  .  .  whenever  the  roads  shall  form, 
in  the  operation  thereof,  a  continuous 
line  or  lines." 

lb.  §  6743:  "Any  railroad  com- 
pany ...  of  any  other  State  .  .  . 
may  buy,  lease,  or  otherwise  acquire 
any  railroad  or  railroads,  the  whole 
or  part  of  which  is  in  this  State  .  .  . 
whenever  the  roads  of  such  companies 
shall  form  in  the  operation  thereof 
a  continuous  line  or  lines." 

lb.  §  6752 :  ' '  Any  railroad  com- 
pany ...  of  this  or  any  other 
State,  or  of  the  United  States,  may 
lease  or  purchase  all,  or  any  part,  of 
a  railroad  .  .  .  the  whole  or  part  of 
wliich  is  in  tills  State,  and  constructed, 


CHAP.    XIIl]  COXTRACT    OF    SALE    AND    ITS    EXECUTION' 


§  145 


In  nearly  all  of  these  statutes  the  power  to  sell  or  purchase 
is  granted  in  connection  with  the  grant  of  power  to  lease  or 
take  a  lease. 


owned  or  leased  by  any  other  com- 
pany, or  connected  at  anj'  point 
either  within  or  without  this  State." 

lb.  §  6762:  "Every  railroad  cor- 
poration ...  of  this  State  ...  is 
authorized  to  sell,  lease  or  otherwise 
dispose  of  .  .  .  its  road,"  etc.,  "to  an^- 
connecting  railroad  company,  or  to 
any  railroad  corporation  ...  of  this 
or  any  other  State." 

Ih.  §  6766:  "Any  railroad  com- 
pany ...  of  any  other  State"  maj^, 
for  the  purpose  of  continuing  its  line 
through  this  State,  "lease  or  purchase 
the  property'  ...  of  any  railroad  .  .  . 
of  this  State." 

California.  Pomeroy's  Code,  inoi, 
§  494:  "Any  railroad  corporation 
owning  a  railroad  in  this  State  may 
sell,  convey  and  transfer  its  property 
and  franchises  ...  to  any  other  rail- 
road corporation  ...  of  this  or  any 
other  State  or  Territory,  or  [organized] 
under  any  act  of  Congress,  and  any 
other  such  railroad  corporation  re- 
ceiving such  conveyance  may  hold 
and  operate." 

This  section  does  not  authorize 
any  corporation  to  purchase  any  rail- 
road property  operated  in  competi- 
tion with  it. 

Colorado.  Mill's  Anno.  Stat.,  1891 
(as  amended  bj'  Sess.  Laws  1899, 
pp.  162-163),  §  611:  "Any  railroad 
corporation  ...  of  this  State,  or  .  .  . 
of  an  adjoining  State  or  Territory, 
may  lca.se  or  purcluise  any  part  or  all 
of  a  railroad  constructed  by  another 
company  within  or  without  tliis  State, 
if  the  lines  of  roads  of  such  com- 
panies are  continuous  or  connectetl." 

Sess.  Laws  1899,  ch.  125,  p.  313: 
"Any  railroad  company,  owning  or 
operating  a  line  of  railroad  in  this 
State,  may  purchase  other  lines  of 
railroad,  within  or  without  this  State, 
which    shall    connect    with    the    road 


operated  by  such  company,  directly, 
or  bj'  means  of  any  other  line  which 
such  company  shall  have  the  right, 
by  contract  or  otherwise,  when  con- 
structed, to  use  and  operate." 

lb.  "Any  corporation  ...  of 
this  State  may  sell  its  line  of  railroad 
to  any  other  company,  to  which, 
under  the  laws  of  this  State  it  may 
lease  the  same  or  with  which  it  may 
consolidate." 

Florida.  Gen.  Stat.  1906,  §  2812: 
"Any  railroad  ...  in  this  State 
shall  have  power  ...  to  make  and 
enter  into  contracts  with  an}'  rail- 
road .  .  .  which  has  constructed  or 
will  hereafter  construct  any  railroad 
.  .  .  within  this  State  or  in  another 
State,  as  will  enable  said  companies 
to  rim  their  roads  in  connection  with 
each  other,  .  .  .  or  to  lease  and  jiur- 
chase  the  stock  and  jiroperty  of  any 
other  companj',  and  hold,  use,  and 
occupy  the  .same  in  such  manner  as 
they  shall  deem  most  beneficial  to 
their  interests." 

Georgia.  Code,  1895,  §  2179: 
"Any  railroad  company  incorporated 
under  .  .  .  this  article  shall  have 
authoritj'  to  sell,  lease,  or  transfer  its 
.  .  .  property  or  franchises  to  .  .  .  any 
other  railroad  company  incorjwrated 
under  the  laws  of  this  or  any  other 
State  or  of  the  United  States,  who.se 
railroad,  within  or  without  this  State, 
shall  connect  with  or  form  a  continu- 
ous line  with  the  railroad  of  the  com- 
pany incorporated  under  this  law. 
Conversely,  any  such  corporation 
organized  under  the  provisions  of  this 
article  may  purchase  .  .  .  the  proj)- 
erty  and  franchises  of  any  other  rail- 
road company  ...  of  this  or  any 
other  State  or  of  the  United  States 
whose  railroads  within  or  without  this 
State  shall  connect  with  or  form  a 
continuous   line   or  system    with   the 

283 


§145 


INTERCORPORATE    RELATIONS 


[part  II 


As  a  general  rule  a  railroad  company,  in  these  statutes,  is 
expressly  authorized  to  sell  its  railroad,  property  and  fran- 


railroad  of  such  company  incorporated 
under  this  law." 

lb.  §  2173:  "A  railroad  company 
shall  have  power  ...  to  lease  or  pur- 
chase the  property  of  any  other  such 
company  [one  whose  road  connects 
with  that  of  purchasing  or  leasing 
corporation]  and  hold,  use  and  occupy 
the  same  in  such  manner  as  they  shall 
deem  most  beneficial." 

Idaho.  Laws  1901,  p.  214:  "Any 
railroad  corporation  whose  line  is 
wholly  or  in  part  within  this  State 
whether  .  .  .  organized  under  the 
laws  of  this  State  or  of  any  other  State 
or  Territory  or  of  the  United  States, 
may  lease  or  purchase  .  .  .  the  whole 
or  any  part  of  the  railroad  of  any 
other  railroad  corporation.  .  .  .  Any 
railroad  company  may  sell  or  lease 
the  whole  or  any  part  of  its  railroads 
...  to  any  railroad  company  ...  of 
the  United  States  or  of  this  State  or 
of  any  other  State  or  Territory  of  the 
United  States." 

Illinois.  R.  S.  1903,  §  196,  p.  1475 : 
Domestic  railroad  corporations  operat- 
ing foreign  or  domestic  railroads  may 
purchase  same.  No  parallel  or  com- 
peting lines  can  purchase  one  another. 
lb.  §  218,  p.  1480:  "Whenever  a 
corporation  ...  of  another  State 
shall  be  in  possession  of  a  railroad, 
.  .  .  the  whole  or  a  part  of  which  is 
situated  in  this  State,  belonging  to  a 
corporation  ...  of  this  State,  or 
shall  own  or  control  all  the  capital 
stock  of  such  corporation  of  this  State, 
then  the  corporation  of  this  State  may 
sell  and  convey,  and  such  other  cor- 
poration of  anothe"-  State  .  .  .  may 
purchase  in  fee  simple  all  the  railroad 
of  the  corporation  in  this  State." 

Indiana.  Burns'  Anno.  Stat.  1901, 
§  5215:  "Any  railroad  company,  in- 
corporated under  the  provisions  of 
this  act,  shall  have  the  power  and 
authority  to  acquire,  by  purchase  or 

284 


contract,  the  road  .  .  .  and  franchises 
of  any  other  railroad  corporation  or 
corporations  which  may  cross  or 
intersect  the  line  of  such  railroad 
company,  or  any  part  of  the  same, 
or  the  use  and  enjoyment,  in  whole 
or  in  part,"  may  also  purchase  or 
contract  for  the  use  and  enjoyment 
thereof,  in  whole  or  in  part,  of  any 
railroads  lying  within  adjoining  States. 
.  .  .  [This  act  does  not  authorize] 
"any  railroad  company  organizing 
under  the  same  to  .  .  .  acquire  .  .  . 
the  road  .  .  .  [or]  franchises  of  any 
railroad  already  built,  equipped  and 
operated  within  the  State  of  Indiana 
and  which  may  cross  and  intersect 
the  line  of  railroads  organizing  under 
this  act ;  but  the  powers  .  .  .  are  .  .  . 
limited  ...  to  such  roads  within  the 
State  ...  as  may  cross  or  intersect 
the  same  and  which  have  not  been 
equipped  and  operated  in  whole  or  in 
part." 

Iowa.  Code  1897,  §  2066:  "Any 
railroad  corporation  may  sell  or  lease 
its  property  and  franchises  to  .  .  .  any 
corporation  owning  or  operating  any 
connecting  railway." 

Kanms.  G.  S.  1897,  ch.  70,  §  95: 
"Any  railroad  company  of  this  State 
may  sell  or  lease  .  .  .  its  railroad  and 
branches  ...  to  any  railroad  com- 
pany ...  of  this  State  or  of  any 
other  State  or  Territory  of  the  United 
States.  .  .  .  No  purchase  .  .  .  shall 
be  entered  into  unless  the  line  of  rail- 
road so  purchased  .  .  .  shall  .  .  .  form 
a  continuous  line  with  the  road  of 
the  company  purchasing  .  .  .  either 
bj^  direct  connection  therewith,  or 
through  an  intermediate  line  or  lines." 
lb.  §  51  :  Domestic  corporations 
may  extend  their  lines  into  other 
States  and  purchase  or  lease  lines  of 
railroad  in  such  States,  pro^^ded  that 
such  lines  are  connected,  forming  a 
continuous    line. 


CHAP.    XIIl]         CONTRACT    OF   SALE    AND    ITS    EXECUTION 


§  145 


chises;   but  in  some  cases  the  power  is  confined  to  the  sale  of 
the  railroad,  in  whole  or  part. 


Maine.  R.  S.  1903,  §  30,  p.  531  : 
No  corporation  can  assign  its  charter 
or  any  right  under  it ;  lease  or  grant 
the  use  or  control  of  its  road,  or  anj' 
part  of  it,  without  the  consent  of  the 
legislature. 

Maryland.  P.  G.  L.  1904,  Art.  23, 
§  279:  "Any  railroad  company  in- 
corporated under  .  .  .  [particular 
statutes]  shall  also  have  power  to 
purchase  or  contract  for  the  use  and 
enjoyment,  in  whole  or  in  part,  of 
any  other  railroad  or  railroads  Ijing 
within  or  without  this  State,  if  the 
same  shall  connect  with  or  form  a 
continuous  line  with  the  railroad  of 
the  companj'  incorporated  under  said 
sections." 

Michigan.  Pub.  Acts  1901,  Act 
No.  30,  p.  50:  "Any  railroad  com- 
panj^  ...  of  this  State"  is  author- 
ized to  "sell,  lea.se,  and  convey  its 
road  .  .  .  rights  and  franchises  .  .  . 
to  any  other  railroad  company, 
whether  organized  within  or  witli- 
out  this  State ;  and  to  acquire,  by 
lease  or  purchase,  from  the  owner 
of  any  other  railroad  such  road  .  .  . 
whether  located  within  or  without 
this  State ;  and  .  .  .  the  railroad 
company  so  purchasing  or  leasing" 
may  "actjuire  and  use  such  road, 
rights  and  franchises  by  purchase  of 
stock,  or  otherwise,  .  .  .  said  rail- 
roads not  having  the  same  terminal 
points  and  not  being  competing  lines." 

Comp.  Laws  1897,  §  6328  :  Domes- 
tic railroad  company  being  unable  to 
complete  its  road,  may  sell  to  any 
domestic  corporation  not  owning  a 
competing  line. 

Pub.  Acts  1899,  No.  2G6,  §  17, 
p.  447 :  Miscellaneous  provisions  a.s 
to  sale  of  unfinished  railroads. 

Minnesota.  Laws  1899,  ch.  229, 
p.  253:  "Any  railroad  corporation, 
either  domestic  or  foreign  .  .  .  may 
lease  or  purchase  or  in  any  way  be- 


come the  owner  of,  or  control  or  hold 
the  stock  of  any  other  railroad  cor- 
poration when  their  respective  rail- 
roads can  be  lawfully  connected  and 
operated  together  so  as  to  constitute 
one  continuous  main  line  .  .  .  and  in 
case  such  lease  or  purcha.se  shall  be 
made  by  a  foreign  corporation  "  such 
corporation  shall  have  the  same  rights 
as  the  vendor  company. 

G.  S.  1894,  §  2721  :  "Any  railroad 
corporation  maj'  .  .  .  purchase  or 
lca.se  any  railroad  constructed  bj'  any 
other  corporation  whose  lines  of  roads 
are  continuous  or  connected  with  its 
own." 

Missouri.  R.  S.  1899,  §  1060:  "A 
railroad  company  may  aid  other  rail- 
road companies  by  purchase  and 
"any  railroad  company  ...  of  this 
or  anj'  other  State  or  of  the  United 
States  may  lease  or  purcha.se  all  or 
any  part  of  a  railroad  with  all  its 
privileges,  rights,  franchises,  real 
estate  and  other  propert}',  the  whole 
or  part  of  which  is  in  this  State,  if  the 
lines  of  road  or  roads  of  such  com- 
panies are  continuous  or  connected  at 
a  point,  either  within  or  without  this 
State,  upon  such  terms  a-s  may  be 
agreed  between  the  companies  re- 
spectively." 

lb.  §  1061:  "  Any  , railroad  com- 
pany ...  of  this  State  .  .  .  may  ac- 
([uire  any  line  of  railroad  within  or 
witiiout  this  State  which  shall  form  a 
continuous  line  with  the  road  operated 
by  such  company,  by  direct  connec- 
tion or  over  any  other  line  or  lines 
.  .  .  which  such  company  shall  have 
the  right,  by  contract  or  otherwise 
.   .   .  to  use  and  operate." 

Montana.  Code  1S95,  §  912  :  "Any 
railroatl  corporation  whose  line  is 
wholly  or  partly  within  this  State,  or 
reaches  the  bounilary  line  thereof, 
whether  ...  of  the  State  or  Terri- 
tory  of   Montana,    or   of   the    United 

285 


§  145 


INTERCORPORATE    RELATIONS 


[part  II 


In  all  cases  the  purchaser  must  be  a  railroad  company,  but. 
generally,  no  distinction  is  made  between  domestic  and  foreign 
corporations  as  purchasers. 


States,  or  of  any  other  State  or  Terri- 
tory, may  lease  or  purchase  the  whole 
or  any  part  of  the  railroad  or  line  of 
railroad  of  any  railroad  corporation. 
.  .  .  The  railroad  or  line  of  railroad 
so  leased  or  purchased"  must  be 
"continuous  of  or  connected  with  its 
own  line." 

lb.  §  923:  "Any  company  .  .  . 
within  this  State  may  .  .  .  buy  or 
lease  any  railroad  or  railroads  in  any 
other  State  or  Territory,  or  .  .  .  any 
other  railroad  in  this  State  .  .  . ;  or 
any  railroad  company  may  sell  or 
lease  the  whole  or  any  part  of  its  rail- 
road or  branches  within  this  State 
...  to  any  railroad  company  .  .  . 
of  the  United  States,  or  of  this  State 
or  of  any  other  State  or  Territory  of 
the  United  States." 

Nebraska.  Comp.  Stat.  1901,  § 
4024:  "  Every  railroad  company  .  .  . 
of  this  State  whose  railroads  .  .  . 
within  this  State  shall  be  so  sit- 
uated with  reference  to  any  rail- 
road constructed  through  any  ad- 
joining State  or  Territory  by  any 
railroad  company  .  .  .  of  the  United 
States,  or  any  State  or  Territory,  that 
the  same  may  be  so  connected  at  the 
boundary  line  of  this  State  or  at  anj^ 
point  within  this  State,  by  bridge, 
ferry,  or  otherwise,  as  to  practically 
form  a  continuous  line  of  railway  over 
wMch  cars  may  pass,  is  hereby  author- 
ized to  purchase  such  connecting  rail- 
way, or  to  sell  the  same  to  the  railroad 
company"  that  owns  or  operates, 
etc.,  said  railroad  through  the  adjoin- 
ing State,  to  said  point  of  connec- 
tion. 

lb.  §  1769 :  "Any  railroad  com- 
pany, existing  in  pursuance  of  law, 
may  lease  or  purchase  .  .  .  any  rail- 
road ...  if  said  companies'  lines  of 
railroad  .  .  .  are  continuous  or  con- 
nected." 

286 


See  also  ib.  §§  4018,  4019,  4026. 

Nevada.  Laws  1901,  p.  51  :  "Any 
railroad  corporation  owning  any  rail- 
road in  this  State  may  sell  .  •.  .  its 
property  ...  to  any  other  railroad 
corporation  ...  of  this  State  or  of 
any  other  State  or  Territory;  or 
under  any  act  of  Congress." 

New  Jersey.  Laws  1900,  ch.  46, 
p.  70:  "Whenever  any  railroad  cor- 
poration of  this  State  shall  own  all  the 
bonds  and  shares  of  stock  of  any  other 
railroad  corporation  of  this  State 
whose  railroad  .  .  .  connects  with  the 
railroad  of  said  first-mentioned  cor- 
poration" it  may  acquire,  have,  hold, 
use,  etc.,  all  the  rights,  etc.,  of  the 
corporations  so  controlled. 

New  Mexico.  Comp.  Laws  1897, 
§  3891  :  "Any  railroad  organized  in 
pursuance  of  law  either  within  this 
or  any  other  Territory,  or  State,  may 
lease  or  purchase  any  part  or  all  of 
any  railroad  constructed,  owned,  or 
leased  by  an}^  other  companj'." 

Netv  York.  R.  S.  1901  (Birdseye's> 
Railroad  Law,  §  79:  ".Ajiy  corpora- 
tion ...  of  this  State,  or  its  suc- 
cessors, being  the  lessee  of  any  other 
railroad  corporation  may  take  a  sur- 
render of  the  capital  stock  of  the 
stockholders  or  any  of  them  in  the 
corporation  whose  road  is  held  under 
lease."  The  lessee  corporation  may 
issue  in  exchange  therefor  its  own 
stock  at  par.  When  the  greater  part 
of  the  capital  stock  of  the  lessor  cor- 
poration is  so  acquired  the  chrectors 
of  the  lessee  corporation  become  e.x 
officio  directors  of  the  lessor  corpora- 
tion, and  when  the  whole  of  the  capi- 
tal stock  is  acquired  and  a  certificate 
thereof  filed  with  the  Secretary'  of 
State,  the  estate,  property,  franchises, 
etc.,  of  the  lessor  corporation  vest  in 
the  lessee  corporation  and  may  be 
managed    and    controlled    };y    its    t.;- 


CHAP.    XIIl]         CONTRACT   OF   SALE    AND    ITS    EXECUTION 


§  145 


The  right  to  purchase  and  sell  is  usually  limited  to  corpora- 
tions  owning   connecting   or   continuous   lines   of   road.     The 


rectors.  Rights  of  creditors  and 
existing  liabilities  of  the  lessor  cor- 
poration are  not  affected  bj'  the 
transfer. 

North  Dakota.  Rev.  Codes  1899, 
§  2954:  "Any  such  railroad  corpora- 
tion [of  this  State  or  Territory  of 
Dakota  or  exi.sting  by  consolidation 
of  railways  of  such  State  or  Territory 
and  of  any  other  Territory  or  State] 
may  lease  or  purchase  and  take  by 
conveyance  or  assignment  the  rail- 
road franchises  ...  of  any  other  rail- 
road corporation,  or  any  portion 
thereof  within  or  without  this  State, 
when  their  respective  railroads  can 
be  lawfully  connected  and  operated 
together  to  constitute  one  continuous 
main  line,  or  when  the  roads  .so  pur- 
chased will  constitute  branches  or 
feeders  of  any  road  maintained  and 
operated  by  such  purchasing  cor- 
poration." 

Ohio.  Bates'  Anno.  Stat.  1787- 
1906,  §  3300:  "Any  company  may 
lease  or  purchase  any  part  or  all  of  a 
railroad  constructed  or  in  the  course 
of  construction  by  another  company, 
if  tlic  lines  of  road  of  .such  companies 
are  continuous  or  connected  .  .  . 
upon  such  terms  as  may  be  agreed 
upon  by  the  companies." 

Ih.  §  3409:  A  railroad  company 
unable  to  complete  its  road  may  sell 
to  any  domestic  railroad  company 
authorized  to  operate  over  the  same 
route. 

Oklahoma.  Rev.  and  Anno.  Stat. 
1903,  §  99,  p.  360:  "Any  railroad 
corporation  whose  line  is  wholly  or  in 
part  within  this  Territory,  whether 
...  of  this  'I>rritory,  or  of  any  other 
State  or  Territory,  or  of  the  United 
States,  may  lease  or  purchase  and 
operate  the  .  .  .  railroad  of  any 
other  railroad  corporation  .  .  .  when 
such  railroads  can  be  lawfully  con- 
nected  and   operated    together  so   as 


to  con.stitute  a  continuous  main  or 
branch  line." 

Oregon.  Hills'  Anno.  Laws  1892, 
ch.  32,  §  3221,  subdiv.  7:  Railroad 
companies  have  power  "to  lease  or 
purchase,  maintain  and  operate  any 
part  or  all  of  an\^  other  railroad  con- 
structed by  any  other  company  upon 
such  terms  and  conditions  as  may  be 
agreed  upon  between  said  companies 
respectively." 

No  parallel  or  competing  hnes  are 
authorized  to  lease  or  purcha.se. 

Pennsylvania.  Laws,  1901,  Act 
No.  20,  p.  53  :  "  It  shall  be  lawful  for 
any  railroad  corporation  of  this  com- 
monwealth, having  a  railroad  con- 
necting with  that  of  any  other  like 
corporation,  and  owning  at  least 
two-thirds  of  the  capital  stock  of  the 
latter,  to  acquire  in  the  manner  here- 
inafter pro\-ided,  and  thereafter  be 
possessed  of,  own,  hold,  exercise  and 
enjoy,  all  the  franchises,  corporate 
property,  rights  and  credits  then  po.s- 
.sessed,  owned,  held  or  exercised,  by 
said  last-mentioned  vendor  corpora- 
tion." 

SoiUh  Carolina.  R.  S.  1893,  §  1624  : 
"Railroad  companies  ...  of  this 
State  .  .  .  may  .  .  .  enter  into  con- 
tracts for  the  purchase,  use  or  lease 
of  other  railroads  .  .  .  and  may  run, 
use  and  operate  such  road  or  roads 
in  accordance  with  such  contract  or 
lease  :  Provided  that  the  roails  of  the 
companies  so  contracting  or  leasing 
shall  be  directly,  or  by  means  of  inter- 
vening railroads,  connected  with  each 
other." 

Ih.  §  1542:  "Every  railroad  com- 
pany incorporated  in  this  State  shall 
have  all  the  rights,  powers  .  .  .  set 
forth  in  this  article." 

Ih.  §  1546:  "Such  company  sliall 
have  the  power  and  authority  ...  to 
purchase,  lease,  .  .  .  any  other  rail- 
road   or   railroads   in    or   out    of   this 

287 


§  14o 


INTERCORPORATE    RELATIONS 


[part  II 


considerations  of  public  policy  inducing  this  limitation  have 
already  been  considered  in  connection  with  similar  provisions 
in  consolidation  statutes.* 


State,  in  such  manner  and  upon  such 
terms  as  may  be  agreed  between  such 
railroad  companies." 

South  Dakota.  Rev.  Code,  §  494, 
p.  649  :  "Any  railroad  company  may 
sell  or  lease  the  whole  or  any  part  of 
its  railroad  or  franchises  within  this 
State  ...  to  any  railroad  company 
...  of  the  United  States,  or  of  this 
State,  or  of  any  other  State  or  Terri- 
torj^  of  the  United  States." 

Tennessee.  Code  1896,  §  1.509: 
"Every  railroad  corporation  in  this 
State  .  .  .  shall  have  the  power  to" 
buy  "any  railroad  .  .  .  belonging  to 
any  other  railroad  corporation." 

lb.  §  1521  :  "Any  and  all  railroad 
companies  ...  of  this  State,  or  of 
this  State  and  any  other  State  or 
States,  whose  charters  of  incorporation 
were  or  may  be  granted  by  this  State, " 
may  "acquire  the  line  or  lines  of  any 
other  railroad  company  either  in  this 
State  or  any  other  State  or  States, 
which  may  connect  with  or  form  parts 
and  parcels  or  branches  or  extensions 
of  the  Une  of  such  company  char- 
tered by  this  State"  and  may  "so 
acquire  branches  or  extensions  by 
purchase,  lease  or  otherwise." 

lb.  §  1540  :  "  Railroad  companies  of 
this  State"  may  "lease  or  let,  acquire 
by  purchase,  lease  or  otherwise  .  .  . 
any  railroad  or  railroads  in  any  State 
or  States,  or  any  parts  or  portions  of 
any  such  railroads  ...  as  may  be 
determined  upon  by  the  stockholders. " 

Utah.  Laws  1901,  ch.  26,  p.  21, 
§  3:  "Any  corporation  owning  any 
railroad  Une  in  this  State  may  sell, 
convey,  and  transfer  its  property  and 
franchises  ...  to  any  railroad  cor- 
poration (not  owning  any  competing 
line)  in  this  State  whether  organized 
under  the  laws  of  this  State  or  of  anv 


other  State  or  Territory,  or  of  any 
act  of  Congress." 

lb.  §  4 :  "  Railroad  corporations 
may  be  formed,  pursuant  to  the  laws 
of  this  State,  for  the  purpo.se  of  buy- 
ing or  leasing  a  corporation  or  cor- 
porations whose  lines  of  railroad  are 
situated  within  or  without  this  State, 
or  partly  within  and  partly  without 
this  State." 

Washington.  Ballinger's  Anno. 
Codes  and  Stat.  1897,  §  4304:  "Any 
railroad  corporation  whose  line  is 
wholly  or  in  part  within  this  State, 
whether  chartered  by  or  organized 
under  the  laws  of  this  State,  or  any 
other  State  or  Territorj^,  or  of  the 
United  States,  may  lease  or  purchase 
the  railroad  of  any  other  railroad 
corporation."  * 

West  Virginia.  Code  1906,  §  2346 : 
(1)  Same  as  "con.solidation"  statute 
(see  ante,  §  22),  adding  words  "pur- 
chase"  and  "sell"  to  "consolidate." 

Wisconsiyi.  Sanborn's  Supp. 
(1899-1906),  vol  3,  §  1833,  p.  919: 
"Any  such  railroad  corporation  [see 
ante,  §  22,  "consolidation"],  may 
give  or  take  a  lease  or  may  sell  to, 
or  purchase  from,  any  railroad  com- 
pany .  .  .  within  or  without  the 
State,  and  give  or  take  a  conveyance 
of  the  railroad  franchises  ...  of 
any  railroad  corporation  ...  of  this 
State,  or  of  any  other  State,  or  of 
the  United  States,  or  any  portion 
thereof,  within  or  without  the  State, 
when  their  respective  railroads  can 
be  lawfully  connected  and  operjrted 
together  to  constitute  one  continu- 
ous main  line,  or  when  the  road  so 
purchased  or  leased  will  constitute 
a  branch  ...  or  be  connected  or 
intersected  by,  any  line  maintained 
and    operated    by    such    purchasing 


*  See  ante,  §  22:   "What  Railroads  may  consolidate 

288 


•  Statutory  Provisions." 


CHAP.    XIIl]  CONTRACT    OF    SALE    AND    ITS    EXECUTION 


§  146 


It  will  be  observed  that  the  New  York  statute  relates 
rather  to  succession  than  to  purchase  and  sale. 

§  146.  Construction  of  Statutes.  —  A  railroad  company  ob- 
tains power  to  sell  its  railroad  and  franchises,  or  to  purchase 
the  railroad  and  franchises  of  another  corporation,  only  when 
it  is  distinctly  conferred  by  statutory  authority.  Such  power 
will  not  arise  by  implication  unless  necessary  to  give  effect 
to  the  language  employed  in  a  statute.  Any  ambiguity  in  the 
terms  of  the  grant  will  operate  against  the  corporation  claim- 
ing the  power. ^ 

In  Wood  V.  Bedford,  etc.  R.  Co?  Judge  Sharswood  said: 
"  The  general  canon  of  construction  applicable  to  legislative 
grants  of  this  class,  derogating  as  they  do  from  common  right 
and  public  policy,  requires  that  the  intention  should  be  very 
manifest;  if  not  to  be  unequivocally  expressed,  at  all  events 
not  to  depend  upon  ambiguous  phrases  rendering  the  implica- 
tion doubtful." 

Power  to  purchase  does  not  include  power  to  sell.^  Au- 
thority to  sell  is  not  implied  from  a  grant  of  authority  to  mort- 
gage.^ Authority  granted  to  one  railroad  company  to  "  pur- 
chase, lease,  hold  and  maintain  any  other  railroad  "  does  not 
confer   upon    other   railroad    companies   implied   authority   to 


or  leasing  corporation,  or  whicli  such 
purchasing  or  leasing  corporation  is 
authorized  to  build,  own,  maintain 
or  operate." 

Wyoming.  R.  S.  1899,  §  3206: 
"Any  company  owning  or  operating  a 
railroad  within  this  State  may  ex- 
tend the  same  into  any  other  State 
or  Territory,  and  may  .  .  .  buy, 
lease  or  consolidate  with  any  railroad 
or  railroads  in  such  other  State  or 
Territorj',  or  with  any  other  railroad 
in  this  State,  and  may  operate  the 
same.  .  .  .  Any  railroad  may  sell 
or  lease  its  railroad  or  branches 
within  this  State  ...  to  any  rail- 
road company  ...  of  the  United 
States,  or  of  this  State,  or  of  any 
other  State  or  Territory  of  the  United 
States." 

'  Black  V.  Delaware,  etc.  Canal 
Co.,  24  N.  J.  Eq.  455  (1873).     Com- 


•pare  decision  of  the  Chancellor  in 
the  same  case,  22  N.  J.  Eq.  130 
(1871). 

2  Wood  V.  Bedford,  etc.  R.  Co., 
8  Phila.  (Pa.)  95  (1871). 

3  Southern  Pac.  R.  Co.  v.  Esquibel, 
5  N.  Mex.  123  (1889),  (20  Pac.  Rep. 
109).  Whether  power  to  consolidate 
includes  power  to  sell,  see  ante,  §  28: 
"Construction  of  Particular  Statutory 
Provinions." 

*  Southern  Pac.  R.  Co.  v.  Esquibel, 
5  N.  Mex.  123  (1889),  (20  Pac.  Rep. 
109).  "It  was  argued  for  the  appel- 
lant that,  if  the  land  could  be  mort- 
gaged for  the  means  to  construct, 
equip,  and  operate  the  road,  it  could 
be  assigned,  in  the  first  place,  for  the 
same  object.  The  doctrine  that  a 
power  to  mortgage  includes  a  power 
to  sell  is  not  supported  by  authority 
of  law." 

289 


§    146  INTERCORPORATE   RELATIONS  [PART   11 

sell.^  Authority  to  purchase  the  railroad  of  a  specified  cor- 
poration, however,  empowers  the  latter  corporation  to  make 
the  sale.^  Power  to  sell  a  constructed  railroad  does  not  au- 
thorize the  sale  of  road  before  it  is  finished;  ^  nor  can  a  transfer 
of  franchises  be  justified  under  a  statute  permitting  the  lease 
of  a  completed  railroad.^  Power  to  sell  or  purchase  will  not 
be  implied,  in  favor  of  a  non-competing  railroad,  from  a  statute 
prohibiting  the  execution  of  a  contract  of  sale  between  com- 
peting roads.^ 

"Power  to  buy  a  railroad  cannot  be  implied  from  an  express 
grant  of  power  to  '  construct,  own,  maintain  and  operate  ' 
a  railroad  to  be  constructed  by  the  corporation  to  which  those 
express  powers  are  given,  for  the  existence  of  such  a  power 
is  not  necessary  to  accomplish  the  object  specified."  ®  A 
grant  of  power  to  a  railroad  company  to  locate  and  construct 
l^ranches  to  its  main  road  does  not  include  authority  to  pur- 
chase the  railroad  of  another  company  constructed  under  a 
different  charter.'' 

Where,  however,  the  sale  of  a  railroad  and  franchises  is  dis- 
tinctly authorized  by  statute  a  sale  may  be  effected  although 
thereby  the  objects  for  which  the  corporation  was  created  are 
defeated.^     Authority    "  to    have,    purchase,    possess,    enjoy 

'State  V.   Consolidation  Coal  Co.,        (1871);    Wood    v.    Bedford,    etc.    R. 

46  Md.  1  (1876).  Co.,  8  Phila.  (Pa.)  94  (1871). 

2  New  York,  etc.  R.  Co.  v.  New  *  East  Line,  etc.  R.  Co.,  v.  State,  75 
York,  etc.  R.  Co.,  52  Conn.  274  Te.x.  434  (1889),  (12  S.  W.  Rep.  690). 
(1884).  6  East  Line,  etc.  R.  Co.  v.  Rushing, 

3  Clarke  v.  Omaha,  etc.  R.  Co.,  67  Tex.  692  (1887),  (4  S.  W.  Rep. 
4  Neb.  458  (1876).  156). 

Under  a  statute  authorizing  a  Where,  however,  a  railroad  coin- 
corporation  chartered  for  the  purpose  pany  was  authorized  to  construct 
of  constructing  or  operating  a  rail-  its  main  line  between  certain  points 
road  to  purchase  any  part  of  a  road  and  "to  build  branches  or  extend 
constructed  by  any  other  corpora-  its  line  into  one  or  more  towns" 
tion  if  the  roads  are  continuous  or  it  was  held  that  it  had  power  to 
connecting,  a  railroad  company  has  purchase  a  railroad  already  con- 
power  to  convey  a  part  of  its  right  structed  and  to  use  it  as  a  branch  road, 
of  way  to  a  connecting  line  in  aid  of  Central  Trust  Co.  v.  Washington 
its  construction.  Co.  R.  Co.,  124  Fed.  813  (1903). 

Coyne  i'.  Warrior  Southern  R.  Co.  '  Campbell    v.    Marietta,    etc.    R. 

137  Ala.    553    (1903)    (34    So.    Rep.  Co.,  23  Ohio  St.   168  (1872). 

1004).  8  Mahaska  County  R.   Co.   v.   Des 

*  Pittsburgh,   etc.    R.   Co.   v.    Bed-  Moines,    etc.    R.    Co.,    28    Iowa,    437 

ford,    etc.    R.    Co.,    8H    Pa.    St.    104  (1870). 

290 


CM  a: 


XIIl] 


CONTRACT    OF    SALE    AND    ITS    EXECUTION 


§  li7 


and  retain  lands,  rents,  hereditaments,  goods,  chattels  and 
effects,  of  whatsoever  kind,  nature  or  quality  "  sanctions  tlic 
purchase  of  a  railroad.'  A  statute  authorizing  "  any  railroad 
company  "  to  purchase  the  railroad  and  franchises  of  a  p;u- 
ticular  corporation  authorizes  such  purchase  by  a  railroad 
company  of  another  State.- 

§  147.  Constitutional  and  Statutory  Prohibitions  of  Purchase 
of  Competing  or  Parallel  Lines.  —  The  purchase  by  a  railroad 
company  of  a  line  of  railroad  competing  with,  or  parallel  to, 
its  own  is  prohibited  in  many  constitutional  and  statutoiy 
provisions,  in  connection  with  similar  prohibitions  against  con- 
solidations and  leases.  These  provisions,  their  construction 
and  application,  have  already  been  fully  considered.^ 


>  Branch  v.  Atlantic,  etc.  R.  Co., 
3  Woods  (U.  S.),  4S1  (1879). 

For  construction  of  particular 
statutory  and  constitutional  pro- 
visions relating  to  sales  of  railroads 
and  franchises,  see  Mackintosh  v. 
Flint,  etc.  R.  Co.,  34  Fed.  5S2  (1888); 
Venner  v.  Atchison,  etc.  R.  Co., 
28  Fed.  581  (1886) ;  People  v.  Stan- 
ford, 77  Cal.  3G0  (1888),  (18  Pac. 
Rep.  85,  2  L.  R.  A.  92) ;  Barley  v. 
Southern  R.  Co.,  61  S.  W.  Rep.  31 
(1901). 

-  Boston,  etc.  R.  Co.  v.  Boston, 
etc.  R.  Co.,  65  N.  H.  397  (1888), 
(23  Atl.  Rep.  529).  Chief  Justice 
Doe  said:  "Express  consent  is  given 
to  a  purchase  by  'any  railroad  com- 
pany.' Taken  without  qualification 
this  clause  includes  foreign  as  well 
as  dome.stic  railroad  corporations. 
The  words  'any  railroad  company' 
might  be  used  in  a  connection  and 
for  a  purpose  that  would  show  a 
restricted  sen.se  not  including  for- 
eign companies.  Here  is  no  evi- 
dence to  exclude  them." 

A  statute  authorizing  a  foreign 
railroad  corporation,  in  possession 
or  control  of  a  domestic  railroad,  to 
purcha.se  the  latter,  but  providing 
that  it  should  not  be  so  construed 
a.s  to  permit  the  purcha.se  of  a  parallel 
or  competing  line   in   the  State,   was 


held  not  to  authorize  tlie  purchase 
of  a  line  extending  along  one  side  of 
the  boundary  river  within  the  State 
by  a  foreign  corporation  owning  a 
parallel  road  on  the  opposite  side  of 
the  river  in  another  State. 

Illinois  State  Trust  Co.  v.  St. 
Louis,  etc.  R.  Co.,  208  111.419  (1904) 
(70  X.  J:.  Rep.  357). 

^  See  ante,  ch.  III.:  "Constitutional 
and  Statutory  Restraittts  upon  Con- 
solidation." 

Upon  a  further  hearing  of  tlie 
case  referred  to  in  the  preceding  note 
(Illinois  State  Trust  Co.  i'.  St.  Louis, 
etc.  R.  Co.  208  111.  419  (1904)  (70 
N.  E.  Rep.  357)),  the  Court  found  tliat 
the  two  roads  were,  in  fact,  neither 
competing  nor  jiarallcl,  it  appearing 
that  the  foreign  line  between  the 
two  termini  wa.s  much  longer  and 
more  indirect  than  the  local  roail, 
requiring  a  change  of  cars  antl  ferry- 
ing; that  no  through  trains  were 
operated  on  the  former  aiul  no  through 
business  .solicited,  and  that  no  facil- 
ities were  providetl  for  through  busi- 
ness nor  rates  made  thereon  in  com- 
petition with  the  local  road. 

Illinois  State  Trust  Co.  v.  St. 
Loui.s,  etc.  R.  Co.,  217  111.  504  (1905) 
(75  N.  E.  Rep.  562). 

The  Court  said  (p.  515):  "It, 
therefore,      very      plainly      aj>i)<'ared 

291 


§148 


INTERCORPORATE   RELATIONS 


[part    II 


III.    Authorization  and  Execution  of  Contract  of  Sale 

§  148.  Statutory  Requisites.  —  The  statutes  of  the  different 
States  prescribing  the  method  to  be  followed  in  authorizing 
and  executing  sales  of  railroads  are  referred  to  in  the  footnote.^ 


from  all  the  testimony  that  the  Valley 
railroad,  at  either  terminus  or  at 
any  intervening  point,  was  not  and 
is  not  a  competing  line  of  road  with 
that  of  the  appellee  and  is  not  a 
parallel  line  of  road  either  within  the 
technical  geometrical  definition  of 
the  word  '  parallel '  or  under  the  more 
enlarged  and  practical  meaning  which, 
where  the  element  of  competition  is 
present  should  be  given  the  term 
'parallel  lines'  as  employed  in  the 
statute  under  consideration." 

A  statute  authorizing  a  railroad 
company  to  purchase  a  competing 
portion  of  the  road  of  another  com- 
pany and  to  operate  it,  violates  the 
provision  of  the  Mississippi  Constitu- 
tion, prohibiting  legislation  suspend- 
ing the  operation  of  general  laws 
for  the  benefit  of  any  individual  or 
corporation,  since  it  has  the  effect 
of  suspending  the  operation  of  the 
general  law  forbidding  competing  rail- 
road companies  to  operate  parallel 
lines  within  twenty  miles  of  each 
other,  or  to  purchase  the  lines  of 
each  other  or  any  part  thereof. 

Yazoo  etc.  R.  Co.  v.  Southern  R. 
Co.,  83  Miss.  746  (1904)  (36  So. 
Rep.  74). 

1  Arizona.  R.  S.  1901,  par.  864, 
§  1 :  Assent  of  holders  of  two-thirds 
of  entire  corporate  stock  —  by  vote 
or  in  writing  —  necessary  to  contract 
of  sale. 

Alabama.  Code  1896,  §§  1170, 
1173:  Approval  of  holders  of  ma- 
jority in  value  of  stock  of  vendor  and 
vendee  corporations  at  meeting  called 
for  the  purpose  required. 

Arkansas.  Kirby's  Dig.  1904,  §§ 
0742,  0752,  6762:  Assent  of  holders 
of  two-thirds  of  capital  stock  is 
necessarj'. 

292 


Calijornia.  Pomeroy's  Code  1901, 
§  494:  Contract  of  sale  must  be  au- 
thorized by  directors  and  ratified  by 
three-fourths  of  stockholders  of  both 
corporations. 

Colorado.  Mills'  Anno.  Dig.  1891, 
§  612.  Also  Sess.  Laws  1899,  ch.  125, 
p.  313:  Assent  of  holders  of  two- 
thirds  of  capital  stock  of  each  com- 
pany required. 

illinois.  R.  S.  1903,  §§  196,  218: 
Approval  of  holders  of  two-thirds  of 
capital  stock  required. 

Kansas.  G.  S.  1897,  §  95:  Sale 
must  be  ratified  by  vote  of  two-thirds 
of  capital  stock  of  each  company, 
or  approved  by  such  holders  in  writ- 
ing. 

Michigan.  Comp.  Laws  1897,  § 
6328 :  Consent  of  two-thirds  of  stock- 
holders required  for  sale  of  uncom- 
pleted road.  Consent  of  majority 
sufficient  under  1901  Act  (P.  A.  1901, 
Act  No.  30,  p.  50). 

Minnesota.  G.  S.  1894,  §§  2721, 
2736:  Sale  must  be  approved  by 
holders  of  two-thirds  of  capital  stock 
of  each  company  at  meetings  called 
for   the   purpose. 

Missouri.  R.  S.  1899,  §  1060: 
Holders  of  a  majority  of  stock  of  each 
company  must  assent  in  writing  to 
sale  proposed  by  directors  before  it 
can  be  perfected. 

Montana.  Code  1895,  §  912,  re- 
quires approval  of  three-fifths  of 
stockholders.  lb.  §  923  requires 
approval  by  majority  vote  or  by 
majority  in  writing.  Apply  to  sales 
under  different  statutes. 

Nebraska.  Comp.  Stat.  1901,  § 
1769:  Sale  must  be  assented  to  by 
vote  of  holders  of  two-thirds  of 
capital  stock;  (§  4026)  by  vote  or 
written    apjoroval    of    like    number. 


CHAP.    Xin]  CONTRACT   OF   SALE    AND    ITS    EXECUTION 


§  149 


The  State  may  withhold  the  grant  of  power  to  sell  entirely 
or  may  attach  such  conditions  to  its  exercise  as  it  may  deem 
expedient.  These  conditions  —  as  distinguished  from  mere 
directions  —  must  be  strictly  complied  with.  They  are  con- 
ditions precedent  to  the  validity  of  the  sale. 

As  a  general  rule,  these  statutes  prescribe  three  steps  in  the 
authorization  and  execution  of  a  contract  of  sale: 

1.  The  contract  must  be  approved  by  the  boards  of  directors 
of  both  vendor  and  vendee  companies. 

2.  It  must  be  submitted  to  and  approved  by  the  prescribed 
majority  of  the  stockholders  of  each  company. 

3.  It  must  be  formally  executed  in  behalf  of  each  corporation 
by  agents  appointed  for  the  purpose. 

§  149.  Assent  of  Stockholders.  Whether  Approval  of  Major- 
ity is  sufficient.  — As  shown  in  the  last  section,  statutes  au- 
thorizing sales  of  railroads  generally  prescribe  the  number  of 
stockholders  whose  consent  is  necessar}\ 

Where,  however,  the  statute  merely  grants  power  to  sell, 
questions  may  arise  as  to  the  manner  of  exercising  the  power. 


Ih.  §§  4018,  4019,  authorize  approval 
of  certain  sales  by  majority  vote. 

New  Jersey.  Laws  1900,  ch.  46, 
p.  70 :  Acquisition  effected  by  written 
agreement  executed  pursuant  to 
resolution  adopted  by  directors  of 
each  company. 

New  Mexico.  Comp.  Laws  1897, 
§  3891:  Holders  of  two-thirds  of 
capital  stock  must  assent  to  sale. 

North  Dakota.  Rev.  Codes  1899, 
§  2954:  Sale  must  be  approved  in 
same  manner  as  consolidation.  See 
ante,  §  52:  "Formal  Statutory  Req- 
uisites" (consolidation). 

Ohio.  Bates'  Anno.  Stat.  1787- 
1902,  §§  3301,  3411:  Two-thirds  of 
stockhoklers  must  approve  sale  at 
meeting  called  by  each   corporation. 

Pennsylvania.  Laws  1901,  p.  52, 
Act  No.  20:  Agreement  adopted  by 
directors  must  be  approved  by  ma- 
jority of  stockholders  of  eacli  corpora- 
tion present  at  meeting  called  for 
the  purpose. 

South  Dakota.     Rev.   Code,    §   404 


p.  649:  Sale  must  be  apjiroved  in 
same  manner  a.s  consolidation.  See 
ante,  §  52:  '^Formal  Statutory  Req- 
uisites" (consolidation). 

Tennessee.  Code  1896,  §  1540: 
Sale  must  be  approved  by  votes  of 
holders  of  three-fourths  of  capital 
stock. 

West  Virginia.  Code  1906,  §  2346 : 
Sale  under  first  part  of  statute  re- 
quires approval  of  majority  of  stock- 
holders; under  scconil  part  two- 
thirds.  Also  refers  to  consolidation 
statute.  See  ante,  §  52:  "Formal 
Statutory  Req^^isites"  (consolidation). 

Wyoming.  R.  S.  1899,  §  320(): 
Sale  must  be  approved  by  vote  of 
holders  of  a  majority  of  stock,  or  tlieir 
written  approval  must  be  given. 

All  the  above  abstracts  should  be 
examined  in  Connection  with  the 
statutes  collected  in  note  to  ante, 
§  145:  "What  Railroad.i  may  be  the 
Stibject  of  Sale.  Statutory  Provi- 
sions." 

293 


§149 


INTERCORPORATE    RELATIONS 


[part  II 


It  may  be  contended  that  the  grant  of  authority  to  sell  only 
waives  the  rights  of  the  pubhc/  and,  therefore,  that  a  railroad 
company  —  a  quasi-public  corporation  —  with  power  to  sell, 
stands  in  the  position  of  a  private  corporation  with  respect  to 
the  disposition  of  its  property  —  that  whether  unanimous  con- 
sent is  necessary  to  a  sale  of  a  railroad  and  franchises,  where 
the  governing  statute  is  silent,  depends  upon  the  principles  of 
law,  already  considered,  applicable  to  private  corporations.^ 

Upon  principle,  however,  it  seems  the  better  view  that 
authority  granted  a  railroad  company  to  sell  its  road  and  fran- 
chises is  an  express  power  of  the  corporation;  and  that  it  may 
be  exercised,  unless  otherwise  provided,  in  the  same  manner 
that  other  primary  corporate  powers  are  exercised  —  by  a 
majority  vote  of  the  stockholders.^  As  said  by  the  Supreme 
Court  of  Mississippi  in  Hinds  County  v.  Natchez  etc.  R.  Co.*: 


'  Knoxville  v.  Knoxville,  etc.  R. 
Co.,  22  Fed.  763  (1884):  "The  au- 
thority thus  given  to  any  railroad  com- 
panj^  to  buy  necessaril)'  implies  au- 
thority to  other  companies  to  sell, 
inasmuch  as  there  could  be  no  pur- 
chase without  corresponding  sale. 
But  it  was  not  competent  for  the 
legislature  to  do  more  in  this  respect 
than  to  waive  the  publie  rights. 
It  could  not  divest  or  impair  the 
rights  of  the  shareholder.s,  as  between 
themselves,  as  guaranteed  by  the 
company's  charter,  without  their 
consent.  It  was  upon  the  faith  of 
the  stipulations  contained  in  said 
charter  that  the  shareholders  sub- 
scribed to  the  capital  stock,  and 
thereby  made  themselves  members 
of  the  corporation.  These  stipula- 
tions, as  we  have  alreadj'  seen,  con- 
templated and  provided  for  the  con- 
struction of  a  railroad  between  the 
termini  named,  to  be  governed  bj'  the 
shareholders,  in  the  manner  and 
upon  the  terms  prescribed.  Each 
corporator  is  entitled  to  have  the 
contract  fairly  interpreted  and  hon- 
estly enforced.  The  charter  invests 
the  owners  of  a  majority  of  the  capital 
stock   with   the   right   to   control   the 

294 


corporate  business  within  the  scope 
of  its  provisions.  Within  this  limit, 
the  power  of  the  majority,  when 
acting  in  good  faith,  is  supreme. 
But  complainant's  charter  does  not, 
by  any  reasonable  intendment,  clothe 
the  majority  with  authority  to  sell 
the  companj^'s  franchise  and  property, 
and  in  this  way  coerce  the  minority 
and  protesting  shareholders  into 
another  and  different  corporation, 
owning  and  operating  another  and 
different  railroad,  under  another  and 
different  charter  imposing  other  and 
different  obligations,  and  governed 
by  a  different  set  of  operators.  To 
so  hold  would  be  to  divest  them  of 
their  vested  rights  and  force  them 
into  relations  and  subject  them  to 
duties  and  obligations  which  they 
have  not,  and  probably  would  not, 
have  voluntarily  assumed." 

2  ^eeante,  ch.  XI.,  subdiv.  1  :  "Sales 
of  Property  of  Private  Corporations. " 

^  See  post,  §  189  :  "Whether  Unani- 
mous Consent  is  necessary  unless  other- 
wise provided." 

*  Hinds  County  v.  Natchez  etc.  R. 
Co.  So  ]\n.ss.  599  (1905),  (38  So.  Rep. 
189). 

In  Louis\'ille  etc.  R.  Co.  v.  Jar%'is 


CHAP.    XIIl]         CONTRACT    OF   SALE    AND    ITS    EXECUTION 


§  U9 


"  Even  in  the  absence  of  express  statutory  authority  a  private 
corporation  doing  a  losing  and  unprofitable  business  may  sell 
its  entire  assets,  upon  a  vote  of  the  majority  of  the  stockholders. 
...  It  is  true  that  a  railroad  corporation  has  quasi  public 
functions  but  when  the  State  by  a  valid  statute  has  consented 
to  the  sale  all  difficulty  on  this  account  is  removed.  What- 
ever interest  the  State  might  have  in  the  continued  ownership 
and  operation  of  the  road  by  the  corporation  this  interest  was 
certainly  committed  to  the  legislature." 

l^nquestionably,  the  assent  of  at  least  a  majority  of  the 
stockholders  is  essential.  Unless  the  power  is  distinctly  con- 
ferred by  statute  or  by-laws  upon  the  directors,  they  have 
no  authority  to  sell  the  railroad  or  franchises  of  their  corpo- 
ration, in  whole  or  in  j)art.' 


(Ky.  1905),  87  S.  W.  Rep.  759 
%vliere  the  charter  of  a  railroad 
company  was  amended  by  pro\iding 
that  no  contract  which  tlie  president 
and  directors  might  make  with  any 
other  railroad  company  should  be 
valid  until  "ratified  by  the  stock- 
holders" it  was  held  that  a  contract 
for  the  sale  of  the  road  did  not  re- 
quire the  unanimous  vote  of  the 
stockholders  —  that  a  majority--  vote 
wassufficient.  The  Court  said  (p. 761)  : 
'■  It  seems  to  us  more  reasonable 
to  presume  that  the  legislature  meant 
by  the  expression  'ratified  bj'  the 
stockholders  of  this  company'  only 
to  require  the  directors  to  bring  all 
those  contracts  which,  under  section 
21  of  the  original  charter,  the}'  were 
authorized  to  make  without  the  aj)- 
proval  of  the  stockholders,  before  a 
stockholders'  meeting  for  ratification 
—  not  by  the  unanimous  vote  of  the 
stockholders,  but  by  a  majoritj'.  It 
reiiuires  but  little  observation  to 
know  that  the  trend  of  railroad  dc- 
^■clopment  has  been  constantly  from 
isolated  fragments  of  railway  lines 
towards  consolidation  into  grand 
trunk  lines,  and  that  in  proportion 
as  this  has  been  successfully  accom- 
plished has  the  great  usefulness  of 
this   braucli   of  the  common  carriers 


of  traffic  and  passengers  of  this  coun- 
try been  increased.  It  therefore 
would  seem  to  follow,  as  a  natural 
and  logical  conclusion,  that  it  is 
much  to  the  interest  of  small  and 
fragmentary  lines  that  they  should 
be  enabled  with  the  utmost  facilitj-, 
consistent  with  the  preservation  of 
the  rights  of  the  owners,  to  enter  into 
contracts  of  consolidation  or  sale 
with  other  railroads,  whereby  they 
may  become  parts  of  great  systems 
of  interstate  traffic,  rather  than  re- 
main small,  isolated  lines.  To  require 
the  unanimous  vote  of  all  the  stock 
of  a  railroad  to  unite  with  another 
railroad,  or  to  sell  its  franchises  out 
to  another  railroad,  if  that  be  desir- 
able, is  to  render  tliis  method  of 
developing  the  interests  of  the  corpora- 
tion impracticable,  as  it  simply  pro- 
\-ides  an  opportunity  for  a  small  num- 
ber of  the  stockholders  to  entirely 
block  the  interest  of  the  great  ma- 
jorit}'  of  the  stock  for  their  own  selfish 
purposes.  It  needs  but  little  under- 
standing of  human  nature  to  believe 
that  the  opportunist  will  be  ready 
whenever  the  opportunity  is  pre- 
sented." 

'See  ante,  §  112:  "Sale  of  Entire 
Corporate  Property  by  Directors." 

In  Martin  r.  Continental  Passenger 

295 


§151 


INTERCORPORATE    RELATIONS 


[part  II 


§150.  Acquiescence  of  Stockholders. — The  assent  of  the 
stockholders  of  a  raih-oad  company  to  the  purchase  or  sale  of 
a  railroad  should,  regularly,  be  expressed  in  the  manner  pro- 
vided in  the  statute  authorizing  the  sale;  and,  in  the  absence 
of  other  statutory  provision,  by  their  votes  at  stockholders' 
meeting.  Acquiescence,  however,  is  an  implied  sanction  of  a 
sale.^  Stockholders  who  stand  by  and  take  no  action  until 
the  rights  of  third  persons  intervene  lose  their  right  to  ques- 
tion sales  of  railroads  made  without  their  approval.^  Stock- 
holders who  participate  in  the  transaction  cannot,  after  its 
consummation,  question  its  validity,  although  their  formal 
votes  were  lacking.^ 

§  151.  Rights  and  Remedies  of  Dissenting  Stockholders.  — 
It  is  well  settled  that  equity  will  restrain,  at  the  instance  of  a 
single  stockholder,  a  majority  of  the  stockholders  of  a  corpora- 
tion, acting  in  its  name,  from  entering  into  ultra  vires  or  un- 
lawful contracts.  Minority  stockholders  acting  with  due  dili- 
gence may  sue  for  an  injunction  against  the  unauthorized  sale 


R.  Co.,  14Phila.  (Pa.)  10  (1880),  the 
Court  said  :  "Boards  of  managers  are 
simply  the  agents  of  the  corporation 
which,  Hke  natural  persons,  is  bound 
only  by  the  acts  and  contracts  of  its 
agents,  done  within  the  scope  of  their 
authority.  The  business  of  the  direct- 
ors of  a  railway  is  to  manage  the 
business  intrusted  to  their  charge. 
To  give  it  away  or  sell  it,  or  in  any 
way  put  it  out  of  their  control,  and 
to  delegate  to  others  the  power  which 
has  been  intrusted  to  them,  is  clearly 
in  excess  of  their  authority." 

'  Boston,  etc.  R.  Co.  v.  New  York, 
etc.  R.  Co.,  13  R.  I.  260  (1881).  See 
also  ante,  §  45:  "Assent  of  Stock- 
holders, how  manifested.  Acquiescence 
Estoppel."  Also  ante,  §  116:  "De- 
fences to  Stockholders'  Actions.  Estop- 
pel. " 

2  Dimpfel  v.  Ohio,  etc.  R.  Co.,  9 
Biss.  (U.  S.)  127  (1879),  (affirmed  110 
U.  S.  209  (1884)):  "In  the  second 
place,  even  if  the  right  did  not  clearly 
exist  by  virtue  of  the  laws  of  Illinois, 
after  the  lapse  of  so  long  a  time,  and 

296 


after  so  many  rights  and  equities 
have  been  acquired  by  different  par- 
ties under  the  action  of  the  railway 
company,  it  is  not  competent  for  the 
plaintiff,  or  the  other  stockholders 
of  the  Ohio  and  Mississippi  Railway 
Company,  any  more  than  for  the 
company  itself  to  question  the  au- 
thority under  which  the  contract  and 
mortgage  were  executed.  The  only 
power  that  could  do  that  was  the 
State  itself." 

^  Where  the  charter  of  a  railroad 
company  authorized  it  to  purchase 
railroads  which  might  form  a  con- 
tinuation of  its  main  line ;  and  where 
such  purchase  had  been  fully  exe- 
cuted, and  where  its  validity  had 
never  been  questioned  in  a  direct 
proceeding,  it  was  held  the  parties 
to  such  purchase  —  those  who  ac- 
quiesced in  it,  and  those  who  failed 
in  due  time,  by  some  proper  pro- 
ceeding, to  question  its  validit}'  — 
were  estopped  to  raise  any  question. 
Hervey  v.  Illinois  Midland  Ry.  Co., 
28  Fed.  109  (1884). 


CHAP.    XIIl]         CONTRACT   OF   SALE    AND    ITS    EXECUTION  §    lol 

of  a  railroad  before  its  consummation,  and  for  the  cancella- 
tion of  the  contract  after  its  execution.^ 

A  distinction  has  been  drawn  between  the  right  of  a  dissen- 
tient stockholder  to  restrain  an  act  ultra  vires  the  corporation 
and  an  act  ultra  vires  the  majority.  Thus,  it  has  been  declared 
that  while  a  stockholder  might  have  an  unauthorized  sale  of  a 
railroad  declared  illegal  no  relief  could  be  granted  where  the 
prescribed  majority  sanctioned  the  sale,  although  made  for 
stock  in  the  purchasing  corporation.  Judge  Jackson,  in 
Farmers  Loan,  etc.  Co.  v.  Toledo,  etc.  R.  Co.^  said:  "  The 
sale,  being  sanctioned  by  the  requisite  majority  of  stockholders, 
and  made  by  the  corporation,  as  provided  and  authorized  by 
the  general  law  of  the  State  under  which  the  company  was 
organized,  invested  the  purchasing  company  with  as  perfect 
a  title  to  the  property  and  franchises  as  was  vested  in  or  held 
by  the  vendor  corporation,  and  operated  to  make  the  purchas- 
ing corporation  the  legal  successor  of  the  vendor  corporation. 
It  would  be  paradoxical  to  hold  that  such  a  sale  was  valid  as 
to  the  corporation,  and  invalid  as  to  one  of  its  stockholders 
who  objected  thereto,  and  whose  assent  was  not  necessary  to 
give  validity  to  the  transaction.  It  would  be  equally  incon- 
sistent to  hold  that  such  a  sale,  made  under  and  in  pursuance 
of  statutory  authority  in  force  at  the  organization  of  the  cor- 
poration and  at  the  date  of  the  transaction,  should  be  treated 
as  only  binding  upon  the  corporation  and  the  stockholders 
assenting  thereto,  and  invalid  as  to  a  dissenting  sharehokier 
whose  consent  was  not  a  prerequisite  to  its  validity." 

The  distinction  is  not  well  taken.  The  opinion  assumes 
too  much.^     A  sale  authorized  by  the  requisite  majority  of  the 

'  S,GGante,  §  46:  " Rights  and  Reme-  etc.  R.  Co.,  54  Fed.  767  (1893).      See 

dies  of  Dissenting  Stockholders"  (con-  also  Young  v.  Toledo,  etc.  R.  Co.,  76 

soUdation) ;    ante,   §   114  :    "Remedies  Mich.  485  (1889),  (43  N.  W.  Rep.  632) 

of  Dissenting  Stockholders"    (sales  of  — another    case    arising    out    of    the 

property).  same  transactions. 

For  extended  examination  of  the  ^  In  the  case  referred  to  (Farmers 

rights    and    remedies    of    dissenting  Loan,  etc.  Co.  v.  Toledo,  etc.  R.  Co., 

stockholders  in  the  case  of  the  sale  of  54  Fed.  77.5  (1893)),  Judge  Taft  saiil : 

street  railwaj'  properties,  .see  Tanner  "Under  the  statute  of  Michigan  \wr- 

V.  Lindcll  R.  Co.,   180  Mo.   1   (1904),  niitting  the   sale  of   an   inicomploted 

(79  S.  W.  Rep.  155).  railroad  by  its  stockholders  to  another 

*  Farmers  Loan,  etc.  Co.  v.  Toledo,  road,  the  words  of  which  are  quoted 

207 


§  151 


INTERCORPORATE   RELATIONS 


[part  II 


stockholders,  according  to  the  statute,  does  bind  the  minor- 
ity. But  an  exchange  of  property  for  stock  is  not  a  sale.  The 
prescribed  majority  have  no  more  power,  under  a  statute 
authorizing  a  sale,  to  make  an  exchange,  than  they  have  to 
make  a  donation.  A  transfer  of  property  for  stock  may  he 
ultra  vires  of  the  corporation.  It  is  ultra  vires  of  the  majority, 
and  may  be  restrained  at  the  suit  of  any  stockholder.* 


in  the  foregoing  opinion,  there  is  no 
power  in  two-thirds  in  interest  of  the 
stockholders  to  bind  one-third  to  a 
sale  for  any  consideration  but  money 
or  money  credit.  We  have  already 
held  in  this  court,  in  the  case  of 
Perin  v.  Megibben,  53  Fed.  Rep.  86 
(1892),  that  a  statutory  power  to  sell 
does  not  include  a  power  to  exchange 
for  shares  of  stock  in  a  corporation. 
Nor  do  I  understand  the  Supreme 
Court  of  Michigan  to  hold,  in  the 
case  of  Young  v.  Railroad  Co.,  76 
Mich.  485  (1889),  (43  N.  W.  Rep.  632), 
that  it  is  within  the  power  of  two- 
thirds  of  the  stockholders,  under  this 
statute,  to  bind  a  minority  to  a  sale 
for  anything  but  money." 

Judge  Hammond  said  (p.  778)  :  "I 
do  not  think  that  any  corporation  can 
go  out  of  business,  and  sell  its  proper- 
ties and  franchises  in  entirety  (out- 
side of  sales  made  in  the  ordinary 
course  of  business),  and  bind  a  mi- 
nority of  the  stockholders,  by  the 
will  of  the  majority,  to  such  a  sale, 
upon  any  principle  of  the  public  wel- 
fare or  like  consideration  ;  certainly, 
not  to  compel  the  minority,  on  such  a 
sale,  to  take  chips  and  whetstones  for 
their  shares  of  stock,  —  that  is  to  saj^ 
anything  else  than  money." 

The  decision  in  the  case,  however, 
finally  turned  upon  other  grounds. 

*  Judge  Taft  also  said,  following  the 
extract  from  his  opinion  in  the  last 
note:  "There  is  no  doubt  whatever 
of  the  proposition  urged  in  the  fore- 


going opinion,  —  that  a  minority 
stockholder  is  bound  by  the  acts  of 
the  majority  so  long  as  that  majority 
acts  within  its  charter  powers,  —  nor 
is  there  any  doubt  that  neither  the 
majority  nor  the  entire  body  of  .stock- 
holders of  the  corporation  can  do  a 
corporate  act  which  its  charter  for- 
bids ;  but  there  are  corporate  acts 
which  are  not  within  the  charter 
power  of  the  majority  of  the  stock- 
holders, and  yet  which  are  not  be- 
yond the  power  of  the  corporation. 
There  are  acts  of  the  corporation, 
which  the  State,  as  the  grantor  of  the 
corporate  franchise,  has  no  interest 
to  invalidate,  pro\-ided  all  the  stock- 
holders consent  thereto.  There  are 
acts  which,  if  done  by  a  majority, 
only  infringe  upon  the  charter  rights 
of  the  minority.  In  this  case  the 
power  to  sell  for  money  was  conferred 
by  statute  upon  two-thirds  of  the 
stockholders  of  the  uncompleted  road. 
The  sale  could  not  be  for  stock  in  an- 
other company,  against  the  objection 
of  the  minority  stockholders.  No 
such  power  was  vested  bj'  the  statute 
in  the  two-thirds  majority.  If,  how- 
ever, the  minority  consented,  the 
State,  the  grantor  of  the  corporate 
franchise,  had  no  interest  in  object- 
ing to  the  transaction  as  bej^ond  the 
corporate  power  of  the  company." 
See  also  ante,  §  114:  "Remedies  of 
Dissenting  Stockholders  in  Case  of  In- 
valid arid  Unfair  Sales.". 


298 


CHAP.    XIV]       EFFECT   OF    EXECUTION    OF   CONTRACT   OF   SALE  §    152 


CHAPTER    XIV 


EFFECT  OF  EXECUTION  OF  CONTRACT  OF  SALE 

I.     Rights  and  Liabilities  of  Vendor  Corporation 

§  152.     Sale  of  Railroad  and  Franchises  does  not  terminate  Corporate  Exist- 
ence. 
§  153.     Rights  of  Vendor  Corporation  after  Authorized  Sale. 
§  154.     Liabilities  of  Vendor  Corporation  in  Case  of  Authorized  Sale. 
§  155.     Liabilities  of  Vendor  Corporation  in  Case  of  Unauthorized  Sale. 
§  156.     Quo  Warranto  and  other  Proceedings  against  Vendor  Corporation. 

II.     Rights  and  Liabilities  of  Vendee  Corporation 

§  157.     Essential  Franchises  pass  upon  Sale  of  Railroad. 

§  158.     Rights  and  Powers  of  Vendee  Corporation  —  In  General. 

§  159.      Right  of  Imminent  Domain. 

§  160.      Exemptions  from  Taxation. 

§  161.     Right  to  fix  Rates  of  Fare.     Chartered  Rates. 

§  162.  Obligations  of  Vendee  Corporation  in  Respect  of  PubUc  Duties  of  Ven- 
dor. 

§  163.  Vendee  Corporation  not  liable  upon  Obligations  of  Vendor  unless 
assumed  or  imposed  by  Law. 

§  164.     Status  of  Foreign  Vendee  Corporation. 

I.    Rights  and   Liabilities  of   Vendor   Corporation 

§  152.  Sale  of  Railroad  and  Franchises  does  not  terminate 
Corporate  Existence.  —  The  sale  of  all  the  property  of  a  cor- 
poration does  not  work  its  dissolution.*  The  sale  by  a  rail- 
road company  of  its  road  and  franchises,  while  disabling  it 
from  the  performance  of  the  functions  for  which  it  was  cre- 
ated, does  not  terminate  its  corporate  existence.^     Its  dissolu- 

'  See  ante,   §   117:    "Effect  of  Sale  Delaware:    Higgins  v.   Downward, 

of  Entire  Corporate  Property."  8  Houst.  227  (18S8),  (32  Atl.  Rep.  133, 

2  United  States:    United   States  v.  40  Am.  St.  Rep.  141). 

Little  Miami,  etc.  R.  Co.,  1  Fed.  700  Illinois:    Hrufett  v.  Great  ■Western 

(1880)  ;  Swan  Land,  etc.  Co.  v.  Frank,  R.  Co.,  25  111.  353  (1861)  ;   Reichwald 

39  Fed.  456  (1889).  r.  Commercial  Hotel  Co.,  106  111.  439 

Alabama:    Davis  v.  Memphis,  etc.  (1883). 

R.  Co.,  87  Ala.  633  (1888),  (6  So.  Rep.  Indiana:    DeCamp  r-.   Alwurd,  52 

140).  Ind.  468  (1876). 

Connecticut:  Saugutuck  Bridge  Co.  Iowa:    Muscatine  Western   R.  Co. 

V.  Town  of  Westport,  39  Conn.   337  v.  Horton,  38  Iowa,  33  (1873). 

(1872).  Massachusetts:    Richardson  v.  Sib- 

299 


§153 


INTERCORPORATE    RELATIONS 


[part  II 


tion  can  be  accomplished  only  by  the  surrender,  forfeiture  or 
repeal  of  its  charter. 

A  sale,  however,  in  pursuance  of  a  statute  authorizing  a 
railroad  company  to  sell  its  franchises,  including  the  franchise 
to  be  a  corporation,  is,  in  effect,  a  surrender  of  the.  charter.^ 
Statutes  may  also  expressly  provide  that  a  sale  of  all  its  prop- 
erty shall  constitute  a  dissolution  of  a  corporation.'  But, 
under  such  a  statute,  an  illegal  or  fraudulent  sale  will  not 
effect  a  dissolution.^ 

§  153.  Rights  of  Vendor  Corporation  after  Authorized  Sale.  — 
As  the  sale  of  the  railroad  and  franchises  of  a  railroad  com- 
pany does  not  ipso  facto  terminate  its  corporate  existence,  the 
corporation  necessarily  retains  the  formal  powers  essential  to 
a  nominal  existence,  to  the  winding  up  of  its  affairs  and  to  the 
performance  of  its  continuing  public  duties.  It  also  retains 
any  property  and  rights  not  included  in  the  deed  of  conveyance, 
or  of  which  the  statute  does  not  authorize  the  sale.  Thus, 
for  example,  it  has  been  held  that  power  to  sell  a  railroad 
does  not  authorize  the  sale  of  subscriptions  to  the  stock  of  the 
vendor  company.* 


ley,  11  Allen  (Mass.),  67  (1865),  (87 
Am.  Dec.  700). 

Missouri:  Heath  v.  Missouri,  etc. 
R.  Co.,  83  Mo.  617  (1884). 

New  Jersey:  Sewell  v.  East  Cape 
May  Beach  Co.,  50  N.  J.  Eq.  717 
(1892),  (25  Atl.  Rep.  929). 

New  York:  Troy,  etc.  R.  Co.  v. 
Kerr,  17  Barb.  581  (1854). 

Texas:  Gulf,  etc.  R.  Co.  v.  Newell, 
73  Tex.  334  (1889),  (US.  W.  Rep. 
342,  15  Am.  St.  Rep.  788). 

>  Snell  V.  City  of  Chicago,  133  111. 
413  (1890),  (24  N.  E.  Rep.  532,  8  L. 
R.  A.  858) ;  Rogersville,  etc.  R.  Co.  v. 
Kyle,  9  Lea  (Tenn.),  691  (1882); 
Reynolds  v.  Cridge,  1 1  Pa.  Co.  Ct.  Rep. 
306  (1892). 

2  Under  Pennsylvania  statute  of 
1901  (Laws  1901,  p.  53,  Act  No.  20), 
upon  filing  copy  of  agreement  in  office 
of  secretary  of  the  Commonwealth,  cor- 
porate existence  of  vendor  terminates. 

3  Wliite  Mountains  R.  Co.  v.  White 

300 


Mountains  R.  Co.,  50  N.  H.  50 
(1870). 

*  In  Railroad  Co.  v.  Hinsdale,  45 
Ohio  St.  556  (1888),  (15  N.  E.  Rep. 
665),  where  a  person  subscribed  for 
stock  in  a  railroad  company  —  sub- 
scription payable  when  road  was  com- 
pleted —  and  the  company  sold  its 
vmcompleted  road  to  another  corpora- 
tion which  completed  the  construc- 
tion, it  ivas  held  that  the  Ohio  statutes 
(Bates'  Anno.  Stat.  3300  and  3409) 
authorizing  sales  of  railroads  did  not 
confer  authority  to  sell  stock  sub- 
scriptions ;  that  no  ownership  in  the 
subscription  passed  to  the  purchaser 
of  the  railroad,  and  that  such  pur- 
chaser could  not  fulfil  the  condition 
precedent  to  the  payment  of  the  sub- 
scription by  completing  the  road. 

Compare  Armstrong  v.  Karschner, 
47  Ohio  St.  276  (1890),  (24  N.  E.  Rep. 
897),  where  it  was  held  that  a  statute 
authorizing  tlie  .sale  of  a  railroad,  in 


CHAP.    XIV]     EFFECT   OF    EXECUTION    OF   CONTRACT    OF    SALE  §    155 

§  154.  Liabilities  of  Vendor  Corporation  in  Case  of  Authorized 
Sale.  —  It  has  been  held  that  the  oi)Ugations  of  a  railroad 
company  to  the  public  can  only  be  discharged  by  a  sale  of  its 
franchises  to  another  company  under  a  legislative  enactment 
authorizing  the  sale  and  exempting  the  vendor  from  liability; 
that  legislative  consent  is  not  sufficient  —  a  legislative  release 
is  necessary.  Upon  this  doctrine,  the  Supreme  Court  of  Ne- 
braska held  a  vendor  corporation,  after  an  authorized  sale, 
liable  for  the  torts  of  the  vendee  in  the  operation  of  the  road.' 

Public  policy  is  declared  to  be  the  basis  of  the  doctrine,  and 
it  may  well  be  that,  unless  exempted,  a  vendor  corporation 
remains  liable  upon  its  primary  obligations  to  the  State.  But 
when  the  legislature  has  authorized  a  sale,  and  thereby  mani- 
fested the  policy  of  the  State  that  the  railroad  should  be  owned 
and  operated  by  the  vendee,  neither  principle  nor  policy  re- 
quires that  the  vendor  should  be  held  responsible  for  the  opera- 
tion of  the  road  of  another  by  persons  with  whom  it  has  no 
connection  and  over  whom  it  can  exercise  no  control.^ 

§  155.  Liabilities  of  Vendor  Corporation  in  Case  of  Unauthor- 
ized Sale.  —  Whatever  question  there  may  be  as  to  the  lia- 
bility of  a  vendor  corporation  in  case  of  an  authorized  sale,  it 
is  indisputable  that  it  remains  liable  for  the  torts  of  the  vendee 
in  case  of  an  unauthorized  sale. 

A  railroad  company  cannot  absolve  itself  from  continued 

force  at  the  time  of  a  stock  subscrip-  End,  etc.  R.  Co.  v.  Dameron,  4  Mo. 

fion,  becomes  a  part  of  the  contract  App.  414  (1877). 

of  subscription,   and   that  a  sale   by  '  Cholette  v.  Omaha,  etc.  R.  Co.,  26 

the  company  of  a  part  of  its  road  does  Neb.  159  (1889),  (41  N.  W.  Rep.  1106, 

not    release    a    subscriber.     Compare  4  L.   R.   A.   135).     See  also  Acker  j'. 

also  Hays  v.  Ottawa,  etc.  R.  Co.,  61  Alexandria,  etc.   R.   Co.,  84  Va.  648 

III.  422  (1871).  (1888),  (5  S.  E.  Rep.  688) ;   Naglee  v. 

A    sale    by    a    corporation    of    its  Alexandria,   etc.   R.  Co.,  83   Va.   707 

property  and  franchises  does  not  carry  (1887),  (3  S.  E.  Rep.  309,  5  Am.  St. 

with  it  stock  in  its  treasury  which   it  Rep.  308). 

has  bought  in  and  has  not  re-issued.  ^  Pennison  v.  Chicago,  etc.  R.  Co., 

Tulare  Irr.  Dist.  r.  Kaweah  Canal,  etc.  93  Wis.  344  (1890),  (07  N.  W.  R<p. 

Co.  (1806,  Cal.y,  44  Pac.  Rep.  002.  7U2). 

One   railroad   corporation,    having  For  full  consideration  of  this  ques- 

mercly   bought   the    road-bed    of   an-  tion  with  reference  to  the  liability  of 

other,    with    intent    to    complete    the  a  icssorcorporation  .see  po.s<,  ch.  XIX.: 

road,    has   no   right   to   purcha.se   the  "Rights  and  Liabilities  of  Lessor  Cor- 

vcndor's  .stock  subscriptions  and  en-  poration." 
force  them  against  subscribers.    West 

301 


§    157  INTERCORPORATE    RELATIONS  [PART   II 

liability  for  negligence  by  transferring  its  franchises  to  another 
company  in  the  absence  of  a  statute  sanctioning  the  sale.^ 

§  156.  Quo  Warranto  and  Other  Proceedings  against  Vendor 
Corporation.  —  An  attempt  by  a  railroad  company  to  sell  its 
railroad  and  franchises  may  furnish  ground  for  the  forfeiture 
of  its  charter  in  quo  warranto  proceedings.^ 

Especially  is  this  true  where  a  corporation,  in  transferring 
its  property  and  franchises,  acts  not  only  without  authority 
but  in  direct  violation  of  a  constitutional  provision  against  a 
sale  to  a  competing  company,  and  persists  in  the  non-user  of 
its  franchises.^ 

Of  the  power  of  the  State  to  reach  a  foreign  corporation  — 
party  to  such  an  unlawful  contract  —  the  Supreme  Court  of 
Texas,  in  East  Line,  etc.  R.  Co.  v.  State*  said:  "  The  courts 
of  this  State  would  have  no  power  to  declare  a  forfeiture  of 
the  charter  of  that  corporation  granted  by  the  laws  of  the 
State  where  it  was  created,  but  would  have  power  to  withdraw 
the  franchise  here  granted,  whenever  the  facts  justified  it,  and, 
by  injunction  or  otherwise,  to  prevent  its  carrying  on  business 
in  this  State  in  violation  of  its  laws.  They  would  also  have 
power  to  place  property  controlled  by  it  and  situated  in  this 
State  in  the  hands  of  a  receiver,  and  to  adjust  the  rights  of 
such  persons  as  might  be  shown  to  have  valid  claims  against 
it,  or  even  to  avoid  a  valid  incorporation  in  this  State  by  those 
interested  in  property  acquired  by  it  in  an  unlawful  manner." 

II.    Rights  and  Liabilities  of  Vendee  Corporation 

§  157.    Essential  Franchises  pass  upon  Sale  of   Railroad.  — 

A  grant  of  authority  to  sell  a  railroad,  without  expressly  includ- 
ing its  franchises,  embraces  by  implication  the  right  to  transfer 
those  franchises  which  are  essential  to  the  maintenance  and 

'  East  Line,  etc.  R.  Co.  v.  Rushing,  forfeiture  of  its  charter  see  State  v. 

69  Tex.  306(1887),  (6  S.W.  Rep.  834\  Pawtuxet  Turnpike  Co.,  8  R.  I.  .521 

See  also  post,  ch.  XIX. :    "Rights  and  (1867),  (94  Am.  Dec.  123). 
Liabilities  of  Lessor  Corporation."  ^  East  Line,  etc.  R.  Co.  v.  State,  75 

2  State  V.  Minnesota  Central  R.  Co.,  Tex.  434  (1889),  (12  S.  W.  Rep.  690). 
36  Minn.  246  (1886),  (30  N.  W.  Rep.  ■•  East  Line,  etc.  R.  Co.  v.  State,  75 

816).     That  a  sale  of  its  road  by  a  Tex.    451    (1889),    (12    S.    W.    Rep, 

turnpike  company  is  a  ground  for  the  690). 

302 


CHAP.    XIV]      EFFECT   OF    EXECUTION    OF    CONTRACT   OF    SALE  §    158 

operation  of  the  railroad.  A  sale  of  a  railroad,  under  statu- 
tory authority,  carries  with  it  the  ordinary  franchises  necessary 
for  the  use  of  the  railroad  property  and  without  which  it  would 
be  useless.' 

§  158.  Rights  and  Powers  of  Vendee  Corporation — In 
General.  —  A  grant  to  a  railroad  company  of  jjower  to  se.ll  its 
property  and  franchises,  without  limitation,  authorizes  the 
sale  of  all  its  property  and  franchises.^  except  the  franchise 
of  corporate  existence.^  The  vendee  corporation,  under  a  sale 
in  pursuance  of  such  authority,  may  enjoy  the  property  and 
exercise  the  franchises  as  freely  as  if  directly  granted  to  it. 

Statutes  authorizing  the  sale  of  a  railroad  and  franchises 
sometimes  define  the  status  of  the  vendee  corporation  and 
designate  the  rights  and  franchises  acquired  by  the  purchase.* 


'  United  States:  New  Orleans,  etc. 
R.  Co.  V.  Delamore,  114  U.  S.  501 
(1884),  (5  Sup.  Ct.  Rep.  1009)  ; 
Branch  v.  Jesup,  106  U.  S.  468  (1883), 
(1  Sup.  Ct.  Rep.  495).  Contra  PuUan 
V.  Cincinnati,  etc.  R.  Co.,  4  Biss. 
(U.  S.)  35  (1865). 

Alabama:  Meyer  v.  Johnston,  53 
Ala.  237  (1875). 

Massachusetts :  East  Best  on 
Freight  R.  Co.  v.  Eastern  R.  Co.,  13 
Allen,  422  (1866). 

Pennsylvania:  Gloninger  v.  Pitts- 
burgh, etc.  R.  Co.,  139  Pa.  St.  13 
(1891),  (21  Atl.  Rep.  211). 

Texas:  Compare  Missouri  Pac.  R. 
Co.  V.  Owens,  1  Texas  App.  Civ.  Cas. 
§  385  (1883). 

Wisconsin:  Pierce  v.  Milwaukee, 
etc.  R.  Co.,  24  Wis.  551  (1869),  (1 
Am.  Rep.  203). 

England:  County  of  Gloucester 
Bank  v.  Rudry  Merthyr,  etc.  Co.,  L.  R. 
1  Ch.  629  (1895). 

*  Pierce  v.  Milwaukee,  etc.  R.  Co., 
24  Wis.  551  (1869),  (1  Am.  Rep.  203). 
See  also  Sioux  City  Terminal  R.  etc. 
Co.  V.  Trust  Co.  of  North  .\rnerica,  82 
Fed.  124  (1897)  ;  Threadgill  r.  Pum- 
phrey,  87  Tex.  573  (1895),  (30  S.  W. 
Rep.  .3.56). 

3  See  ante,  §  132  :   "  Transferability 


of     Franchise     of    Corporate     Exist- 
ence." 

*  In  Indiana  a  purchasing  companj' 
may  mortgage  franchises  acquired  and 
issue  new  stock  and  bonds.  (Bums' 
R.  S.  1901,  §  5215.) 

In  Nebra^ska  the  purchasing  com- 
pany is  ve.sted  with  all  the  property 
and  franchises  of  the  vendor,  and  may 
receive  municipal  aid,  etc.  (Comp. 
Stat.  1901,  §  4018.)  Foreign  purchas- 
ing companies  have  all  the  powers  and 
rights  of  domestic  railroad  companies 
(76.  §  4024). 

In  Nei'ada  foreign  purchasing  com- 
panies may  hold  and  exercise  fran- 
chises to  the  same  extent  as  if  domestic 
corporations  (Sess.  Laws  1901,  p.  51). 

In  Ohio  the  purcha,sing  company 
acquires  all  the  rights,  p^i^^leges  and 
ea.sements  of  the  vendor  (Bates'  Anno. 
Stat.  (1787-1902)  §§  33(X1,  3384  (d), 
3409). 

In  Pennsyh'ania  all  rights,  property 
arid  franchises  of  vendor  vest  in  ac- 
quiring corporation  (Laws  1901,  p.  .">3, 
Act  No.  20).  This  statute  is  of 
limited  application. 

In  Utah  the  purchasing  company 
is  \osted  with  all  the  rights  and  fran- 
chises of  tiie  vendor  and  of  domestic: 
corporations  generallj*;    may  extend 

303 


§    160  INTERCORPORATE    RELATIONS  [PART    II 

§  159.  Right  of  Eminent  Domain.  —  Probably  the  right  of 
eminent  domain  would  not  pass  by  implication,  as  an  essential 
franchise,  under  a  transfer  which  included  in  terms  only  a 
railroad}  But  when  the  conveyance,  in  pursuance  of  statu- 
tory authority,  embraces  a  railroad  and  fravchises,  the  right  of 
eminent  domain  passes,  with  other  franchises,  to  the  purchas- 
ing corporation.^  Thus,  a  purchaser  who  acquires  the  prop- 
erty of  a  railroad  company  and  "  all  its  contracts,  franchises, 
rights,  privileges  and  immunities,"  acquires  the  right  of  emi- 
nent domain.^ 

Where,  however,  a  railroad  is  sold  in  sections  to  different 
purchasers,  the  right  of  eminent  domain  belonging  to  the 
vendor  corporation  is  not  parcelled  out.^  A  purchasing  cor- 
poration does  not  succeed  to  a  right  of  eminent  domain  of 
a  peculiar  nature  granted  to  a  vendor  corporation  by  special 
statute.^ 

A  purchasing  corporation  does  not  acquire  the  right  to 
prosecute  condemnation  proceedings,  pending  at  the  time  of 
the  purchase.^ 

§  160.  Exemptions  from  Taxation.  —  An  exemption  from 
taxation  is  a  personal  privilege  of  the  corporation  to  which 
it  is  granted.  It  cannot  be  transferred,  unless  the  legisla- 
ture, in  authorizing  a  sale,  uses  apt  words  to  describe  the 
exemption,     as     distinguished    from     other     privileges,     and 

its  lines;    may  lease  or  purchase  con-  etc.  Co.,  39  La.  Ann.  427  (1887),  (2  So. 

necting  lines;    may  issue  bonds  and  Rep.  69,  4  Am.  St.  Rep.  265). 

mortgage  property,  etc.  (Laws  1901,  In  Arkansas  (S.   &  H.   Dig.   1894, 

eh.  26,  p.  21,  §  4).  §    6342),    Nevada   (Sess.    Laws    1901, 

In  Wisconsin  the  purchasing  com-  p.  51)   and  Ohio  (Bates'  Anno.  Stat. 

pany  takes  all  the  rights,   privileges  (1787-1902),  §  3300),  Wyoming  (R.  S. 

and  immunities  of  the  vendor  (Stat.  1899,  §  3206),  it  is  provided  by  statute 

1888,    §    1833,   as  amended  by  Laws  that   a   purchasing   corporation   shall 

1899,  ch.  191).  acquire    the    right    of    eminent     do- 

*  In   Mayor  of  Worcester   v.    Nor-  main. 

wich,    etc.    R.    Co.,    109    Mass.    103  *  North    Carolina,    etc.    R.    Co.    v. 

(1871),  it  was  held  that  authority  to  Carolina  Central  R.  Co.,  83  N.  C.  489 

lease  a  railroad  would  not  confer,  by  (1880). 

implication,  the  right  of  eminent  do-  *  State  v.  Morgan,  28  La.  Ann.  482 

main  upon  the  lessee.     Compare  New  (1876). 

Orleans,  etc.  R.  Co.  v.  Delamore,  114  ^Little     Rock,     etc.     R.     Co.     v. 

V.   S.   501    (1885),    (5   Sup.   Ct.   Rep.  McGehee,  41  Ark.  202  (1883). 

1009).  *  Mahoney  v.  Spring  Valley  Water 

*  Lawrence  v.  Morgan'.?  Louisiana,  Co.,  52  Cal.  159  (1877). 

304 


CHAP.    XIV]     EFFECT   OF    EXECUTION    OF   CONTRACT   OF   SALE  §    160 

the  legislative  intention  that  it  should  pass  is  clearly  ap- 
parent.^ 

In  Memphis,  etc.  R.  Co.  v.  Commissioners  ^  Mr.  Justice 
Matthews  said:  "  Exemption  from  taxation  must  be  construed 
to  have  been  the  personal  privilege  of  the  very  corporation 
specifically  referred  to,  and  to  have  perished  with  that,  unless 
the  express  and  clear  intention  of  the  law  requires  the  exemp- 
tion to  pass  as  a  continuing  franchise  to  a  successor.  This 
salutary  rule  of  interpretation  being  founded  upon  an  obvious 
public  policy  which  regards  such  exemptions  as  in  derogation 
of  the  sovereign  authority  and  of  common  right,  and  therefore 
not  to  be  extended  beyond  the  exact  and  express  requirement 
of  the  grants,  is  construed  strictissimi  juris." 

In  the  appHcation  of  this  rule  the  words  "rights,"  "fran- 
chises" and  "privileges"  have  been  held  not  to  include  an 
exemption  from  taxation;^  while  the  contrary  has  been  held 
with  reference  to  the  word  "immunities."  * 


*  United  States:  Yazoo,  etc.  R.  Co. 
V.  Adams,  180  U.  S.  22  (1901),  (21 
Sup.  Ct.  Rep.  240)  ;  Phoenix  Fire,  etc. 
Ins.  Co.  V.  Tennessee,  161  U.  S.  174 
(1896),  (16  Sup.  Ct.  Rep.  471);  Wil- 
mington, etc.  R.  Co.  V.  Alsbrook,  146 
U.  S.  279  (1892),  (13  Sup.  Ct.  Rep. 
72) ;  Picard  v.  East  Tennessee,  etc. 
R.  Co.,  130  U.  S.  637  (1889),  (9  Sup. 
Ct.  Rep.  640) ;  Chesapeake,  etc.  R. 
Co.  V.  Miller,  114  U.  S.  176  (1885),  (5 
Sup.  Ct.  Rep.  813) ;  Memphis,  etc. 
R.  Co.  V.  Commissioners,  112  U.  S. 
609  (1884),  (5  Sup.  Ct.  Rep.  299)  ; 
Railroad  Co.  v.  Palmes,  109  U.  S.  244 
(188.3),  (3  Sup.  Ct.  Rep.  19.3);  East 
Tennessee,  etc.  R.  Co.  v.  Hamblin  Co., 
102  U.  S.  273  (1880) ;  Railroad  Co.  v. 
Gaines,  97  U.  S.  697  (1878)  ;  Morgan 
V.  Louisiana,  93  U.  S.  217  (1876). 

Arkansas:  Arkansas  Midland  R. 
Co.  V.  Berry,  44  .\rk.  17  (1884). 

Kentucky:  Evansville,  etc.  R.  Co. 
V.  Commonwealth,  9  Bush,  438  (1872)  ; 


*  Phoenix  Ins.  Co.  v.  Tennessee,  161 
U.  S.  177  (1896),  (16  Sup.  Ct.  Rop. 
471) ;  Louisville,  etc.  R.  Co.  v.  Palmes, 


Commonwealth  v.  Nash\nlle,  etc.  R. 
Co.,  93  Ky.  430  (1892),  (20  S.  W.  Rep. 
383). 

Minnesota:  Contra,  St.  Paul,  etc. 
R.  Co.  V.  Parcher,  14  Minn.  297 
(1869). 

Missouri:  State  v.  Chicago,  etc.  R. 
Co.,  89  Mo.  523  (1886),  (14  S.  W.  Rep. 
522). 

New  Jersey:  Asse.ssors  v.  Morris, 
etc.  R.  Co.,  49  N.  J.  L.  193  (1886),  (7 
Atl.  Rep.  826). 

South  Carolina:  Contra,  Hand  v. 
Savannah,  etc.  R.  Co.,  17  S.  C.  280 
(1881). 

Tennessee:  Wilson  v.  Gaines,  9 
Baxt.  546  (1877),  {affirmed  103  U.  S. 
417),  (1880). 

Sec  also  ante,  §  72  :  "Exemptions 
from  Taxation"  (consolidation). 

2  Memphis,  etc.  R.  Co.  7).  Commis- 
sioners, 112  U.  S.  609  (1884),  (5  Sup. 
Ct.  Rep.  299)., 

^  The    decisions    of    the    Supreme 


109  U.  S.  252  (1883),  (3  Sup.  Ct.  Rep. 
193);  Tra.sk  v.  Maguire,  18  Wall. 
(U.  S.)   391   (1873);    Nichols  v.  New 

305 


§  161 


INTERCORPORATE    RELATIONS 


[part  II 


§  161.  Right  to  fix  Rates  of  Fare.  Chartered  Rates.  —  It  has 
been  held  that  the  rates  prescribed  in  the  charter  of  a  railroad 
company  for  transportation  upon  its  railroad  follow  the  prop- 
erty when  sold,  and  attach  to  its  operation  by  a  purchasing 


Court  of  the  United  States  are  irrec- 
oncilable. 

In  Railroad  Co.  v.  Gaines,  97  U.  S. 
697  (1878),  it  was  held  that  an  exemp- 
tion from  taxation  was  not  carried  by 
the  use  of  the  words  "rights,  powers 
and  pri\-ileges. "  In  Keokuk,  etc.  R. 
Co.  V.  Missouri,  152  U.  S.  301  (1894), 
(14  Sup.  Ct.  Rep.  592),  it  was  doubted 
whether,  under  the  name  "franchises 
and  pri\nleges, "  an  exemption  would 
pass.  In  Chesapeake,  etc.  R.  Co.  v. 
Miller,  114  U.  S.  176  (1885),  (5  Sup. 
Ct.  Rep.  813),  it  was  decided  that  an 
exemption  did  not  pass  to  the  pur- 
chaser by  the  use  of  the  words  "fran- 
chises, rights  and  privileges."  In 
Morgan  v.  Louisiana,  93  U.  S.  217 
(1876),  it  was  held  that  the  words 
"franchises,  rights  and  pri\nleges"  did 
not,  necessarily,  include  an  exemption 
from  taxation.  See  also  Phcenix,  etc. 
Ins.  Co.  V.  Tennessee,  161  U.  S.  182 
(1896),  (16  Sup.  Ct.  Rep.  471);  Wil- 
mington, etc.  R.  Co.  V.  Alsbrook,  146 
U.  S.  279  (1892),  (13  Sup.  Ct.  Rep. 
72).  Also  Evansville,  etc.  R.  Co.  v. 
Commonwealth,  9  Busli  (Ky.),  438 
(1892).  On  the  other  hand,  in  Hum- 
phrey V.  Pegues,  16  Wall.  (U.  S.)  24 
(1872),  the  Supreme  Court  held  the 
words,  "all  the  rights,  powers  and 
privileges, "  to  include  an  exemption 
from  taxation.  Again  in  Tennessee  v. 
Whitworth,  117  U.  S.  139  (1886),  (6 
Sup.  Ct.  Rep.  649),  it  was  said  that 
the  same  words  included  the  right  of 
exemption.  Chief  Justice  Waite,  in 
his  opinion,  said  (p.  146)  :  "As  has 
already  been  seen,  the  word  'pri\'i- 
lege,'  in   its  ordinary  meaning,  when 


used  in  this  connection,  includes  an 
exemption  from  taxation."  See  also 
Atlantic,  etc.  R.  Co.  v.  Allen,  15  Fla. 
637  (1876);  Louisville,  etc.  R.  Co.  v. 
Gaines,  3  Fed.  266  (1880). 

W^hile  the  opinions  cannot  be  recon- 
ciled the  conclusion  to  be  drawn  from 
the  later  decisions  of  the  Supreme 
Court  of  the  L^nited  States  is  that 
there  must  be  other  language  than 
the  words  "rights,"  "franchises"  and 
"priA-ileges"  or  other  pro\'i.sions  suffi- 
cient to  remove  all  doubt  as  to  the 
legislative  intention  before  the  trans- 
fer of  an  exemption  from  taxation  can 
take  place. 

Gulf,  etc.  R.  Co.  V.  Hewes,  183  U.  S. 
66  (1901),  (22  Sup.  Ct.  Rep.  26). 
Phceni.x  Ins.  Co.  v.  Tennessee,  161 
U.  S.  182  (1896),  (16  Sup.  Ct.  Rep. 
471) ;  Wilmington,  etc.  R.  Co.  v.  Als- 
brook, 146  U.  S.  279  (1892),  (13  Sup. 
Ct.  Rep.  72) ;  Picard  v.  East  Tennessee, 
etc.  R.  Co.,  130  U.  S.  637  (1889),  (9 
Sup.  Ct.  Rep.  640). 

And  any  question  as  to  the  posi- 
tion of  the  Supreme  Court  has  now 
been  definitely  settled  by  the  very 
recent  decision  in  Rochester  Railway 
Co.  V.  City  of  Rochester,  205  U.  S. 
236  (1907),  (27  Sup.  Ct.  Rep.  469), 
where  Mr.  Justice  Moody  said  :  "We 
think  it  now  the  rule,  notwithstand- 
ing earlier  decisions  and  dicta  to  the 
contrary,  that  a  statute  authorizing 
or  directing  the  grant  or  transfer  of 
the  '  pri\'ileges'  of  a  corporation, 
which  enjoys  immunity  from  taxa- 
tion or  regulation,  should  not  be  inter- 
preted as  including  that  immu- 
nity." 


Haven,  etc.  R.  Co.,  42  Conn.  103 
(1875) ;  Commonwealth  v.  Owens- 
boro,  etc.  R.  Co.,  81  Ky.  572  (1884); 

306 


State  V.  Nashville,  etc.  R.  Co.,  12  Lea 
(Tenn.),  583  (1883). 


CHAP.  XIV]  EFFECT  OF  EXECUTION  OF  CONTRACT  OF  SALE     §  162 

company.^  Thus  in  Campbell  v.  Marietta,  etc.  R.  Co.j^  the 
Supreme  Court  of  Ohio  said:  "  It  must  be  inferred  that  the 
legishiture  intended  the  purchasing  company  to  succeed  to 
the  powers  and  privileges  of  the  vending  t'omj)any,  and  to  none 
other.  .  .  .  The  intrinsic  as  well  as  the  market  value  of  such 
property  as  a  railroad  largely  depends  u])on  the  rates  which 
may  be  charged  for  transportation  thereon.  Now,  if  the 
chartered  rates  follow  the  property,  the  contracting  parties 
stand  on  perfect  equality,  but  if  the  value,  or,  in  other  words, 
the  inducement  to  contract,  depends  upon  the  chartered  jirivi- 
lege  of  the  purchaser,  the  equality  is  not  preserved,  and  espe- 
cially would  different  companies  with  different  charters  occupy 
unequal  grounds  as  bidders  for  and  purchasers  of  such  prop- 
erty." 

This  decision  is  too  broad.  It  may  be  that  restrictions  and 
limitations  upon  rates  of  fare  presumptively  attach  as  burdens 
to  railroads  when  sold;  but  the  converse  of  the  ])roposition  is 
not  true  that  the  chartered  rates  so  follow  the  property  as 
privileges.  In  the  absence  of  an  express  statutory  direction, 
the  right  to  fix  and  determine  rates  of  fare,  or  to  charge  a 
greater  rate  then  permitted  by  general  laws,  does  not  accom- 
pany a  railroad  in  its  transfer  to  a  purchaser.^ 

§  162.  Obligations  of  Vendee  Corporation  in  Respect  of  Pub- 
lic Duties  of  Vendor.  —  As  a  general  rule,  a  vendee  corporation, 
in  the  operation  of  a  purchased  railroad,  takes  the  place  of  the 
vendor  company  and  must  hold  and  operate  the  road  subject 
to  the  conditions  attaching  to  it  in  the  hands  of  the  vendor.^ 

*  Campbell  v.  Marietta,  etc.  R.  Co.,  organized  under  general  laws,  and, 
23  Ohio  St.  168  (1872);  Peters  v.  therefore,  subject  to  a  statute  fixing 
Railroad  Co.,  42  Ohio  St.  275  (1884),  rates  of  fare.  See  also  Dow  v.  Heidei- 
(51  Am.  Rep.  814).  man,   49  Ark.   325   (1887),    (5  S.   W. 

2  Campbell  v.  Marietta,  etc.  R.  Co.,       Rep.  207). 
23  Ohio  St.  168  (1872).  ■•  Daniels  v.  St.  Louis,  etc.  R.  Co., 

*  St.  Louis,  etc.  R.  Co.  v.  Gill,    156       62  Mo.  43  (1876). 

U.S.  656(1895),  (15  Sup.  Ct.  Rep.  484).  Wliere  a  street   railway   company 

In  Norfolk,  etc.  R.  Co.  v.    Pendle-  under  its  charter  was  bound  to  pay 

ton,   156  U.   S.  667  (1895),   (15    Sup.  only  a  part  of  the  cost  of  paving  be- 

Ct.  Rep.  484),  affirming  86   Va.   1004  tween   and   alongside   its  tracks,   but 

(1890),  (11    S.  E.  Rep.   1062),  it  was  did  not  act  under  this  provi-^ion,  and 

held  that  a  right  to  fix  tolls,  conferred  purcha.sed   the   franchises  of  another 

upon  a  vendor  corporation,  could  not  company     which     was     rei|uire<l     to 

be  claimed  by  a  purchasing  company  assinnc  the  entire  cost  of  such   pav- 

307 


§  163 


INTERCORPORATE   RELATIONS 


[part    II 


While  a  vendor  corporation  may  remain  liable  upon  its 
public  obligations  notwithstanding  a  sale  of  its  railroad,  it 
seems  clear  that  a  vendee  company,  in  purchasing  and  taking 
over  a  railroad  and  franchises,  assumes  and  is  bound  to  per- 
form the  accompanying  obligations  to  the  State.' 

§  163.  Vendee  Corporation  not  liable  upon  Obligations  of 
Vendor  unless  assumed  or  imposed  by  Law.  —  A  railroad  com- 
pany purchasing,  in  good  faith  and  for  value,  the  railroad  and 
franchises  of  another  company  is  not  liable  for  the  obligations 
of  the  latter  company  which  are  not  liens  upon  the  property.^ 

The  reason  for  the  rule  and  its  qualifications  are  clearly 


ing,  it  was  held  that  the  purchasing 
company  was  bound  to  act  under 
the  provisions  of  the  charter  of 
vendee  company  in  the  streets  which 
it  was  autliorized  to  occupy. 

Kent  V.  City  of  Binghampton, 
40  Misc.  Rep.  (N.  Y.)  1  (1903),  (81 
•N.  Y.  Supp.  198). 

*  A  railroad  comtpanj^  which  pur- 
chases the  property  and  franchises  of 
any  other  company  pursuant  to  a 
Michigan  Statute  (Act  No.  10,  Laws 
1889),  holds  subject  to  all  the  duties 
and  obligations  prescribed  by  the 
general  railroad  laws  of  the  State. 
Thaj^er  v.  Flint,  etc.  R.  Co.,  93  Mich. 
150  (1892),  (53  N.  W.  Rep.  216). 

A  railroad  company  in  selling  its 
railroad  cannot  relieve  the  purchasing 
company  from  the  performance  of 
the  duty  imposed  bj'  statute  to  con- 
struct and  maintain  proper  crossings 
over  streams. 

Graham  v.  Chicago,  etc.  R.  Co., 
39  Ind.  App.  249  (1906)  (77  N.  E. 
Rep.  1055). 

^  Chesapeake,  etc.  R.  Co.  v.  Griest, 
85  Ky.  625  (1887),  (4  S.  W.  Rep. 
323):  "If  the  power  to  sell  is  given 
by  the  terms  of  the  grant,  the  pur- 
chaser for  value  holds  the  property 
as  if  it  had  been  an  individual  trans- 
action. There  is  no  reason  for  mak- 
ing a  distinction,  and  the  rule  in 
individual  transactions  should  apply 
as    between    corporations    when    the 

308 


power  to  sell  and  purchase  is  con- 
ferred by  charter.  While  a  dissolu- 
tion of  a  corporation  would  entitle 
the  creditors  to  enforce  their  demands 
in  a  court  of  equity,  or  where  there  is 
a  consolidation  to  follow  the  as- 
sets of  their  debtor  in  the  consoli- 
dated company,  still,  where  there 
is  a  sale  of  the  corporate  property, 
it  passes  the  title  as  to  all,  in  the  ab- 
sence of  some  reservation  in  the  char- 
ter protecting  the  rights  of  creditors." 
Burge  V.  St.  Louis,  etc.  R.  Co., 
100  Mo.  App.  460  (1903),  (74  S.  W. 
Rep.  7):  "Under  the  section  making 
valid  the  purchase  by  one  railroad 
company  of  the  line  and  property 
of  another  railroad  companj',  no 
responsibility  is  imposed  on  the  pur- 
chasing company  for  the  obligations 
of  its  vendor.  It  is  manifest  that  no 
statutory  liability  resulted  from  the 
mere  purchase  by  the  defendant, 
and,  in  the  absence  of  averment  and 
proof  that  it  acquired  and  succeeded 
to  the  line  and  property  of  the  selling 
companj'  otherwise  than  as  a  pur- 
chaser in  good  faith,  and  for  a  valu- 
able consideration,  the  transaction 
in  no  wise  differs  in  legal  effect  from 
the  purchase  of  any  other  property, 
realty  or  personalty,  and  no  duty  is 
devolved  by  law  upon  defendant  to 
respond  to  the  liabilities,  whether 
in  contract  or  in  tort,  of  the  selling 
corporation.     A     mere     purchase     in 


CHAP.    XIV]     EFFECT    OF    EXECUTION    OF   CONTRACT   OF    SALE  §    163 

stated  by  the  Supreme  Court  of  Arkansas  in  Sappington  v. 
Little  Rock,  etc.  R.  Co.: '  "  It  would  not,  as  a  matter  of  law, 
by  virtue  of  its  purchase  of  the  property  and  franchises  of 
the  consolidated  company,  become  bound  to  fulfil  its  personal 
obligations,  as  distinct  from  those  which  were  liens  upon  the 
property.  If  the  purchasing  company  knew  of  any  equities 
against  the  other  in  favor  of  third  persons,  and  bought  subject 
to  them,  it  might  make  a  different  case,  and,  perhaps,  afford 
ground  for  some  appropriate  relief  in  chanceiy.  But  the  obli- 
gation is  not  transferred  ipso  facto  on  the  purchase.  Other- 
wise no  sale  could  ever  be  made  of  a  railroad,  from  fear  of 
coming  into  a  damnosa  haereditas." 

But  when  a  purchasing  corporation,  as  a  part  of  the  con- 
sideration for  the  transfer,  assumes  the  obligations  of  the 
vendor  company,  it  is,  manifestly,  liable  for  all  obligations 
whether  founded  in  contract  or  tort.^     It  has  been  held,  how- 


good  faith  for  value  imposes  no  such 
obligation." 

See  also: 

United  States :  Rice  v.  Norfolk,  etc. 
R.  Co.  153  Fed.  497  (1907). 

Arkansas:  Sappington  v.  Little 
Rock,  etc.  R.  Co.,  37  Ark.  23  (1881). 

District  of  Columbia:  Capital 
Traction  Co.  v.  OfTut,  17  App.  D.  C. 
292  (1900). 

Georgia:  Southern  R.  Co.  v. 
Puckett,  121  Ga.  322  (1904),  (48  S.  E. 
Rep.  9G8) ;  Hawkins  v.  Central  of 
Georgia  R.  Co.,  119  Ga.  159  (1903) 
(46  S.  E.  Rep.  82). 

Illinois :  Sartison  v.  Baltimore, 
etc.  R.  Co.,  103  111.  App.  507  (1902), 
Compare  Chicago,  etc.  R.  Co.  v.  Chi- 
cago, etc.  Coal  Co.,  79  111.  121  (1875). 

Kansas:  Hukle  v.  Atchison,  etc. 
R.  Co.,  71  Kan.  251  (1905),  (SO  Pac. 
Rejx  603). 

Missouri:  Ilageniann  i'.  Southern 
El.  R.  Co.,  202  Mo.  249  (1907),  (100 
S.  W.  Rep.  1081);  Lawson  v.  Illinois 
Southern  R.  Co.,  116  Mo.  App.  690 
(1906),  (94  S.  W.  Rep.  807);  Porter 
V.  Illinois  Southern  R.  Co.,  116  Mo. 
App.  526  (1906),  (92  S.  W.  Rep.  744) ; 


Kann  v.  Illinois  Southern  R.  Co., 
114  Mo.  App.  162  (1905)  (89  S.  W. 
Rep.  346). 

South  Carolina :  Hammond  v.  Port 
Royal,  etc.  R.  Co.,  15  S.  C.  10  (1881). 

Texas:  Texas  Central  R.  Co.  r. 
Lyons  (Tex.  Civ.  App.  1896).  (34  S. 
W.  Rep.  362). 

See  also  ante,  §  123:  "Liability 
of  Purchasing  Corporation  for  Debts 
of  Vendor  Company." 

'  Sappington  v.  Little  Rock,  etc. 
R.  Co.,  37  Ark.  27  (1881). 

-  Chesapeake,  etc.  R.  Co.  v.  Griest, 
85  Ky.  619  (1887),  (4  S.  W.  Rep. 
323).  See  also  Union  Trust  Co.  v. 
Illinois  Mid.  R.  Co.,  117  U.  S.  434 
(1886),  (6  Sup.  Ct.  Rep.  809);  Her- 
vey  t'.  Illinois  Mid.  R.  Co.,  28  Fed. 
169  (1884). 

Where  an  insolvent  railroad  com- 
pany .sold  its  railroad  to  another  com- 
j)any  ancl  furnisheil  a  guaranty  that 
the  property  sold  should  be  free  from 
inciunbrances,  and  that  all  claims 
against  the  vendor  company  should 
be  discharged  and  the  p\irchasing 
company  held  harmless  therefrom, 
it  was  held   that  the  guaranty  was 

309 


§163 


INTERCORPORATE    RELATIONS 


[part  II 


ever,  that  before  such  a  purchaser  can  be  held  Uable  for  a  tort 
committed  by  the  vendor  company  in  the  operation  of  the  road 
before  the  sale,  the  claim  must  be  reduced  to  judgment  in  an 
action  against  the  vendor.* 

A  provision  in  the  charter  of  a  railroad  company  authoriz- 
ing it  to  purchase  the  railroad  of  another  company  and  stipu- 


personal  to  the  purchasing  company 
and  was  not  enforceable  in  favor  of 
the  creditors  of  the  vendor  company. 

Randall  v.  Detroit,  etc.  R.  Co.,  134 
Mich.  493  (1903),  (96  N.  W.  Rep. 
567). 

Where  the  controlling  stockholder 
of  a  corporation  purchased  a  large 
amount  of  its  stock  and  agreed  with 
the  remaining  stockholders  to  give 
them  for  their  shares  stock  in  another 
corporation  upon  the  conversance 
thereto  of  the  property  and  franchises 
of  the  former  corporation,  it  was  held 
that  the  latter  corporation  became 
responsible  for  the  debts  of  the  former 
and  could  not  avoid  liability  upon  the 
ground  that  the  former  was  insolvent 
at  the  time  of  the  sale. 

Camden  Interstate  R.  Co.  v.  Lee, 
(Ky.    1905),    (84  S.   W.   Rep.   332). 

A  railroad  company  purchasing 
the  railroad  of  another  company 
without  assuming  its  debts  or  obliga- 
tions is  not  bound  to  honor  a  per- 
petvial  pass  given  by  the  vendor 
company  in  consideration  of  a  grant 
of  a  right  of  way.  Neither  does  a 
covenant  to  furnish  such  a  pass  run 
with  the  land. 

Dickey  v.  Railway  Co.,  122  Mo. 
223  (1894),  (26  S.  W.  Rep.  685). 

'  Where  the  purchasing  corpora- 
tion undertook  to  pay  "  all  current 
indebtedness"  incurred  by  the  vendor 
in  the  operation,  of  its  railroad,  it 
Was  held  that,  even  if  the  contract 
could  be  construed  to  render  the  pur- 
chaser liable  for  a  tort  committed  by 
the  vendor  in  the  operation  of  its 
road,  the  claim  must  first  be  reduced 
to  judgment  in  an  action  against  the 
vendor.     Chesapeake,     etc.     R.     Co. 

310 


V.  Griest,  85  Ky.  619  (1887),  (4  S.  W. 
Rep.  323). 

Where  a  railroad  company  took 
over  the  property  of  another  com- 
pany subject  to  the  pajrment  of  its 
indebtedness,  it  was  held  that  as  a 
claim  for  a  tort  could  not  be  enforced 
against  the  purchaser  until  judgment 
therefor  had  been  rendered  against 
the  vendor,  the  statute  of  limitations 
would  only  begin  to  run  upon  the 
rendition  of  such  judgment. 

Louisville,  etc.  R.  Co.  v.  Biddell, 
112  Ky.  494  (1902),  (66  S.W.Rep.34). 

Under  a  statute  authorizing  the 
incorporation  of  railroad  companies 
for  the  purpose  of  acquiring  railroads 
authorized  to  be  sold,  and  providing 
that,  in  case  of  purchase,  the  prop- 
erty should  pass  subject  to  all  claims 
for  damages,  and  also  providing  that 
the  purchasing  company  might  be 
made  a  party  to  pending  suits,  and 
that  in  case  a  judgment  had  been 
rendered  against  the  vendor  company 
execution  might  be  levied  against 
the  propertj'  in  the  hands  of  the 
vendee,  it  was  held : 

(1)  That  a  judgment  for  a  tort 
against  the  vendee  corporation  was 
binding  upon  the  vendor  although 
it  had  not  been  made  a  party  to  the 
suit ; 

(2)  That  as  the  claim  could  not 
have  been  enforced  against  the  pur- 
chasing company  until  judgment 
had  been  rendered  against  the  vendor, 
the  statute  of  limitations  did  not  be- 
gin to  run  in  favor  of  the  purchaser 
until  after  judgment. 

Missouri,  etc.  R.  Co.  v.  Warner, 
30  Tex.  Civ.  App.  280  (1902),  (70 
S.  W.  Rep.  365). 


CHAP.    XIV]     EFFECT    OF    EXECUTION    OF   CONTRACT    OF    SALE  §    164 


lating  that  the  sale  shall  in  no  way  affect  the  rights  of  the 
latter's  creditors,  protects  unsecured  creditors.'  The  word 
"  indebtedness,"  as  used  in  a  statute  providing  that  a  pur- 
chasing railroad  company  shall  assume  the  indebtedness  of 
its  vendor,  embraces  all  debts  and  demands  —  claims  founded 
both  upon  tort  and  contract.- 

§  164.  Status  of  Foreign  Vendee  Corporation.  —  The  legisla- 
ture, in  granting  to  a  foreign  corporation  {)o\ver  to  purchase 
a  railroad  and  franchises  within  the  State,  may  describe  the 
terms  and  conditions  upon  which  the  purchase  may  be  made 
and  define  the  status,  within  the  State,  of  the  purchasing  cor- 
poration.^ And,  in  Georgia,  it  has  been  held  that  where  per- 
mission to  a  foreign  corporation  to  purchase  a  domestic  rail- 
road is  made  the  subject  of  an  original  and  tlirect  grant  by 
the  legislature,  the  purchasing  corporation,  upon  the  purchase. 
"  becomes  eo  instanti  the  offspring  of  the  legislative  will  of 
the  State."  * 


Co.     V.       § 


'  Montgomery,     etc.      R. 
Branch,  59  Ala.  139  (1877). 

2  Chicago,  etc.  R.  Co.  v.  Lund- 
strom,  16  Neb.  254  (1884),  (20  N.  W. 
Rep.  198,  49  Am.  Rep.  718). 

Where  a  railroad  company  ac- 
quired the  property  of  another  rail- 
road company  subject  to  its  bonded 
indebtedness  and  "all  other  indebt- 
edness," it  was  held  that  the  term 
"indebtedness"  should  be  broadly 
construed  as  including  claims  for  torts, 
as  well  as  contractual  liabilities. 

Louisville,  etc.  R.  Co.  v.  Biddell, 
112  Ky.  494  (1902),  (GO  S.  W.  Rep. 
34). 

The  following  statutes  provide,  in 
substance,  that  the  sale  of  a  railroad 
as  therein  authorized  shall  not  affect 
the  rights  of  creditors:  Alabama, 
Code  1896,  §  1169  (as  amended  in 
1899);  Arizona,  R.  S.  1901,  par.  864, 
§  1  ;  Arkansas,  S.  &  H.  Dig.  1894, 
§  6188;  California,  Pomeroy's  Code 
1901,  §  494;  Afichigan,  Comp.  Laws 
1897,  §  6328;  Nebraska,  Comp.  Stat. 
1901,  §§  1769,  4020,  4024,  4026; 
New  Jersey,  Laws  1900,  ch.  46,  p.  70; 
Ohio,  Bates'  Anno.  Stat.  (17S7-1902), 


1898, 


3300;       Wiscon.nn,      Stat. 
§  1833  (as  amended  in  1899). 

»  State  V.  Chicago,  etc.  R.  Co.,  89 
Mo.  523  (1886),  (14  S.  W.  Rep.  522). 

*  Angier  v.  East  Tennessee,  etc.  R. 
Co.,  74  Ga.  640  (1885).  The  Court 
said  (p.  641):  "The  truth  is  to  be 
ascertained  whether  the  State  in- 
tended merely  to  license  a  foreigner 
to  exercise  franchises  and  buy  a 
charter  she  granted  to  another  with- 
out assuming  all  the  liabilities  which 
the  charter  it  bought  rc<iuired, 
or  did  she  intend  it  to  be  a  domestic 
corporation  and  under  all  the  obliga- 
tions of  corporate  citizenship?  It  is 
a  question  of  intention ;  and  it  can- 
not' be  that  she  meant  to  make  any 
such  contract,  with  but  one  side  to  it, 
with  anybody,  natural  or  artificial, 
that  might  buy  the  charter  she  had 
granted.  It  must  be  that  she  in- 
tended, and  expressed  the  intention 
in  plain  words,  to  substitute  the  pur- 
chaser for  the  entitys  he  allowed  to  be 
purchased  and  to  make  the  ])urcha.'<cr 
subject  to  her  control  within  her 
own  borders  as  fully  as  the  seller  of 
the  charter  had  been  before  the  sale." 

311 


§   165  INTERCORPORATE   RELATIONS  [PART   III 


PART   III 
CORPORATE  LEASES 


Article   I 
CHAPTER   XV 

LEASES  OF  CORPORATE  PROPERTY  AND  FRANCHISES 

I.    Leases  of  Property  of  Private  Corporations 

§  165.  Power  to  lease  and  take  a  Lease  generally. 

§  166.  Lease  of  Entire  Property  of  Prosperous  Corporation. 

§  167.  Lease  of  Entire  Property  of  Losing  Corporation. 

§  168.  Voidable  Leases. 

§  169.  Remedies  of  Objecting  Stockholders. 

II.    Leases  of  Property  and  Franchises  of  Quasi-public  Corporations 

§  170.  Distinction  between  Leases  of  Private  and  Qwosi-public  Corporations. 

§  171.  Leases  of  Indispensable  Property  of  Quasi-public  Corporation. 

§  172.  Leases  of  Surplus  Property. 

§  173.  Leases  of  Franchises. 

§  174.  Railroad  Leases  typical  of  Leases  of  Quasz-public  Corporations. 

I.    Leases  of  Property  of  Private  Corporations 

§  165.  Power  to  lease  and  take  a  Lease  generally.  —  Every 
corporation,  as  an  incident  to  its  existence,  has  power  to  ac- 
quire and  dispose  of  property.^  The  greater  power  to  sell 
and  purchase  includes  the  lesser  power  to  lease  and  take  a 
lease.^ 

>  See  ante,  §  108:    "Power  to  pur-  Ct.  97  (1885),  that  authority  granted 

chase  and  sell  generally."  to    a   corporation   to   sell   real   estate 

2  The     decision     in     Metropolitan  not  required  for   its   use  did   not   au- 

Concert  Co.  v.  Abbey,  52  N.  Y.  Super.  thorize  a  lease  thereof  for  a  term  of 

312 


CHAP.  XV]      LEASES  OF  PROPERTY  AND  FRANCHISES 


§  165 


A  corporation  has  implied  power  to  lease  any  portion  of 
its  property  not  required  for  the  purposes  of  its  business;* 
and  may  take  a  lease  of  property  for  the  purpose  of  promoting 
its  legitimate  interests,'  but  not  for  a  purpose  entirely  foreign 
thereto.^ 


years  cannot  be  justified  upon  prin- 
ciple. 

In  State  v.  New  Orleans  Ware- 
house Co.,  109  La.  69  (1902)  (33 
So.  Rep.  81)  the  Court  said:  "This 
corporation  had  the  right  to  sell  the 
property.  We  think,  under  the  cir- 
cumstances, that  the  power  to  sell 
carries  with  it  the   power  to  lea.se." 

'  Indiana :  Phillips  v.  Aurora  Lodge, 
87  Ind.  505  (1882). 

Illinois:  Keeley  Brewing  Co.  v. 
Mason,     116    111.    App.    603  (1904). 

Massachusetts :  Nye  v.  Storer,  168 
Mass.  53  (1897),  (46  N.  E.  Rep.  402). 
In  this  case  it  was  held  that  a  corpora- 
tion authorized  by  its  charter  to  hold 
propert}^  might  lease  it  so  as  to  pro- 
duce an  income,  for  purpo.ses  entirely 
different  from  its  own  objects  of  in- 
corporation. 

Missouri :  Gilliland  v.  Chicago,  etc., 
R.  Co.,  19  Mo.  App.  411  (1885). 

New  York:  Denike  v.  New  York, 
etc.  Cement  Co.,  80  N.  Y.  599  (1880) ; 
Smith  V.  Berndt,  1  N.  Y.  Supp.  108 
(1888). 

Pennsylvania :  Ardesco  Oil  Co.  v. 
North  American  Oil,  etc.  Co.,  66  Pa. 
St.  375  (1870). 

Tennessee  .•  Coal  Creek,  etc.  Co.  v. 
Tennessee  Coal,  etc.  Co.,  106  Tenn. 
651   (1901),  (62  S.  W.  Rep.  162). 

England :  Featherstonhaugh  v. 
Lee  Moor  Porcelain  Clay  Co.,  L.  R.  1 
Eq.  318  (1865);  Simpson  v.  West- 
minster, etc.  Hotel  Co.,  8  H.  L.  Cas. 
712  (1860). 


'  Cecum  Co.  V.  A.  &  W.  Sprague 
Mfg.  Co.,  34  Conn.  529  (1808).  In 
this  case  it  was  held  that  a  corpora- 
tion, chartered  for  a  specific  purpose, 
had    no    power     to     take     a     lease 


Power  to  sell  land  includes  power 
to  lea.se  with  an  option  of  purchase. 
Re  Female  Orphan  Asj-lum,  17  L.  T. 
(N.  s.)  59  (1867). 

If  a  corporation  exceed  its  powers 
in  the  purchase  of  property  it  may 
nevertheless  lease  it  and  reco"er 
against  a  third  person  on  a  guaranty 
of  the  rent.  Nantasket  Beach  S.  S. 
Co.  V.  Shea,  182  Mass.  147  (1902), 
(65  N.  E.  Rep.  57). 

A  lease  of  the  real  estate  used  by 
a  corporation  to  carry  on  its  business 
does  not  constitute  an  abandonment 
of  the  purposes  for  which  it  was 
created. 

Starke  v.  J.  M.  Guffey  Petroleum 
Co.,  98  Tex.  542  (1905),  (86  S.  W. 
Rep.  1). 

"Abby  V.  Billups,  35  Miss.  618 
(1858),  (72  Am.  Dec.  143);  Crawford 
V.  Longstreet,  43  N.  J.  L.  325  (1881). 
In  Jacksonville,  etc.  R.  Co.  v.  Hooper, 
160  U.  S.  514  (1896),  (16  Sup.  Ct. 
Rep.  379),  it  was  held  that  a  railroad 
company  might  lease  and  maintain 
a  hotel  at  its  terminus.  The  Court 
said  (p.  523):  "Courts  may  be  per- 
mitted, where  there  is  no  legislative 
prohibition  shown,  to  put  a  favorable 
construction  upon  such  exercise  of 
power  by  a  railroad  company  as  is 
suitable  to  promote  the  success  of 
the  company,  within  its  chartered 
powers,  and  to  contribute  to  the 
comfort  of  those  who  travel  thereon. 
To  lease  and  maintain  a  summer 
hotel    at    the    seaside    terminus   of    a 


property  not  needed  for  that  purpose, 
with  the  intention  antl  for  the  object 
of  hara-ssing  another  party  by  the 
use,  under  the  forms  of  law,  of  tlie 
supposed  rights  thus  obtained. 

313 


i  iOO 


INTERCORPORATE   RELATIONS 


[part   III 


§  166.    Lease  of  Entire  Property  of  Prosperous  Corporation. 

—  While  a  lease  of  a  portion  of  the  property  of  a  corporation  — 
not  impairing  its  capacity  to  do  business  —  may  be  authorized 
by  its  directors  or  a  majority  of  its  stockholders,  they  have  no 
authority  to  lease  the  entire  property  and  business  of  the  cor- 
poration. A  lease  by  a  prosperous  corporation  of  all  its  prop- 
erty constitutes  such  a  departure  from  the  purpose  for  which 
it  was  organized  that,  in  the  absence  of  express  statutorj' 
authority,  it  can  be  authorized  only  by  the  unanimous  consent 
of  its  stockholders.' 


railroad  might,  obviously,  increase 
the  business  of  the  company  and  the 
comfort  of  its  passengers,  and  be 
within  the  provisions  of  the  statute 
of  Florida  above  cited,  whereby  a 
railroad  company  is  authorized  'to 
sell,  lease,  or  buy  any  land  or  real 
estate  necessary  for  its  use,'  and  to 
'erect  and  maintain  all  convenient 
buildings  .  .  .  for  the  accommoda- 
tion and  use  of  their  passengers.'  " 

A  foreign  corporation  has  power  to 
take  a  lease  of  property  necessary  for 
the  transaction  of  its  business. 
Northern  Transportation  Co.  v.  Chi- 
cago, 7  Biss.  (U.  S.)  45  (1874), 
affirmed  99  U.  S.  635  (1878). 

>  In  Cass  V.  Manchester,  etc.  Co., 
9  Fed.  642  (1881),  Judge  McKennan 
said:  "The  change  propo.sed  here  is 
not  organic,  it  is  true,  but  it  is  thor- 
ough and  fimdamental,  as  it  affects 
the  administration  of  the  company's 
affairs.  It  involves  a  withdrawal, 
from  the  control  and  management 
of  the  stockholders,  of  the  entire 
property  of  the  corporation  for  a 
period  of  at  least  five  years;  it  will 
preclude,  for  a  like  period,  the  exercise 
annually  by  the  stockholders  of  their 
judgment  as  to  the  particular  char- 
acter and  method  of  conducting  the 
business  affairs  of  the  corporation." 

In  Small  v.  Minneapolis,  etc.  Co., 
45  Minn.  267  (1891),  (47  N.  W.  Rep. 
797),  the  Court  said:  "We  need  not 
inquire  how  far,  or  under  what  cir- 
cumstances,  considerations  of  public 

314 


policy  and  of  the  general  interests 
of  the  State  may  affect  the  right  of  a 
corporation  to  discontinue  the  busi- 
ness for  which  it  was  created,  and  to 
surrender  to  another  corporation  its 
property  and  the  conduct  of  such 
business.  We  do  decide  that  such  a 
surrender  of  the  property,  and,  so 
far  as  possible,  of  the  functions  of  a 
corporation,  in  order  that,  while  it 
is  still  to  continue  in  existence,  its 
business  can  be  carried  on  by  another 
corporation,  to  which  such  transfer 
is  made,  would  violate  the  rights  of  a 
non-assenting  stockholder  arising  from 
a  contract  implied,  if  not  expressed, 
in  the  creation  of  such  an  organiza- 
tion, and  he  would  be  entitled  to 
have  such  acts  restrained  by  injunc- 
tion." 

A  manufacturing  corporation  made 
a  lease  of  its  plant  and  all  its  propert}' 
to  its  president  for  a  term  of  two  and 
one-half  years  and  it  was  held  that  the . 
lease  was  void  in  that  it  suspended 
the  business  of  the  corporation  for 
more  than  a  year,  and  that  it 
amounted  to  a  surrender  of  the  char- 
ter of  the  corporation,  under  a  stat- 
ute providing  that  a  corporation, 
suspending  its  ordinary-  business  for 
more  than  a  3'ear,  should  be  deemed 
to  have  surrendered  its  charter. 
Conro  r.  Port  Henrj'  Iron  Co.,  12 
Barb.  (N.  Y.)  27  (1851).  See  also 
Copeland  v.  Citizens  Gaslight  Co.,  61 
Barb.  (N.  Y.)  60  (1871). 

Where  a  solvent   corporation  has 


CHAP.  XV]      LEASES  OF  PROPERTY  AND  FRANCHISES 


166 


This  limitation  upon  the  power  of  the  majority  is  entirely 
apart  from  any  public  duty  the  corporation  may  owe.  It  is 
founded  upon  the  principle  that  every  stockholder  in  a  going 
concern  has  a  right  to  insist  that  its  affairs  be  administered 
by  its  own  officers.  He  is  entitled  to  participate  in  dictating 
the  policy  of  the  company  and  to  receive  a  proportion  of  the 


no  express  power  to  lease  all  its 
property,  and  it  appears  that  in  ad- 
dition to  its  tangible  property  a 
large  part  of  the  subscriptions  to  its 
capital  stock  are  unpaid,  a  lease  of 
its  entire  property  upon  the  ground 
that  it  is  impossible  to  obtain  capital 
to  carry  on  the  business,  by  vote  of  a 
majority  of  the  stockholders,  will  be 
set  aside  at  the  suit  of  a  dissenting 
stockholder. 

Parsons  v.  Tacoina  Smelt,  etc.  Co., 
25  Wash.  492  (1901),  (Go  Pac.  Rep. 
765). 

It  has  been  held,  however,  that 
when  a  corporation  is  expressly 
authorized  by  its  charter  to  lease  its 
property  it  may  lease  its  entire 
property,  although  it  is  thereby 
disabled  from  continuing  business. 
Gubernator  v.  City  of  New  Orleans, 
20  La.  Ann.  106  (1S68).  In  tliis  case 
the  Court  said  (p.  107):  "The  power 
to  lease,  granted  by  the  charter,  is 
unlimited  and  unrestricted;  no  dis- 
tinction is  made  whether  or  not  it  be 
for  the  whole  or  a  part  of  the  property. 
How  can  we  discriminate  and  distin- 
guish when  the  law  does  not?  Ubi 
lex  -non  distinguit,  nee  nos  dislinguere 
debermts.  Were  we  to  attempt  to 
draw  a  line  of  restriction  and  limita- 
tion, where  would  we  trace  it?  It 
would  be  an  arbitrarj'  e.xercise  of 
power  on  our  part,  reprobated  by 
law." 

And  in  Starke  v.  J.  M.  Gaflfey 
Petroleum  Co.,  98  Tex.  542  (1905), 
(86  S.  W.  Rep.  1,  4),  it  was  said: 
"There  is  some  conflict  of  authority 
upon  the  power  of  a  private  corpora- 
tion, at  common  law,  to  lease  for  a 
term  of  years  all  of  the  property  used 


in  the  transaction  of  its  business. 
.  .  .  These  cases  are  based  upon  the 
broad  proposition,  that  the  power 
to  lease  does  not  exist  in  a  private 
corporation,  and  therefore  a  lease 
made  by  such  corporation  is  void, 
and  amounts  to  an  abandonment 
of  the  purposes  for  which  it  was  in- 
corporated. .  .  .  The  cases  which 
hold  adversely  to  our  conclusion 
rest  upon  the  proposition  that  the 
charter  of  a  corporation  is  a  contract 
between  its  stockholders  to  the  effect 
that  the  funds  put  into  the  business 
should  not  be  diverted  to  any  other 
use  or  purpose  without  the  consent  of 
all.  This  is  a  .sound  principle  .  .  .  ; 
but  from  that  proposition  it  is  argued 
that  the  lease  is  a  departure  from 
the  purposes  for  which  the  corpora- 
tion was  formed,  which  had  in  view 
the  management  of  the  business  by 
the  directors  themselves,  and  is 
therefore  a  violation  of  the  terms  of 
the  contract  between  the  stockholders. 
The  reasoning  cannot  apply  as  to 
corporations  in  this  State,  because 
when  the  contract  was  formed  (that 
is,  when  the  charter  was  filed)  the 
law  authorized  the  corporation  to 
lease  its  property,  and  each  stock- 
holder entered  into  the  contract 
(that  is,  into  the  corporation)  with 
the  understanding  and  knowledge 
of  the  fact  that  in  doing  so  he  em- 
powered the  directors  to  lease  the 
property.  The  lease  was  not  ultra 
vires  but  was  made  by  virtue  of  the 
power  expressly  given  by  the  statute. 
It  was  not  a  violation  of  the  con- 
tract between  the  stockholders,  but 
was  made  in  pursuance  of  the  terms 
of  the  contract  —  the  charter." 

31.") 


§167 


INTERCORPORATE   RELATIONS 


[part   III 


profits  of  the  enterprise  rather  than  a  share  of  a  fixed  rental. 
He  cannot  be  compelled  to  accept  an  annuity  in  lieu  of  his 
share  in  the  profits. 

§  167.  Lease  of  Entire  Property  of  Losing  Corporation.  — 
When  a  corporation  is  in  a  position  where  it  cannot  further 
profitably  cany  on  its  business  and  is  a  losing  concern,  a  major- 
ity of  its  stockholders,  for  the  purpose  of  protecting  the  whole 
body  from  further  loss  and  as  a  method  of  winding  up  the  affairs 
of  the  corporation,  may  authorize  the  lease  of  its  entire  property 
and  business  to  another  corporation  or  person,  provision  being 
made  for  creditors.^  But  a  lease  —  which  must  necessarily 
occasion  delay  in  winding  up  the  affairs  of  a  corporation  and 
in  distributing  its  assets  —  can  only  be  justified,  under  such 
circumstances,  when  it  appears  to  be  the  best  method  of  real- 
izing upon  the  assets  of  the  company.  Its  term  must  be  fixed 
with  reference  to  the  fact  that  it  is  executed  only  as  a  method  of 
winding  up  the  affairs  of  the  corporation  within  a  reasonable 
time.  A  lease  for  a  long  term  of  years  would  be  invalid  with- 
out the  unanimous  consent  of  the  stockholders.^ 


1  Denike  v.  New  York,  etc.  Cement 
Co.,  80  N.  Y.  608  (1880) :  "The  lessee 
by  the  terms  of  the  lease  was  to  carry 
on  the  business  of  manufacturing  and 
selling  cement,  so  that  the  brand  of 
the  company  would  be  kept  before 
the  public.  I  do  not  understand  that 
this  company  could  not  lawfully  tem- 
porarily lease  its  property  to  some  per- 
son who  would  carry  on  its  business 
when  it  could  not  profitably  do  so." 

A  manufacturing  corporation,  for 
the  purpose  of  protecting  its  stock- 
holders from  further  loss,  may  discon- 
tinue the  business  and  sell  or  lease  its 
property.  Skinner  v.  Smith,  134 
N.  Y.  240  (1892),  (31  N.  E.  Rep.  911). 

A  private  corporation  has  the 
power  to  rent  its  property  for  the 
purpose  of  raising  money  necessary 
to  pay  a  pressing  indebtedness  which 
cannot  otherwise  be  met,  when  it 
appears  that  svich  a  course  is  neces- 
sary for  its  protection,  and  is  entered 
into  in  good  faith,  and  especially 
when    it    further    appears    that    the 

316 


arrangement  is  temporary  and  there 
is  no  purpose  on  the  part  of  the  lessor 
to  abandon  its  corporate  powers. 

Plant  V.  Macon  Oil,  etc.  Co.,  103 
Ga.  666  (1898),  (30  S.  E.  Rep.  567). 

The  directors  of  a  manufacturing 
company  which  has  been  unsuccess- 
fully carrj-ing  on  business  and  whose 
financial  standing  is  impaired,  may, 
with  the  consent  of  a  majority  of 
the  stockholders,  lease  its  entire 
plant  and  business  to  another  cor- 
poration for  ten  years  with  the  priv- 
ilege of  purchase,  the  lease  being  the 
best  means  of  preventing  insolvency 
and  the  transaction  being  in  good 
faith.  Bartholomew  v.  Derby  Rubber 
Co.,  69  Conn.  521  (1897),  (38  Atl. 
Rep.  45,  61  Am.  St.  Rep.  57). 

See  Shawnee  Compress  Co.  v.  An- 
derson, decided  by  U.  S.  Supreme 
Court,  April,  1908,  affirming  17  Okl. 
231  (1906).  And  see  ante,  §  111: 
"Sale  of  Entire  Property  of  Losing 
Corporation  by  Majority  Vote." 

'  In    an    English    case,    however. 


CHAP.  XV]      LEASES  OF  PROPERTY  AND  FRANCHISES 


§  168 


It  has  been  held  that  even  a  long  term  lease  might  be  exe- 
cuted if  provision  were  made  for  paying  dissenting  stock- 
holders, at  their  option,  the  cash  value  of  their  shares.'  Un- 
less so  provided  by  statute,  however,  the  scheme  is  open  to 
the  objection  that  it  gives  a  dissenting  stockholder  a  theo- 
retical distributive  share  instead  of  the  actual  share  of  the 
assets  to  which  he  is  entitled.^  If  such  a  method  be  pro- 
vided, it  can  only  be  followed  w'hen  it  is  clear  that  the  corpo- 
ration is  a  losing  concern.  It  can  never  be  adopted  for  the 
purpose  of  forcing  a  stockholder  in  a  prosperous  company 
either  to  sell  out  or  to  consent  to  a  lease. 

§  168.  Voidable  Leases.  —  The  directors  of  a  corporation  are 
its  trustees.  They  cannot  tleal  with  corporate  property  for 
their  personal  benefit.  A  lease  of  the  property  of  a  corpora- 
tion to  another  corporation  in  which  a  director  is  interested  is 
voidable  at  the  option  of  either  corporation.^     When  the  cor- 


vvhere  wide  powers  were  given  by  the 
clauses  of  the  charter  of  a  porcelain 
company  to  a  two-thirds  vote  of  the 
stockholders,  it  was  held  that,  after 
a  period  of  nine  years  of  unsuccessful 
working,  a  majority  of  two-thirds  of 
the  shareholders  in  general  meeting 
were  empowered,  under  such  clauses, 
to  authorize  the  directors  to  make  a 
valid  mining  lease  for  twenty-one 
years  of  tlie  whole  of  the  works  and 
buildings  of  the  companj'.  Semble, 
the  clauses  would  not  authorize  the 
like  majority  to  engage  the  company 
in  a  new  enterjjrise  wholly  uncon- 
nected with  their  original  purpose. 
Featherstonhaugh  v.  Lee  Moor  Porce- 
lain Clay  Co.,  L.  R.  1  Eq.  318  (1805). 
'  In  Black  v.  Delaware,  etc.  Canal 
Co.,  22  N.  J.  Eq.  415  (1871),  Chancel- 
lor Zabriskie  said:  "If  I  am  right  in 
tlie  conclusion  arrived  at  above,  that 
the  majority  of  corporators  under  a 
charter,  which  specifies  no  definite 
time  for  its  continuance,  have  a  riglit 
to  abandon  the  undertaking,  and  dis- 
pose of  and  divide  the  property,  the 
proceeding  in  this  case  is  valid  as 
against  the  complainants  as  a  lawful 
way  of  accomplishing  that  end  as  to 


them.  Two-thirds  of  these  corpora- 
tors have  determined  that  thej'  do 
not  desire  to  go  on  with  these  enter- 
prises, under  the  charters,  and  that 
thej''  wish  to  abandon  them,  and  are 
willing  to  accept  as  their  share  of  the 
corporate  proj^crty  a  yearly  rent  or 
annuity  secured  by  a  provision  like 
that  contained  in  this  proposed  lease. 
Some  stockholders  are  not  willing; 
and  although  the  majority  can  effect 
the  abandonment,  they  cannot  compel 
the  dissentients  to  accejjt  like  coni- 
pen.sation  for  their  stock;  it  niiglit 
be  compelling  them  to  embark  in  a 
new  enterprise.  Provision  is,  there- 
fore, made  to  pay  or  return  to  them 
the  full  value  of  their  share  of  the 
whole  property  of  the  corporation. 
Tliis  is  all  they  would  have  if  the 
works  were  sold  out.  The  provision 
is  a  most  equitable  one,  and  without 
it  the  transaction,  even  if  valid  and 
legal,  would  not  be  ecjuitable  and 
just." 

*  See  ante,  §  121:  "Appraisal  of 
Stock  of  Dissenting  Stockholders." 

'  Where  a  trustee  of  a  corporation, 
whose  presence  is  necessary  to  make 
a  majority  for  the  transaction  of  cor- 

.317 


§    168  INTERCORPORATE    RELATIONS  [PART   111 

poration  fails  to  act  a  court  of  equity  may  intervene  at  the 
instance  of  any  stockholder. 

The  majority  of  the  stockholders  of  a  corporation  stand  in 
a  similar  fiduciary  relation  towards  the  minority.  They  can 
authorize  the  lease  of  corporate  property  to  another  corpo- 
ration, controlled  by  themselves,  only  when  they  act  in  the 
utmost  good  faith  towards  minority  stockholders.  In  Meeker 
V.  Winthrop  Iron  Co}  Judge  Baxter  in  declaring  void,  as  a 
fraud  upon  minority  stockholders,  a  lease  of  a  mining  property 
authorized  by  a  majority  of  the  stockholders  of  a  corporation 
to  another  corporation  of  which  they  likewise  held  control, 
said:  "  The  ownership  of  a  majority  of  the  capital  stock  of  a 
corporation  invests  the  holders  thereof  with  many  and  valuable 
incidental  rights.  They  may  legally  control  the  company's 
business,  prescribe  its  general  policy,  make  themselves  its 
agents,  and  take  reasonable  compensation  for  their  services. 
But,  in  thus  assuming  control,  they  also  take  upon  themselves 
the  correlative  duty  of  diligence  and  good  faith.  They  cannot 
lawfully  manipulate  the  company's  business  in  their  own 
interests  to  the  injury  of  other  corporators.^ 

porate  business,   is  interested  in  an-  ^  Where  one  corporation  purchases 

other  corporation  to  which  the  board  a  controlhng  interest  in  the  stock  of 

vote  to  lease  the  entire  property  of  the  another  and  thereby  elects  directors 

corporation,    the    lease,    executed    in  and  secures  a  lease  of  the  property  of 

pursuance  of  such  authority,  is  void-  such    corporation   on    its   own   terms 

able  upon  the  complaint  of  any  stock-  and  conditions,   it  is  held  that  such 

holder.     Parsons  v.  Tacoma  Smelting,  lease  will  be  set  aside  at  the  suit  of 

etc.   Co.,   25  Wash.    492    (1901),    (65  minority    stockholders    of    the    latter 

Pac.   Rep.  765).  company,      even      though      obtained 

A  lease  by  an  officer  of  a  corpora-  without  actual  fraud. 

tion  of   property   to   the  corporation  Glengary     Consol.     Min.     Co.     v. 

may  be  binding  upon   the  company  Boehmer,  28  Colo.  1  (1900),  (62  Pac, 

when  made  in  good  faith  and  ratified  839). 

by  it  by  taking  possession  and  paying  In    Shaw    v.    Davis,    78    Md.    308 

rent  for  a  time  according  to  the  terms  (1894),  (28  Atl.  Rep.  619,  23  L.  R.  A. 

of  the  lease.     Louisville,  etc.  R.  Co.  v.  294),     however,     where    a    minority 

Carson,  151  111.  444  (1894),  (38  N.  E.  stockholder  filed    a    bill  against  the 

Rep.    140).     See    also    post,    §    248:  majority     stockholders     and     officers 

"Voidable  Railroad  Leases."  of     a    corporation     praying     an     in- 

>  Meeker  v.  Winthrop  Iron  Co.,  17  junction     restraining     the    execution 

Fed.  50  (1883).     See  also  cases  cited  of    a    lease   of   the   property   of   such 

in   notes   to   post,    §    248:     "Voidable  corporation  to  another  corporation  in 

Railroad    Leases "    and   in   notes    to  which    such    majority    likewise    held 

§  114,  ante.  controlling   interests,   the  Court  said 

318 


CHAP.  XV]     LEASES  OF  PROPERTY  AND  FRANCHISES 


§  160 


§  169.  Remedies  of  Objecting  Stockholders.  —  Any  stock- 
holder in  a  prosperous  corporation  who  objects  to  a  lease  of 
the  entire  property  and  business  of  his  corporation  is  entitled 
to  an  injunction  to  restrain  its  execution.*  But  an  injunction 
will  not  be  granted  where  a  lease  of  only  a  part  of  the  property 
of  the  corporation,  insufficient  to  interfere  with  the  continued 
prosecution  of  its  business,  is  contemplated.' 

Courts  of  equity,  at  the  instance  of  stockholders,  will  also 
issue  injunctions  to  restrain  the  execution  of  leases  authorized 
by  directors  or  majority  stockholders  in  violation  of  their 
fiduciary  obligations.^ 


(p.  318):  "The  fact  that  the  same 
persons  hold  the  majority  of  the 
stock  in  both  companies  does  not  of 
itself  enlarge  the  court's  jurisdiction; 
the  act  complained  of  furnishes  the 
test  of  jurisdiction,  and  it  must  be 
ultra  mres,  fraudulent  or  illegal ;  noth- 
ing short  of  this  will  suffice.  This  is 
true  even  in  a  case  where  directors 
and  not  stockholders  do  the  act  com- 
plained of.  And  for  stronger  and 
more  obvious  reasons  it  is  also  true 
in  a  case  where  .stockholders  them- 
selves act  directly.  They  are  not 
trustees  or  quasi-trustees  for  each 
other." 

But  this  last  statement  is  contrary 
to  the  weight  of  authority.  See  post, 
§  3(K):  "Trust  Relation  of  Controlling 
Corporation  to  Minoritrj  Stockholders" 
and  cases  cited. 

A  domestic  corporation  acquired 
a  controlling  interest  in  a  foreign 
corporation  and  took  a  lease  of  its 
property,  promising  to  pay  rent  in 
the  form  of  dividends  to  the  stock- 
holders of  the  lessor  corporation  and, 
after  various  transfers  of  this  con- 
trolling stock  interest,  it  came  into 
the  hands  of  a  corporation  which 
proposed  to  vote  such  controlling 
stock  to  rescind  the  agreement  and 
avoid  paying  the  dividend.  It  was 
held  that  a  minority  stockholder  of 
the  lessor  corporation  was  entitled  to 
restrain  such  action,  as  being  so  detri- 


mental to  the  interests  of  the  lessor 
corporation  as  to  lead  to  the  inference 
that  the  interests  of  the  majority 
stockholders  were  opposed  to  those 
of  tiie  corporation  as  well  as  to  those 
of  the  minority,  and  also  because 
such  action  was  so  oppressive  to  the 
minority  as  to  amount  to  fraud. 

McLear>-  v.  Erie  Tel.,  etc.  Co.,  38 
Misc.  (N.  Y.)  3  (1902),  (76  N.  Y. 
Supp.  712). 

'  A  stockholder  in  a  manufacturing 
corporation  may  enjoin  a  lease,  au- 
thorized by  a  majority  of  the  stock- 
holders, of  all  its  property  and  busi- 
ness for  twentj'-five  years  at  a  rental 
equal  to  one-half  the  profits  derived 
from  the  busine.'^s.  Small  v.  Min- 
neapolis, etc.  Co.,  45  Minn.  2G4  (1891), 
(47  N.  W.  Rep.  797).  Also  Copeland 
V.  Citizens  Gaslight  Co.,  61  Barb. 
(N.  Y.)  60  (1871). 

That  a  lease,  altliough  unlawful, 
does  not  give  a  portion  of  the  stock- 
holders a  standing  in  equity  to  ask 
for  the  dissohition  of  the  corporation, 
see  Denike  v.  New  York,  etc.  Cement 
Co.,  80  N.  Y.  599  (1880).  See  also 
ante,  §  114:  "Remedies  of  Dissentitig 
Stockholders  in  Case  of  Invalid  or  Un- 
fair Sales.      Voidable  Sales." 

^  Small  V.  Miiuieapolis,  etc.  Co.,  57 
Hun  (N.  Y.),  587  (1890),  (10  N.  Y. 
Supp.  456). 

3  Meeker  r.  Winthrop  Iron  Co.,  17 
Fed.  48  (1883);     Parsons  v.  Tacoma 

.319 


§    172  INTERCORPORATE    RELATIOfJS  [PART    III 

II.    Leases  of  Property  and  Franchises  of  Quasi-public 
Corporations 

§  170.  Distinction  between  Leases  of  Private  and  Quasi- 
public  Corporations.  —  Leases  of  guasi-public  corporations  vary 
from  those  executed  by  private  corporations,  owing  no  public 
duties,  in  their  need  of  the  approval  of  the  State,  in  the  for- 
malities attending  their  execution,  and  in  their  essential  na- 
ture. A  lease  by  a  private  corporation  is  generally  an  inci- 
dent to  its  business,  runs  for  a  limited  term  and  is  analogous 
to  a  lease  by  a  natural  person.  A  lease  by  a  guasi-public 
corporation  of  its  property  and  franchises  requires  legislative 
sanction,  mast  follow  the  conditions  of  the  legislative  grant, 
and  is,  when  executed  for  the  customary  periods  —  ninety- 
nine  or  nine  hundred  and  ninety-nine  years  —  substantiall}'  a 
sale  in  consideration  of  an  annuity.  While  the  relation  of  the 
parties  is  that  of  landlord  and  tenant,  and  the  lease  may  be  the 
subject  of  forfeiture,  for  practical  purposes  based  upon  present 
and  future  control  of  the  franchises  and  property,  the  lessee 
stands  in  the  position  of  owner. 

§  171.  Leases  of  Indispensable  Property  of  Quasi-public  Cor- 
poration. —  Upon  principles  already  considered,  property  neces- 
sary for  the  performance  of  the  public  duties  of  a  quasi-puhYic 
corporation  cannot  be  leased  without  statutory  authority.^ 
The  test  of  indispensability  applicable  in  the  case  of  corporate 
sales  applies  in  the  case  of  corporate  leases.- 

§  172.  Leases  of  Surplus  Property.  — The  greater  power  to 
sell  and  absolutely  convey  the  surplus  property  of  a  quasi- 
public  corporation  includes  the  lesser  power  to  lease  it.^ 

In  the  absence  of  a  statutory  prohibition,  such  a  corporation 
may  lease  its  property,  real  and  personal,  not  necessary  to 
carry  on  the  business  for  which  it  was  chartered  nor  to  fulfil 
its  public  obligations,  in  the  same  manner  and  upon  the  same 

Smelting,     etc.    Co.     25     Wash.    492  o?i    Execution    mithout    Statutory   Au- 

(1901),  (65  Pac.  Rep.  765).     See  also  thority." 

cases  cited  in   notes   to    §   248,   post:  ^  See  ante,  §  128:    "Test  of  Indis- 

"  Voidable  Railroad  Leases."  pensability ." 

'See  ante,   §    127:     "Indispensable  ^  See  on^e,  §  129:    "  Sales  of  Surplus 

Property  cannot  be  alienated  or  taken  Property." 

320 


CHAP.    XV]  LEASES    OF    PROPERTY   AND    FRANCHISES 


§  172 


conditions  as  a  natural  person.*  Thus,  for  example,  a  railroad 
company  may  lease  its  outlying  lands  and  any  rolling  stock 
or  other  personal  property  not  required  in  the  use  and  opera- 
tion of  its  railroad.^  And  a  feriy  company  may  let  its  Ijoats 
when  'not  needed  in  its  business.^ 


'  Statutes  regulating  the  method 
and  formalities  by  which  guo«,'-pub]ic 
corporations  may  lease  their  property 
and  franchises  do  not  apply  to  ordi- 
nary leases  of  property  not  necessary 
for  the  proper  discharge  of  corporate 
duties.  Coal  Creek,  etc.  Co.  v.  Ten- 
nessee, etc.  Co.,  106  Tenn.  651  (1901), 
(62  S.  W.  Rep.  162). 

^  In  Hartford  Ins.  Co.  v.  Chicago, 
etc.  R.  Co.,  175  U.  S.  99  (1899),  (20 
Sup.  Ct.  Rep.  33),  Mr.  Justice  Gray 
said:  "A  railroad  corporation  holds 
its  station  grounds,  railroad  tracks  and 
right  of  way  for  the  public  use  for 
which  it  is  incorporated,  3^et  as  its 
private  property,  and  to  be  occupied 
by  itself  or  by  others,  in  the  manner 
which  it  may  consider  best  fitted  to 
promote,  or  not  to  interfere  with,  the 
public  use.  It  may,  in  its  discretion, 
permit  them  to  be  occupied  by  others 
w-ith  structures  convenient  for  the 
receiving  and  delivering  of  freight 
upon  its  railroad,  so  long  as  a  free 
and  safe  passage  is  left  for  the  car- 
riage of  freight  and  passengers.  .  .  . 
The  case  is  wholly  different  from 
those  cited  by  the  plaintiffs,  in  which 
a  lease  by  a  railroad  corporation, 
transferring  its  entire  property  and 
franchises  to  another  corporation,  and 
thus  undertaking  to  disable  itself 
from  performing  all  the  duties  to  the 
public  imposed  upon  it  by  its  charter, 
has  been  held  to  be  ultra  vires,  and 
therefore  void." 

.\nd  in  Union  Pacific  R.  Co.  v. 
Chicago,  etc.  R.  Co.,  51  Fed.  321 
(1892),  Judge  Sanborn  said:  "The 
result  is  that  it  is  not  beyond  the 
powers  of  a  corporation  authorized  to 
construct,  maintain  and  operate  a 
railroad  and  its  appurtenances  to  let 


by  contract  to  a  like  corporation  its 
surplus  rolling  stock,  or  the  surplus 
use  of  its  terminal  tracks,  depots,  and 
bridges,  which  it  has  necessarily  ac- 
quired for  the  purpose  of  its  incor- 
poration ;  provided,  always,  that  such 
contract  in  no  way  disables  it  from 
the  full  performance  of  its  obligations 
and  duties  to  the  State  and  the  public." 

In  Attorney-General  v.  Great  East- 
ern R.  Co.,  L.  R.  11  Ch.  449  (1879),  it 
was  held  that  the  letting  for  hire  by 
one  railroad  company  to  another 
whose  line  was  connected  with  its 
own,  and  which  could  only  be  worked 
profitably  in  connection  with  it,  of 
parts  of  its  surplus  rolling  stock,  was 
not  ultra  vires. 

A  railroad  corporation  may  lease 
a  portion  of  its  property,  not  required 
in  its  business,  to  a  public  warehouse 
company. 

State  V.  Kew  Orleans  Warehouse 
Co.,  109  La.  64  (1902),  (33  So.  Rep. 
81). 

A  railroad  company  has  a  right  to 
lease  a  portion  of  its  right  of  way 
for  the  purpose  of  securing  freight 
from  the  lessee.  Detroit  v.  Little,  146 
Mich.  373  (1906),  (109  N.  W.  Rep. 
671).  See  also  Michigan  Central  R. 
Co.  V.  BuUard,  120  Mich.  416  (1899), 
(79  N.  W.  Rep.  635). 

A  railroad  company,  authorized  to 
construct  and  oj>erate  a  telegraph  line 
as  well  as  a  railroad,  has  no  power  to 
lease  its  telegraph  line  without  statu- 
tory authorization.  Its  duties  are  the 
same  with  respect  to  the  telegraph  line 
as  to  the  railroad,  .\tlantic,  etc.  Til. 
Co.  V.  Union  Pacific  R.  Co.,  1  McCrary 
(U.  S.),  541  (1880),  1  Fed.  745. 

'  In  Brown  v.  Wiiuiisimmet  Co.,  11 
Allen  (Mass.)  326  (1865),  the  Court, 

321 


§    174  INTERCORPORATE    RELATIONS  [PART   III 

Analogous  to  this  principle  in  practical  results,  although 
based  upon  essentially  different  grounds  —  in  that  a  joint  use 
is  distinguishable  from  a  lease  —  is  the  principle  that  a  rail- 
road company  may  grant  to  another  corporation  the  surplus 
use  of  its  tracks.^ 

§  173,  Leases  of  Franchises.  —  The  principles  of  law  gov- 
erning leases  of  franchises  have  already  been  considered  at 
length  in  connection  with  the  subject  of  the  sale  of  franchises.^ 

§  174.  Railroad  Leases  typical  of  Leases  of  Quasi-public 
Corporations.  —  As  indicated  in  the  preliminary  part  of  this 
treatise,  railroad  companies  have  been  granted,  and  have 
exercised,  the  power  of  leasing  their  property  and  franchise 
to  a  far  greater  extent  than  other  corporations  of  a  similar 
nature.  Legal  principles  relating  to  leases  of  quasi-public 
corporations  have  been  established,  almost  without  exception, 
in  cases  involving  railroad  leases. 

While,  therefore,  in  the  further  consideration  of  the  subject 
special  reference  will  be  made  to  leases  of  railroads,  it  must 
be  borne  in  mind  that  the  principles  exemplified  are  of  general 
application  and  apply  alike  to  every  gwasi-public  corporation 
—  to  turnpike,  canal,  telegraph,  telephone,  electric  light,  gas, 
water  and  other  public  utility   companies.^ 


after  referring  to  the  powers  of  ferry  to  carry  over  the  persons  who  wish  to 
companies  and  to  their  right  to  own  use  the  ferry,  they  are  at  liberty  to 
extra  boats,  said  (p.  333):  "It  is  not  use  them  as  they  think  fit,  for  the 
necessary  that  such  extra  or  additional  profit  of  the  company,  and  either  to 
steamboats  should  be  kept  unem-  let  them  out  to  private  parties  for 
jjloyed  when  not  required  for  the  busi-  excursions,  or  to  carry  excursion 
ness  of  the  ferry,  but  ...  it  is  com-  parties  themselves." 
petent  for  the  defendants  to  use  them  '  Cliicago,  etc.  R.  Co.  v.  Union  Pac. 
or  to  let  them  to  others  to  be  used  in  R.  Co.,  47  Fed.  23  (1891),  affirmed  sub 
carrying  on  any  legitimate  business."  nom.  Union  Pac.  R.  Co.  v.  Chicago, 
In  Forrest  v.  Manchester,  etc.  R.  etc.  R.  Co.,  51  Fed.  321  (1892),  163 
Co.,  30  Beav.  47  (1861),  the  Master  U.  S.  564  (1895),  (16  Sup.  Ct.  Rep. 
of  the  Rolls  said :  "What  are  they  to  1173).  See  post,  ch.  XXIV.:  "Track- 
do   with   those    stean^boats    at    other  age  Contracts." 

times  when  unemployed  at  the  ferry?  ^  See  ante,  ch.  XII.  :    "Sales  of  Cor- 

Are  they  to  keep  them  idle?     I  am  of  porate  Franchises." 

opinion  that  they  are  not ;    and  that  ^  The  following  cases  relate  to  leases 

if  the  capital  of  the  company  is  reallj'  of  gwasi-public  corporations  other  than 

embarked  for  the  purpose  of  the  ferry  railroad  companies, 

and  not  for  the  purpose  of  excursions,  Gas  and  Electric  Light  Companies  : 

when  the  steamboats  are  not  required  Jersey  City  Gas  Co.   v.   United  Gas 

322 


CHAP,    XVl]  NATURE   AND   AUTHORIZATION   OF   LEASE  §    175 


Article   II 

LEASES    OF    RAILROADS    (INCLUDING    TRACKAGE    CON- 
TRACTS) 


CHAPTER    XVI 


NATURE  AND  AUTHORIZATION  OF  CONTRACT  OF  LEASE 

I.    Nature  of  Lease  of  Railroad 

§  175.     What  constitutes  a  Lease  of  a  Railroad. 

§  176.     Distinction  between  Relation  of  Lessor  and  Lessee  and  other  Intercor- 
porate Relations. 

II.    Legislative  Authority  for  Lease  of  Railroad 

§  177.  Lease  of  Railroad  invalid  without  Legislative  Authority. 

§  178.  Necessity  for  Legislative  Authority  to  take  a  Lease. 

§  179.  Legislative  Ratification  of  Unauthorized  Lease. 

§  180.  What  Railroads  may  be  leased.     Statutory  Provisions. 

§  181.  Rule  of  Construction  of  Statutes. 

§  182.  Construction  of  Statutes.  —  (A)  Provisions  authorizing  Leases. 

§  183.  Construction  of  Statutes.  —  (B)  Provisions  not  authorizing  Leases. 

§  184.  Construction  of  Statutes.  —  (C)  Power  to  lease  Unfinished  Road. 

§  1^.  Construction  of  Statutes.  —  (D)  Leases  of  Connecting  Lines. 

§  186.  Constitutional  and  Statutory  Prohibitions  of  Leases  of  Competing  or 

Parallel  Lines. 

§  187.  Long-term  Leases  not  prohibited  by  Statutes  against  Perpetuities. 

I.    Nature  of  Lease  of  Railroad 

§175.    What  constitutes  a  Lease  of  a  Railroad.  — A  railroad 
lease  is  a  conveyance  by  a  raih-oad  company,  for  rent  reserved, 

Imp.  Co.,  46  Fed.  264  (1891);    Visalia  Rep.    525);     Bath   Gas   Light   Co.    v. 

Gas,   etc.   Co.   v.   Sims,    104   Cal.   326  Claffy,  151  N.  Y.  24  (1896),  (45  N.  E- 

(1894),  (43  Am.  St.  Rep.  105,  37  Pac.  Rep.  390,  36  L.  R.  A.  664). 
Rep.  1042);    Chicago  Gas  Light,  etc.  Tdrgraph  Companies :  Philadelphia 

Co.   V.   People's  Gas  Light,   etc.   Co.,  v.  Western  Union  Tel.  Co.,  11  Phila. 

121  111.  530  (1887),  (13  N.  E.  Rep.  169,  327  (1876) ;    Atlantic,  etc.  Tel.  Co.  v. 

2  Am.  St.  Rep.  124);    Brunswick  Gas  Union    Pacific    R.    Co.,    1    Fed.    745 

Light  Co.  V.  United  Gas,  etc.  Co.,  85  (1880),  1  McCrary  (U.  S.),  541;   West- 

Me.  532  (1893),  (.35  Am.  St.  Rep.  385,  em  Union  Tel.  Co.  v.  Union  Pacific  R, 

43  Am.  &  Eng.  Corp.  Cas.  459,  27  Atl.  Co.,  3   Fed.  1   (1880),  1   McCrary  (U. 

323 


§175 


INTERCORPORATE    RELATIONS 


[part    III 


of  its  railroad  for  any  term  which  leaves  a  reversionary  interest.^ 
It  necessarily  involves  a  transfer  of  an  estate  in  the  railroad 
property  and  of  the  franchises  attaching  thereto.  It  generally 
involves  a  transfer  of  the  railroad  and  all  the  franchises  of  the 
vendor  corporation  for  a  long  term  of  years  —  often  equivalent 
to  a  grant  of  the  fee  in  consideration  of  stated  payments.^ 


S.),  418;  Central  Branch  Union  Pacific 
R.  Co.  V.  Western  Union  Tel.  Co.,  2 
Fed.  417  (1881),  1  McCrary  (U.  S.), 
551;  Reiff  v.  Western  Union  Tel.  Co., 
49  N.  Y.  Super.  Ct.  441  (1883). 

1  A  grant  and  demise  by  one  rail- 
road corporation  to  another  of  all  its 
property,  real  and  personal,  arfd  all  its 
privileges  and  franchises  in  perpetuity, 
has  been  held  equivalent  to  an  abso- 
lute conveyance.  Chicago,  etc.  R.  Co. 
V.  Boyd,  118  111.  73  (1886),  (7  N.  E. 
Rep.  487). 

See  also  Hazard  v.  Vermont,  etc.  R. 
Co.,  17  Fed.  753  (1883);  Vermont, 
etc.  R.  Co.  V.  Vermont  Cent.  R.  Co., 
34  Vt.  1  (1861);  Town  of  West- 
brook's  Appeal  from  Commissioners, 
57  Conn.  95  (1889),  (17  Atl.  Rep.  368). 
Compare  State  v.  Housatonic  R.  Co., 
48  Conn.  44  (1880). 

While  this  conclusion  may  be  cor- 
rect where  no  right  of  reentry  is  re- 
served in  a  lease,  it  is  not  well  founded, 
as  a  matter  of  law,  where  there  is 
clause  of  reentry.  A  reservation  of 
the  right  to  reenter  together  with 
that  of  rent,  constitute  a  reversionary 
interest,  —  the  essential  feature  of  a 
lease  as  distinguished  from  an  abso- 
lute conveyance. 

A  conveyance  of  a  right  of  way  to 
a  railroad  company  contained  this 
condition:  "In  ca.se  the  second  party 
shall  sell  the  above-mentioned"  right 
of  way  to  any  othe."  company,  the 
party  of  the  first  part  shall  be  en- 
titled to  receive  one-half  of  the  pur- 
chase money."  The  railroad  com- 
pany leased  its  entire  railroad  and 
property  for  999  years.  It  was  held 
that  the  lease  was  not  a  sale  within 
the  meaning  of  the  condition. 

324 


Morrison  v.  St.  Paul,  etc.  R.  Co., 
63  Minn.  75  (1895),  (65  N.  W.  Rep. 
141,  30  L.  R.  A.  546). 

2  Moorshead  v.  United  Rys.  Co.,  119 
Mo.  App.  541  (1906),  (96  S.  W.  Rep. 
261),  affirmed  203  Mo.  121  (1907), 
(100  S.  W.  Rep.  611):  "Does  the 
contract  pos.sess  the  elements  of  a 
lease?  In  this  connection  it  is  proper 
to  remark,  in  the  first  place,  that 
goods,  chattels,  and  franchises  may 
be  leased  as  well  as  lands  and  tene- 
ments. The  statutes  of  the  State 
gave  the  United  Railways  Company 
the  right  to  lease  its  franchises,  rail- 
way lines  and  every  other  property, 
and  by  the  same  statute  the  Transit 
Company  had  the  right  to  acquire 
every  character  of  property  belong- 
ing to  the  United  Railways  Company, 
including  its  franchises.  We  need  not 
be  troubled  about  the  power  of  the 
two  companies  to  enter  into  a  lease 
covering  all  the  properties  mentioned 
in  the  instrument.  The  contract 
mentioned  divested  the  United  Rail- 
ways Company  of  the  possession  and 
use  of  the  properties  during  the 
period  named  (40  years)  in  considera- 
tion of  a  specific  rent  to  be  paid  by 
the  Transit  Compan3%  and  other 
duties  in  the  nature  of  rent,  to  be 
performed  by  the  latter;  provided 
further  for  the  reversion  of  the 
property  to  the  grantor,  the  United 
Railways  Companj%  at  the  end  of  the 
term,  and  for  reentry  if  the  Transit 
Company  defaulted  in  the  perform- 
ance of  its  covenants  during  the 
term.  Those  ingredients  in  the  agree- 
ment suffice  to  constitute  a  lease." 

A  vote  by  a   railroad  company  to 
agree  with  another  company  to  take 


CHAP.    XVl]  NATURE    AND    AUTHORIZATION    OF    LEASE 


§  175 


The  elements  essential  to  the  existence  of  a  valid  railroad 
lease  are  as  follows: 


a  lease  of  a  railroad  to  be  constructed 
bj'  the  latter  and  to  pay  as  rent  a 
stipulated  percentage  upon  its  cost, 
and  a  similar  vote  of  the  latter  cor- 
poration to  lease  its  railroad  to  the 
former  upon  these  terms,  are  merely 
preliminary  and  do  not  constitute  an 
actual  lease.  Peters  v.  Boston,  etc. 
R.  Co.,  114  Mass.  127  (1873). 

The  receiver  of  a  railroad,  the 
earnings  of  which  were  less  than  the 
expense  of  operation,  entered  into  a 
contract  with  a  companj'  owning  a 
connecting  line  by  which  the  latter 
agreed  to  operate  the  road,  keeping 
the  accounts  in  the  receiver's  name 
and  charging  against  the  road  only 
the  cost  of  operation  and  necessary 
repairs.  It  was  held  that  the  con- 
tract was  not  a  lease,  but  one  under 
which  the  latter  company  operated 
the  road  as  agent  of  the  receiver. 
South  Carolina,  etc.  R.  Co.  v.  Carolina, 
etc.  R.  Co.,  93  Fed.  543  (1899). 

A  railroad  company  agreed  to  sell 
to  another  company  and  the  latter 
agreed  to  buy,  part  of  its  road  at  a 
fixed  price.  The  contract,  however, 
recited  that  the  vendor  could  not,  at 
the  time,  make  a  clear  title  and  it  was, 
therefore,  stipulated  that,  in  the  mean 
time,  the  vendor  should  lea.se  the  road 
to  the  purchaser.  The  provisions  in 
relation  to  the  sale  and  to  the  lease 
were  kept  distinct  throughout  the  con- 
tract. It  was  held  that,  prior  to  the 
time  when  title  could  be  transferred, 
the  relations  of  the  corporations  were 
those  of  lessor  and  les.see,  and  that, 
even  if  the  contract  of  sale  was  ultra 
vires,  the  lease  was  valid.  United 
States  Trust  Co.  v.  Mercantile  Co.,  SS 
Fed.  140  (1898). 

A  written  agreement  by  which  one 
railroad  company  grants  to  another 
tlie  right,  for  a  term  of  years,  to  main- 
tain its  track  acro.ss  the  right  of  way 
of   the   former,    upon    payment   of   a 


nominal  rental,  is  a  lea.<;e,  the  cove- 
nants of  which  run  with  the  land. 
Louisville,  etc.  R.  Co.  v.  Illinois,  etc. 
R.  Co.,  174  111.  448  (1898),  (51  N.  E. 
Rep.  824). 

The  fact  that  the  road  of  one  rail- 
road company  was  operated  by  the 
receiver  of  another  company  who 
paid  therefor  a  part  of  the  gross 
receipts  arising  from  its  operation 
established  the  relationship  of  lessor 
and  lessee  rather  than  a  partnership. 

Houston  etc.  R.  Co.  v.  Mcl-'adden, 
91  Tex.  194  (1897),  (42  8.  W.  Rep. 
593). 

A  contract,  by  which  a  telegraph 
company  grants  to  another  the  privi- 
lege of  stringing  wires  on  its  telcgraj)h 
poles,  is  not  a  lease  of  the  corpo- 
ration's property,  within  the  mean- 
ing of  a  statute  providing  that  lea.ses 
of  corporate  propertj^  can  be  made 
only  when  sanctionetl  by  holders  of 
three-fifths  of  the  stock.  Farnsworth 
V.  Western  Union  Tel.  Co.,  53  Hun 
(X.  Y.),  636  (1889),  (6  N.  Y.  Sup).. 
735). 

As  to  whether  a  particular  agree- 
ment was  a  "contract"  or  leivse,  see 
Archer  v.  Terre  Haute,  etc.  R.  Co., 
102  111.  492  (1882),  (7  Am.  &  Eng. 
R.  Cas.  255).  See  also  Wiggins  Ferry 
Co.  V.  Ohio,  etc.  R.  Co.,  142  U.  S.  396 
(1891),  (12  Sup.  Ct.  Rep.  188);  South 
Carolina,  etc.  R.  Co.  v.  .\ugusta,  etc.  R. 
Co..  107  Ga.  164  (1899),  E.  Rep.  (33  S. 
36). 

In  Michigan  Central  R.  Co.  v. 
Pere  Marquette  R.  Co.,  128  Mich. 
333  (1901),  (87  N.  W.  Rep.  271) 
the  Court  said:  "The  rights  of 
the  p>arties  must,  therefore,  be  deter- 
mined by  the  contract  which  they 
voluntarily  made.  The  situation  wa.s 
this :  The  Saginaw  Valley  Comjiany 
de-sired  to  avoid  tiie  construction 
and  maintenance  of  a  separate  road 
for  a  distance  of  five  miles,   and  as 

32.") 


§    177  INTERCORPORATE   RELATIONS  [PART   III 

(1)  A  grant  of  authority  by  the  State  to  both  lessor  and 
lessee  corporations. 

(2)  The  assent  of  the  stockholders  of  both  corporations. 

(3)  A  written  instrument  stating  the  term  and  rent. 

(4)  Its  formal  execution. 

§  176.  Distinction  between  Relation  of  Lessor  and  Lessee 
and  other  Intercorporate  Relations.  —  The  distinction  between 
a  contract  of  lease  entered  into  by  railroad  corporations  and 
their  consolidation  has  already  been  pointed  out.^  The  differ- 
ence between  the  relation  of  lessor  and  lessee  and  other  inter- 
corporate relations  is,  generally,  obvious. 

Contracts  for  the  joint  use  of  railroad  property  are,  how- 
ever, analogous  to  leases,  and  some  difficulty  has  arisen  in 
distinguishing  between  them.  The  point  of  difference  is  that 
a  lease  conveys  an  estate  in,  and  the  possession  of,  the  prop- 
erty constituting  its  subject-matter,  while  a  trackage  con- 
tract or  terminal  privilege  carries  with  it  no  interest  in  the 
property  and  no  right  to  its  exclusive  possession.^ 

11.    Legislative  Authority  for  Lease  of  Railroad 

§  177.  Lease  of  Railroad  invalid  without  Legislative  Author- 
ity.—  Upon  principles  elsewhere  considered,  a  gwas^-public 
corporation  cannot  transfer,  absolutely  or  for  a  limited  period, 
its  franchises,  or  the  property  necessary'  for  the  performance  of 
its  public   duties,   without  legislative  authority.^     A  lease  of 

well     the    construction     of    separate  the   arrangement,   but  might   at   any 

depots    and    the    purchase    of    depot  time    construct    its    own    road ;     and 

grounds.     It   must   do   this   or   make  there   is   nothing   in   the   contract   to 

a    contract    with    the    Jackson  .   .   .  prevent     it.     The     relation     between 

Company.     The     former     could     not  the  parties  was  simply  that  of  lessor 

compel  the  use  of  the  latter 's  road  and  and  lessee,   and  not  that   of  tenants 

depots.     The    latter    was    wilUng    to  in    common    of    the    right    of    way. 

grant  a  permanent  use  of  its  road  to  The  right  conveyed  was  that  of  user, 

the  former  for  certain  considerations.  and  not  that  of  ownership." 

These  were  agreed  to.     The  Jackson  '  See     ante,     §     14:      "Distinction 

road    did    not    sell    to    the    Saginaw  between  Consolidation  and  Lease." 

Vallejr   road    any   of   its    real    estate,  ^  See    post,    §    255:    "Nature   of  a 

but  granted  only  a  permanent  lease.  Trackage  Contract." 

To    hold    otherwise    would    be    doing  ^  See   ante,    §§    17-18:    "Necessity 

\dolence  to  the  meaning  of  the  plain-  for  Legislative  Authority"  (consolida- 

est  terms.     The  Saginaw  Valley  road  tion) ;     ante,    §§    135-139:     " Legisla- 

was  under  no  obligation  to  continue  tive  Authority  for  Sale  of  Franchises.". 

326 


CHAP.    XVl]  NATURE    AND    AUTHORIZATION    OF    LEASE 


§  177 


a  railroad,  in  the  absence  of  a  statute  authorizing  it,  is.  ultra 
vires  and  against  public  policy.' 


'  I.  Cases  holding  Unauthorized 
Railroad  Lease  invalid  because  Ultra 
Vires. 

United  States:  St.  Louis,  etc.  R. 
Co.  t'.  Terre  Haute,  etc.  R.  Co.,  145  U. 
S.  393  (1892),  (12  Sup.  Ct.  Rep.  953) ; 
Central  Transp.  Co.  v.  Pullman  Car 
Co.,  139  U.  S.  24  (1891),  (11  Sup.  Ct. 
Rep.  478)  ;  Pittsburgh,  etc.  R.  Co.  v. 
Keokuk  Bridge  Co.,  131  U.  S.  371 
(1889),  (9  Sup.  Ct.  Rep.  770)  ;  Oregon 
R.,  etc.  Co.  V.  Oregonian  Co.,  130 
U.  S.  1  (1889),  (9  Sup.  Ct.  Rep.  409) ; 
Pennsylvania  R.  Co.  v.  St.  Louis,  etc. 
R.  Co.",  118  U.  S.  290  (1886),  (6  Sup. 
Ct.  Rep.  1094);  Thomas  v.  Railroad 
Co.,  101  U.  S.  71  (1879),  (leading 
case) ;  Hamilton  ?".  Savannah,  etc. 
R.  Co.,  49  Fed.  412  (1892). 

Alabama:  Memphis,  etc.  R.  Co.  v. 
Grayson,  88  Ala.  572  (1889),  (7  So. 
Rep.  122,  16  Am.  St.  Rep.  69,  43  Am. 
&  Eng.  R.  Cas.  681). 

Iridiana :  Commissioners  of  Tippe- 
canoe Co.  V.  Lafayette,  etc.  R.  Co., 
50  Ind.  85  (1875). 

Massachusetts:  Middlesex  R.  Co. 
V.  Boston,  etc.  R.  Co.,  115  Mass.  347 
(1874). 

Montana :  State  v.  Montana  R.  Co., 
21  Mont.  221  (1898),  (53  Pac.  Rep. 
623). 

Nebraska:  State  v.  Atchison,  etc. 
R.  Co.,  24  Neb.  143  (1888),  (8  Am. 
St.  Rep.  164,  38  N.  W.  Rep.  43). 

New  Hampshire:  Dow  v.  Northern 
R.  Co.,  67  N.  H.  1  (1886),  (.36  Atl. 
Rep.  510). 

New  Jersey:  Black  v.  Delaware, 
etc.  Canal  Co.,  24  N.  .J.  Eq.  454 
(1873). 

Neiv  Y'nrk :  Abbott  r.  Johnstown, 
etc.  Hor.se  R.  Co.,  80  N.  Y.  27  (1880), 
(.36  Am.  Rep.  572) ;  Troy,  etc.  R. 
Co.  V.  Kerr,  17  Barb.  (N.  Y.)  581 
(1854) ;  Gere  v.  New  York  Central, 
etc.  R.  Co.,  19  Abb.  N.  C.  193 
(1885). 


England:  East  Anglian  R.  Co.  v. 
Ea.stern  Counties  R.  Co.,  11  C.  B. 
(o.  s.)  775  (1851);  Simp.son  v.  Deni- 
son,  10  Hare,  51  (1852),  (16  Jur.  828). 

IL  Cases  holding  Unauthorized 
Railroad  Lease  invalid  because  against 
Public  Policy. 

United  States :  Thomas  v.  Railroad 
Co.,  101  U.  S.  71  (1879);  Earle  v. 
Seattle,  etc.  R.  Co.,  56  Fed.  909 
(1893).  Compare,  however,  Pitts- 
burgh, etc.  R.  Co.  V.  Columbus,  etc. 
R.  Co.,  8  Biss.  4.56  (1879). 

Georgia:  Singleton  v.  Southwestern 
R.  Co.,  70  Ga.  464  (1883),  (48  Am. 
Dec.  574). 

Illinois:  Wabash,  etc.  R.  Co.  v. 
Payson,  106  111.  534  (1883),  46  Am. 
Rep.  705). 

Kentucky:  McCabe's  Admx.  v. 
Mays\-ille,  etc.  R.  Co.,  112  Ky.  861 
(1902),  (66  S.  W.  Rep.  1054). 

Massachusetts:  Braslin  v.  Somer- 
\dlle  Horse  R.  Co.,  145  Mas.s.  64 
(1887X,  (13  N.  E.  Rep.  65)  :  "The  gen- 
eral rule  is  familiar,  that  neither  a  .steam 
nor  a  street  railway  corporation  can 
make  a  valid  transfer,  either  by  way  of 
absolute  deed,  mortgage  or  lease,  of 
its  franchise,  or  of  its  railroad  and 
bulk  of  its  property,  or  relieve  itself 
of  the  burdens  impo.sed  upon  it  by 
law,  or  by  its  charter,  without  the 
consent  of  the  State." 

Minnesota :  Freeman  i'.  Minne- 
apolis, etc.  R.  Co.,  28  Minn.  443 
(1881),  (10  N.  W.  Rep.  594). 

Neiv  Jersey :  A  corporation  created 
by  statute  possesses  no  rights,  and 
can  exerci.se  no  powers,  which  are 
not  expressly  given  or  necessarily 
implied.  Such  a  corporation  can- 
not lease  or  dispose  of  any  franchise 
needful  in  the  performance  of  its 
obligations  to  the  State,  without 
legislative  consent.  Stockton  r.  Cen- 
tral H.  Co.,  50  N.  J.  Eq.  52  (1892), 
(24    Atl.    Rep.  964).       Also    Mills   v. 

327 


§  177 


INTERCORPORATE    RELATIONS 


[part    III 


In  Pennsylvania  R.  Co.  v.  St.  Louis,  etc.  R.  Co.^  Mr.  Justice 
Miller  thus  applied  the  principle  of  ultra  vires  to  railroad  leases: 
"  We  think  it  may  be  stated,  as  the  just  result  of  these  cases 
and  on  sound  principle,  that,  unless  specially  authorized  by 
its  charter  or  aided  by  some  other  legislative  action,  a  railroad 
company  cannot,  by  lease  or  any  other  contract,  turn  over  to 
another  company,  for  a  long  period  of  time,  its  road  and  all 
its  appurtenances,  the  use  of  its  franchises,  and  the  exercise  of 
its  powers;  nor  can  any  other  railroad  company,  without 
similar  authority,  make  a  contract  to  receive  and  operate  such 
road,  franchises,  and  property  of  the  first  corporation,  and  that 
such  a  contract  is  not  among  the  ordinary  powers  of  a  railroad 
company,  and  is  not  to  be  presumed  from  the  usual  grant  of 
powers  in  a  railroad  charter." 

And  in  the  earlier  case  of  Thomas  v.  Railroad  Co.^  the  same 
Justice,  after  discussing  the  doctrine  of  ultra  vires,  said:  "  There 
is  another  principle  of  equal  importance  and  equally  conclu- 


Central  R.  Co.,  41  N.  J.  Eq.  1  (1886), 
(2  Atl.  Rep.  453) ;  Black  v.  Delaware, 
etc.  Canal  Co.,  22  N.  J.  Eq.  130  (1871) ; 
s.  c.  24  N.  J.  Eq.  454  (1873). 

Pennsylvania:  Van  Steuben  v. 
Central  R.  Co.,  178  Pa.  St.  367  (1896), 
(35  Atl.  Rep.  992). 

South  Carolina :  Harmon  v.  Co- 
lumbia, etc.  R.  Co.,  28  S.  C.  401 
(1887),  (5  S.  E.  Rep.  835,  13  Am.  St. 
Rep.  686). 

Texas:  International,  etc.  R.  Co. 
V.  Moody,  71  Tex.  614  (1888),  (9  S.  W. 
Rep.  465) ;  Gulf  etc.  R.  Co.  v.  Morris, 
67  Tex.  692  (1887),  (4  S.  W.  Rep. 
156) ;  Central,  etc.  R.  Co.  v.  Morris,  68 
Tex.  49  (1887),  (3  S.  W.  Rep.  457). 

Vermont:  Nelson  v.  Vermont,  etc. 
R.  Co.,  26  Vt.  717  (1854),  (62  Am. 
Dec.  614). 

Virginia :  Roper  v.  McWhorter, 
77  Va.  214  (1883). 

West  Virginia:  Ricketts  v.  Chesa- 
peake, etc.  R.  Co.,  33  W.  Va.  433 
(1890),  (10  S.  E.  Rep.  801,  25  Am. 
St.  Rep.  901,  7  L.  R.  A.  354)  :  "We 
think  it  may  be  stated,  as  the  just 
result   of  the   decided   cases,   and   on 

328 


sound  principle,  that  a  railroad  cor- 
poration cannot,  without  distinct 
legislative  authority,  by  lease,  or  any 
other  contract,  turn  over  to  another 
company  its  road  and  the  use  of  its 
franchises,  and  thereby  exempt  itself 
from  responsibilitj'^  for  the  conduct 
and  management  of  the  road."  Also 
Fischer  v.  West  Virginia  R.  Co.,  39 
W.  Va.  366  (1894),  (9  S.  E.  Rep. 
578). 

England :  An  agreement  between 
two  railway  companies,  made  with- 
out the  authority  of  the  legislature, 
whereby  one  company  delegates  to 
another  all  the  powers  which  have 
been  conferred  upon  it  by  parliament, 
is  an  unlawful  attempt  to  effect  that 
which  parliament  alone  can  au- 
thorize, and  is  against  pubUc  poUcy. 
Great  Northern  R.  Co.  v.  Eastern 
Counties  R.  Co.,  12  Eng.  L.  &  Eq. 
224  (1851),  9  Hare,  306. 

1  Pennsylvania  R.  Co.  v.  St.  Louis, 
etc.  R.  Co.,  118  U.  S.  309  (1886),  (6 
Sup.  Ct.  Rep.  1094). 

2  Thomas  v.  Railroad  Co.,  101  U.  S. 
S3  (1879). 


CHAP.    XVl]  NATURE    AND    AUTHORIZATION    OF    LEASE  §    179 

sive  against  the  validity  of  this  contract,  which,  if  not  coming 
exactly  within  the  doctrine  of  ultra  vires  as  we  have  just  dis- 
cussed it,  shows  very  clearly  that  the  railroad  company  was 
without  the  power  to  make  such  a  contract.  That  principle 
is  that  where  a  corporation,  like  a  railroad  company,  has 
granted  to  it  by  charter  a  franchise  intended,  in  large  measure, 
to  be  exercised  for  the  public  good,  the  due  performance  of 
those  functions  being  the  consideration  of  the  public  grant, 
any  contract  which  disables  the  corporation  from  performing 
those  functions,  which  undertakes,  without  the  consent  of 
the  State,  to  transfer  to  others  the  rights  and  powers  conferred 
by  the  charter,  and  to  relieve  the  grantees  of  the  burden  which 
it  imposes,  is  a  violation  of  the  contract  with  the  State,  and  is 
void  as  against  public  ))oli('y." 

§  178.  Necessity  for  Legislative  Authority  to  take  a  Lease.  — 
Legislative  authority  is  as  necessary  to  take  as  to  make  a  lease. 
A  railroad  company,  unless  expressly  authorized,  has  no  power 
to  accept  a  lease  of  the  railroad  and  franchises  of  another  cor- 
poration. Such  an  act,  unauthorized,  is  both  ultra  vires  and 
opposed  to  public  policy.  One  corporation  cannot  assume 
the  performance  of  the  public  duties  of  another  unless  the 
State  approve. 

If  either  party  to  a  lease  of  a  railroad  is  acting  without  au- 
thority it  is  void.  A  contract  beyond  the  powers  of  either  is 
as  invalid  as  if  beyond  the  powers  of  both.^ 

§  179.  Legislative  Ratification  of  Unauthorized  Lease.  — 
While  legislative  authority  is  essential  to  the  validity  of  a  lease 
of  a  railroad  it  is  not  necessary  that  it  should  be  granted  before 
the  execution  of  the  lease.     The  legislature  may  cure  invalidity 

>  St.  Louis,  etc.  R.  Co.  v.  Terre  Rep.  1094) ;  Thomas  v.  Railroad  Co., 
Haute,  etc.  R.  Co.,  145  U.  S.  404  101  11.8.82(1879);  Rogers  f.  Nash- 
(1892),  (12  Sup.  Ct.  Rep.  953)  ;  \-ille,  etc.  R.  Co.,  91  Fed.  316  (1898). 
Central  Transp.  Co.  v.  Pullman  Car  Also  Louisxallc,  etc.  R.  Co.  r.  Ken- 
Co.,  139  U.  S.  24  (1891),  (11  Sup.  Ct.  tucky,  IGl  U.  S.  691  (1896).  (16  Sup. 
Rep.  478);  Pittsburgh,  etc.  R.  Co.  Ct.  Rep.  714) ;  Winch  p.  Birkenhead, 
V.  Keokuk,  etc.  Bridge  Co.,  131  U.  S.  etc.  R.  Co.,  16  Jur.  1035  (18.35). 
371  (1889),  (9  Sup.  Ct.  Rep.  770);  And  see  ante,  §  139:  " Lcgi.tl alive 
Oregon  R.,  etc.  Co.  v.  Oregonian  R.  Authority  essential  to  Purchase  of 
Co.,  130  U.  S.  36  (1889);  Pennsyl-  Franchises";  ante,  §  144:  "Seller 
vania  Co.  v.  St.  Louis,  etc.  R.  Co.,  must  have  Authoriti/  to  sell  and  Buyer 
118   U.   S.   310   (1886),    (6   Sup.   Ct.  to  buy." 

329 


§  179 


INTERCORPORATE   RELATIONS 


[part  III 


by  subsequent  ratification,  and,  when  ratified,  a  contract  stands 
as  if  authorized  in  the  first  instance.'  Thus,  a  lease  of  a  rail- 
road and  franchises,  unauthorized  when  made  either  by  the 
corporation's  articles  of  incorporation  or  by  statute,  was  held 
to  be  validated  by  an  act  of  the  legislature  subsequently 
passed  conferring  such  authority.^ 

Legislative  ratification  must  be  clearly  expressed.  A  refer- 
ence to  "  lessees,"  in  an  act  regulating  rates  of  fare  upon  a 
railroad  operated  under  an  unauthorized  lease,  does  not  vali- 
date it.     "It  is  not  by  such  an  incidental  use  of  the  word 

^  Terre  Haute,  etc.  R.  Co.  v.  Cox, 
102  Fed.  825  (1900).  In  this  case 
Judge  Grosscup  said:  "  From  the  mo- 
ment the  act  was  passed  the  two  rail- 
way companies  had  the  power  to  enter 
into  a  lease  containing  provisions  such 
as  are  here  sought  to  be  enforced. 
Thenceforth  such  power  existed 
under  the  laws  of  Indiana.  Had  the 
two  companies,  at  any  time  thereafter, 
formally  adopted  the  lease,  under  the 
act  giving  authority,  no  one  would 
insist  that  the  lease  was  ultra  vires. 
An  adoption  of  the  lease,  otherwi.se 
unauthorized,  under  an  act  confer- 
ring authority,  must  be  distinguished 
from  an  attempted  ratification  with- 
out any  new  statutory  authority. 
In  the  one  case  the  law  is  changed 
so  that  the  contemplated  agreement 
is  no  longer  unlawful ;  in  the  other 
the  contemplated  ratification,  if  held 
valid,  would,  in  effect,  substitute,  on 
the  question  of  power,  the  will  of  the 
corporation  for  the  will  of  the  legis- 
lature. Bvit  an  adoption  of  the  agree- 
ment embodied  in  the  lease,  in  the 
light  of  the  new  power  conferred, 
may  be  implied  from  conduct,  as  well 
as  from  a  formal  act  of  readoption. 
...  It  is  not  an  attempted  over- 
reaching of  the  law,  by  the  ratifica- 
tion of  an  unauthorized  act ;  but 
is,  in  effect,  a  readjustment  of  the 
companies'  relations  to  the  powers 
conferred  by  the  new  legislative 
authoritv." 


'  Terre  Haute,  etc.  R.  Co.  v.  Cox, 
102  Fed.  825  (1900).  See  also  the 
following  cases  of  mortgages  and  con- 
solidations without  authority  made 
binding  by  subsequent  legislative  rati- 
fication which  involve  principles 
applicable  to  cases  of  leases. 

United  States:  Graham  v.  Boston, 
etc.  R.  Co.,  118  U.  S.  161  (1SS6), 
(6  Sup.  Ct.  Rep.  1009) ;  Gross  v.  U.  S. 
Mortgage  Co.,  108  U.  S.  447  (1883), 
(2  Sup.  Ct.  Rep.  940) ;  Galveston  R. 
Co.  V.  Cowdrey,  11  Wall.  (U.  S.)  459 
(1870);  Whitewater,  etc.  Canal  Co. 
V.  Valette,  21  How.  (U.  S.)  414  (1858) ; 
Hall  V.  Sullivan  R.  Co.  11  Fed.  Cas. 
257  (1857),  (2  Redfield  Am.  Ry.  Cas. 
621,  21  Law  Rep.  138). 

Illinois :  U.  S.  Mortgage  Co.  v. 
Gross,  93  111.  483  (1879),  (.s.  c.  108 
U.  S.  supra) ;  Mitchell  v.  Deeds,  49 
111.  416  (1867),  (95  Am.  Dec.  621); 
Racine,  etc.  R.  Co.  v.  Farmers  Loan, 
etc.  R.  Co.,  49  111.  331  (1868),  (95  Am. 
Dec.  595) ;  Hatcher  v.  Toledo,  etc. 
R.  Co.,  62  111.  477  (1872),  (6  Am.  R. 
Rep.  405). 

Maine:  Kennebec,  etc.  R.  Co.  v. 
Portland,  etc.  R.  Co.,  59  Me.  1  (1871) ; 
Shepley  v.  Atlantic,  etc.  R.  Co.,  55 
Me.  395  (1868). 

Massachusetts :  Shaw  r.  Norfolk 
County  R.  Co.,  5  Gray  162  (1855). 

New  Hampshire :  Richards  r.  Mer- 
rimack, etc.  R.  Co.,  44  X.  H.  127 
(1862). 

See  ante,  §  20:  "Legislative  Sanc- 
tion —  how  expressed." 

330 


CHAP.    XVl]  NATURE    AND    AUTHORIZATION    OF    LEASE 


§180 


'  lessees  '  .  .  .  that  a  contract,  unauthorized  by  the  charter 
and  forbidden  by  pubUc  poUcy,  is  to  be  made  valid  and  ratified 
by  the  State."  ' 

Ratification  by  the  legislature  must  be  distinguished  from 
ratification  by  stockholders.  The  stockholders  of  a  corpora- 
tion may  ratify  an  irregularity  in  the  exercise  of  granted  powers ; 
the  State  alone  can  make  good  an  act  beyond  the  scope  of 
those  powers.^ 

§  180.  What  Railroads  may  be  leased.  Statutory  Provi- 
sions. —  The  power  to  lease  railroads  is,  in  many  cases,  granted 
in  conjunction  with  a  grant  of  power  to  sell  them.  Divers 
statutes  of  this  character  are  included  in  the  summary  printed 
in  connection  with  the  subject  of  sales  of  railroads.  Other 
statutes  relating  only  to  railroad  leases  are  collected  in  the 
footnote.^ 


'  Thomas  v.  Railroad  Co.,  101  U.  S. 
85  (1879).  See  also  Oregon  R.,  etc. 
Co.  V.  Oregonian  R.  Co.,  130  U.  S.  1 
(1889),  (9  Sup.  Ct.  Rep.  409). 

2  Louisville,  etc.  R.  Co.  v.  Louis- 
ville Trust  Co.,  174  U.  S.  552  (1899), 
(19  Sup.  Ct.  Rep.  817),  and  cases 
cited. 

*  Alabama.  See  ante,  §  145 
("Sales"). 

Arizona.  Code  1896,  §  1171  : 
"Any  railroad  company  incorporated 
by  the  laws  of  any  other  State  antl 
now  owning  or  which  is  authorized 
to  own  or  operate,  by  lease  or  other- 
wise, any  railroad  in  this  State," 
may  "aid  any  railroad  company  in- 
corporated under  any  .  .  .  law  of 
this  State  ...  by  leasing  .  .  .  any 
such  railroad,  on  such  terms  as  may 
be  agreed  upon  by  the  respective 
boards  of  directors."  See  also  ante, 
§  145  ("Sales"). 

Arkansas.  See  ante,  §  145  ("Sales"). 

California.  Pomeroy's  Code  1901, 
§  473  (a)  :  "Railroad  corporations 
doing  business  iti  this  State,  anfl 
organized  under  the  law  of  this  State, 
or  of  the  United  States,  or  any  other 
State  or  Territory  thereof,  have  power 
to    enter    into    contracts    with    one 


another  whereby  the  one  may  lease 
of  the  other  the  whole  or  any  part 
of  its  railroad." 

Colorado.  Speante,  §  145 ("Sales"). 

ConnecticiU.  G.  S.  1902,  §  3702  : 
"Any  company  may  make  lawful 
contracts  with  any  other  company 
with  whose  railroad  its  tracks  may 
connect  or  intersect  .  .  .  and  may 
take  a  lease  of  the  property  or  fran- 
chises of,  or  lease  its  property  or 
franchises  to,  any  such  company. " 

Florida.    Sec  ante,  §  145  ("Sales"). 

Georgia.  See  ante,  §  145  ("Sales"). 

Idaho.     See  a^ite,  §  145  ("Sales"). 

Iowa.     See  ante,  §   145  ("Sales"). 

Kansas.  G.  S.  1897,  ch.  70,  §  94  : 
"Any  railroad  company  shall  have 
power  to  lease  its  road  and  appurte- 
nances to  any  railroad  corporation  or- 
ganized under  the  laws  of  this  State, 
or  any  adjoining  State,  when  the  road 
so  leased  shall  tiioreby  become  on  the 
operation  thereof  a  continuation  and 
extension  of  the  road  of  the  company 
accepting  such  lease. "  For  additional 
statutes  see  ante,  §  145  ("Sales"). 

Maine.    See  ante,  §  145  ("Sales"). 

Marylatid.  See  atite,  §  145 
("Sales"). 

Massachusetts.        Supp.    to    Rev. 

331 


§180 


'INTERCORPORATE    RELATIONS 


[part  hi 


These  statutes,  as  a  general  rule,  limit  the  right  to  make  and 
take  leases  to  railroad  companies  owning  or  operating  con- 
necting lines. 


Laws,  1906,  ch.  112,  §  209:  "Two 
railroad  corporations  created  by  this 
Commonwealth,  whose  roads  enter 
upon  or  connect  with  each  other 
.  .  .  ;  and  any  such  corporation 
may  lease  its  road  to  any  other  such 
corporation."  [This  section,  how- 
ever, does  not  authorize  a  lease  be- 
tween two  corporations,  each  of 
which  has  a  terminus  in  Boston.] 
"The  roads  of  two  railway  companies 
shall  be  deemed  to  enter  upon  or 
coimect  with  each  other  ...  if  one 
of  such  roads  enters  upon,  connects 
with,  or  intersects  a  road  leased  to 
the  other,  or  operated  by  it  under  a 
contract." 

Ih.  §  210:  "No  railroad  shall 
lease  ...  its  road  for  a  period  of 
more  than  ninety-nine  years." 

Michigan.  See  ante,  §  145 
("Sales"). 

Minnesota.  See  ante,  §  145 
("Sales"). 

Mississippi.  Code  1906,  §  4079  : 
"Every  railroad  corporation  organ- 
ized under  the  provisions  of  this 
chapter  shall  have  and  exercise  the 
following  powers,  rights,  and  privi- 
leges, viz  :"  — 

(lb.  §  4090).  "To  lease  its  rail- 
road and  all  its  property  and  fran- 
chises, rights,  powers,  privileges,  and 
immunities  then  owned  or  thereafter 
to  be  acquired,  or  to  lease  other  rail- 
roads, in  or  out  of  this  State,  not  in 
either  case  parallel  or  competing  lines, 
for  a  term  of  years." 

Missouri.  See  ante,  §  145 
("Sales"). 

Montana.  See  aiite,  §  145 
("Sales"). 

Nebraska.  See  ante,  §  145 
("Sales"). 

New  Hampshire.  Pub.  Stat.  & 
Sess.  Laws  1901,  ch.  156,  §  21,  p.  503  : 
"Any  railroad  corporation  may  lease 

332 


its  railroad  ...  to  any  other  rail- 
road corporations  for  such  a  length  of 
time  and  upon  such  terms  as  may  be 
agreed  to  by  the  lessor  and  lessee 
corporations  at  meetings  of  their 
respective  stockholders  .  .  .  by  a 
two-thirds  vote  of  all  the  stock 
represented  and  voting  at  such 
meetings." 

lb.  §  44,  p.  506  :  Foreign  corpora- 
tions operating  roads  within  this 
State  shall  have  the  same  rights  for 
the  purpose  of  leasing  other  roads 
as  if  created  by  the  laws  of  this 
State. 

New  Jersey.  See  ante,  §  22,  note 
("Consolidation  ") . 

New  Mexico.  Comp.  Laws  1897, 
§  3847 :  Every  corporation  formed 
under  this  act  shall  have  the  follow- 
ing powers:  (15)  "To  lease  the 
whole  or  any  portion  of  its  railroad 
...  to  any  other  corporation  formed 
under  this  act  or  .  .  .  under  the 
laws  of  any  other  State  or  Territory, 
with  the  road  of  which  its  road  may 
connect  and  form  a  continuous  Una 
of  travel  and  transportation."  (16) 
"To  take  leases  of  such  other  rail- 
roads ...  as  are  mentioned  in  the 
last  preceding  subdivision  of  this 
section." 

For  additional  statutes,  see  ante, 
§   145  ("Sales"). 

New  York.  R.  S.  1901  (Birds- 
eye's)  Railroad  Law,  §  78:  "Any 
railroad  corporation  or  any  corpora- 
tion owning  or  operating  a  railroad 
route  witliin  this  State  may  contract 
with  any  other  such  corporation  for 
the  use  of  their  respective  roads  or 
routes  ...  in  such  manner  ...  as 
prescribed  ...  in  such  contract  .  .  . 
and  if  such  contract  shall  be  a  lease 
of  any  such  road,  and  for  a  longer 
period  than  one  j-ear, "  it  shall  not 
be  binding  "unless  approved  by  the 


CHAP.  XVI ]    NATURE  AND  AUTHORIZATION  OF  LEASE 


§  180 


Power  to  take  a  lease  of  a  railroad  within  the  State  is,  as 
a  general  rule,  conferred  indiscriminately  upon  domestic  and 
foreign  corporations. 


votes  of  stockholders  owning  at  least 
two-thirds  of  the  stock  of  each  cor- 
poration which  is  represented  and 
voted  upon  in  person  or  by  proxy 
at  a  meeting  called  separately  for 
that  purpose." 

North  Carolina.  Laws  1885,  ch. 
108,  p.  159,  §  2:  "Any  railroad  .  .  . 
may  lease  any  railroad  or  branch  rail- 
road ...  in  this  or  any  adjoining 
State  connecting  with  it,  directly 
or  indirectly." 

North  Dakota.  See  ante,  §  145 
("Sales"). 

Ohio.  Bates'  Anno.  Stat.  (1787- 
1906),  §  3384  (a)  :  "Any  consolidated 
company  ...  of  this  State  or  any 
other  State,  may  .  .  .  lease  .  .  .  any 
railroad  ...  of  this  State  or  of  any 
other  State,  if  the  line  of  road  cov- 
ered by  such  lease  ...  is  connected 
with  the  line  of  road  of  such  con- 
solidated railroad  company,  upon 
such  terms  a-s  may  be  agreed  upon 
between  the  companies." 

For  additional  statute,  see  ante, 
§  145  ("Sales"). 

Oklahoma.  See  ante,  §  ,145 
("Sales"). 

Orcfjon.  See  ante,  §  145 
("Sales"). 

Pennsylvania.  Bright  Purd.  Dig. 
1894,  §  153,  p.  1810 :  (.\ct  of  March 
13,  1847),  relates  to  the  running  of 
cars  on  connecting  railwaj's. 

lb.  §  154,  p.  1810:  The  act  of 
March  13,  1847,  "shall  be  .so  construed 
as  to  authorize  companies  owning  any 
connecting  railroads  in  the  State  of 
Pennsylvania  to  enter  into  any  lease 
.  .   .  with  each  other." 

Ih.  §  156,  p.  1810:  "It  shall  bo 
lawful  for  any  railroad  companies  to 
enter  into  contracts  for  the  use  or 
lease  of  any  other  railroads  upon  such 
terms  as  may  be  agreed  upon.  .  .  . 
Provided,  that  the  roads  of  the  com- 


panies so  contracting  or  leasing  shall 
be  directly,  or  by  means  of  intervening 
railroads,  connected  with  each  other." 
lb.  §  169,  p.  1812:  ".\ny  railroad 
company  or  companies  ...  of  this 
Commonwealth"  may  "lease  or  be- 
come the  lessees,  by  assignment  or 
otherwise,  of  any  railroad  or  rail- 
roads .  .  .  whether  the  road  or  roads 
embraced  in  such  lease  .  .  .  may  be 
within  the  Umits  of  this  State,  or 
created  by  or  existing  under  the  laws 
of  any  other  State  or  States  .  .  . 
ProNTded,  however,  that  the  road  or 
roads,  so  embraced  in  any  such  lease 
.  .  .  shall  be  connected,  either  di- 
rectly, or  by  means  of  an  intervening 
line,  with  the  railroad  or  railroads  of 
said  company  or  companies  of  tliis 
Commonwealth  so  entering  into  such 
lea.se  .  .  .  and  thus  forming  a  con- 
tinuous route  or  routes  for  the  trans- 
portation  of  persons   and   property." 

Sovth  .Carolina.  See  ante,  §  145 
("Sales"). 

South  Dakota.  See  ante,  §  145 
("Sales"). 

Tennessee.  Code  1896,  §  1538: 
".\ny  railroad  company  owning  any 
main  line  may  contract  with  any  com- 
pany owning  a  railroail  connecting 
witli  such  main  line  for  the  lease 
thereof." 

For  additional  statutes,  see  ante, 
§  145  ("Sales"). 

Texas.  Sayles'  Civ.  Stat.  1897 
(Supp.  to  1900),  vol.  2,  ch.  15a  (Acts 
1899,  p.  73)  :  "Any  railroad  now  or 
hereafter  constructed,  not  exceeding 
thirty  miles  in  length,  connected  at  or 
near  the  State  line  with  any  other 
railroad,  may  be  leased  by  tlie  com- 
pany owning  such  other  railroad"  for 
not  exceeding  ten  years. 

Utah.  Laws  1901,  ch.  26,  p.  23, 
§7:  "Any  railroad  .  .  .  of  this  State 
may   lease    and    operate  ...  a    rail- 

333 


§181 


INTERCORPORATE   RELATIONS 


[part   III 


The  term  for  which  leases  of  railroads  may  be  taken  is  gen- 
erally unlimited.  In  Massachusetts,  however,  it  cannot  exceed 
ninety-nine  years. 

The  English  "  Railway  Leasing  Act,"  which  forbids  the 
lease  of  any  railway  "  unless  under  a  distinct  provision  of  an 
Act  specifying  the  parties  "  seems  to  be  a  "  leasing  act  "  in 
the  negative. 

§  181.  Rule  of  Construction  of  Statutes.  — A  statute  grant- 
ing powers  to  a  corporation  is  construed  strictly,  against  the 
grantee  and  in  favor  of  the  public.  In  grants  by  the  public 
everything  must  be  expressed;   nothing  passes  by  implication.* 


road  owned  by  any  other  company 
within  or  without  this  State ;  and 
any  railroad  ...  of  the  United 
States,  or  of  any  State  or  Territory, 
may  lease  and  operate  .  .  .  the  rail- 
road owned  by  a  company  of  this 
State." 

This  act  does  not  permit  leasing  of 
competing  lines. 

For  additional  statute,  see  ante, 
§  145  ("Sales"). 

Vermont.  Stat.  1894,  §  3747: 
"Railroad  companies  in  this  State 
may  make  contracts  and  arrange- 
ments with  each  other,  and  with 
railroad  corporations  ...  of  other 
of  the  United  States,  or  ...  of 
the  Dominion  of  Canada,  for  leas- 
ing and  running  the  roads  of  the 
respective  corporations,  or  a  part 
thereof. " 

Washington.  See  ante,  §  145 
("Sales"). 

West  Virginia..  Code  1906,  §  2346. 
See  ante,  §  22,  note,  where  this  statute 
is  shown  with  reference  to  consolida- 
tions. 

Wisconsin.  See  ante,  §  145 
("Sales"). 

Wyoming.  See      ante,      §      145 

('"Sales"). 

England.  "The  Railway  Leasing 
Act,"  8  &  9  Vict.  c.  96  (1845),  pro- 
vides that  no  railway  company  shall 
grant  or  accept  a  lease  or  transfer  of 
any  railway   unless   under  a  distinct 

334 


provision    of    an  Act  specifj-ing    the 
parties. 

'  Charles  River  Bridge  v.  Warren 
Bridge,  11  Pet.  (U.  S.)  420  (1837); 
Dubuque,  etc.  R.  Co.  v.  Litchfield  Co. 
23HoV.  (U.  S.)66(  1859) ;  Turnpike  Co. 
V.  Illinois,  96  U.  S.  63  (1877) ;  SUdeU 
V.  Grandjean,  111  U.  S.  412  (1884), 
(4  Sup.  Ct.  Rep.  475);  Oregon  R., 
etc.  Co.  V.  Oregonian  R.  Co.,  130  U.  S. 
1  (1889),  (9  Sup.  Ct.  Rep.  409). 

In  Central  Transp.  Co.  v.  Pullman 
Car  Co.,  139  U.  S.  24  (1891),  (11  Sup. 
Ct.  Rep.  478),  the  Supreme  Court  of  the 
United  States  said:  "By  a  familiar 
rule,  every  public  grant  of  property, 
or  of  privileges  or  franchises,  if  am- 
biguous, is  to  be  construed  against 
the  grantee  and  in  favor  of  the  pubUc  ; 
because  an  intention,  on  the  part  of 
the  government,  to  grant  to  private 
persons,  or  to  a  particular  corpora- 
tion, property  or  rights  in  which  the 
whole  public  is  interested,  cannot  be 
presumed,  imless  unequivocally  ex- 
pressed or  necessarily  to  be  implied  in 
the  terms  of  the  grant,  and  because 
the  grant  is  supposed  to  be  made  at 
the  solicitation  of  the  grantee,  and  to 
be  drawn  up  by  him  or  by  his  agents, 
and  therefore  the  words  used  are  to 
be  treated  as  those  of  the  grantee; 
and  this  rule  of  construction  is  a 
wholesome  safeguard  of  the  interests 
of  the  public  against  any  attempt  of 
the  grantee,  by  the  insertion  of  am- 


CHAP.    XVl]  NATURE    AXD   AUTHORIZATION    OF    LEASE  §    182 

The  intention  of  the  legislature  to  authorize  a  railroad  com- 
pany to  lease  its  railroad  and  franchises  must  clearly  appear 
or  the  power  will  not  exist.'  In  case  of  doubt,  a  construction 
will  not  be  given  which  will  authorize  a  ^wasi-public  corpora- 
tion to  disable  itself  from  performing  the  duties  for  which  it 
was  created.  In  fact,  it  has  been  said  that  to  justify  a  rail- 
road company  in  claiming  authority  to  lease  its  railroad  to 
another  corporation  "  it  must  be  able  to  point  to  the  exact 
statute  granting  such  authority."  ^ 

The  correct  rule  is,  undoubtedly,  that  grants  are  to  be  strictly 
construed,  but  that  the  intention  of  the  legislature  is  not  to 
be  defeated  by  an  unreasonaljly  strict  construction.-^ 

§  182.  Construction  of  Statutes  —  (A)  Provisions  author- 
izing Leases.  —  Power  to  purchase  outright  is  said  to  inclutle 
power  to  lease  and  operate  for  a  definite  term.  Upon  similar 
principles,  it  is  held  that  where  a  railroad  company,  under  its 
charter,  has  power  both  to  construct  a  railroad  for  another 
corporation  to  operate,  and  to  operate  a  railroad  in  its  own 
behalf,  it  has  power  to  lease  a  railroad  for  its  own  operation.^ 

"  Power  to  receive  a  lease  from  a  connecting  railroad  cor- 
poration implies  power  in  favor  of  the  latter  to  give  it."  ^ 

biguous  language,  to  take  what  could  was   not    approved    by   the   appellate 

not  be  obtained  in  clear  and  express  court,  and  cannot  be  justified  in  prin- 

terms."  ciplc.     24  N.  J.  Eq.  455  (1873). 

>  United    States:    Central    Transp.  Texas:    East   Line,  etc.   R.  Co.   v. 

Co.   V.   Pullman   Car  Co.,     139   U.   S.  State,  75  Tex.  434  (1889),  (12  S.  W. 

24   (1891),   (11    Sup.   Ct.   Rep.   478);  Rep.  690). 

Oregon    R.,    etc.     Co.    v.     Oregonian  ^  State  v.  Atchison,  etc.  R.  Co.,  24 

R.  Co.,  130  U.   S.    1    (1889),   (9  Sup.  Neb.  161  (1888),  (38  N.  W.  Rep.  43, 

Ct.   Rep.    409);    Pennsylvania   Co.   v.  8  .\m.  St.  Rep.  164). 
St.  Louis,  etc.  R.  Co.,    118  U.  S.   290  ^  See    ante,   §    27:    "General    Rule 

(1886),  (6  Sup.  Ct.  Rep.  1094).  of  Construction"  ("Consolidation"); 

Nebraska:    State  v.   Atchison,   etc.  ««<f,  §  146  :  "Constructioti  of  Statutes" 

R.  Co.,  24  Neb.  143  (1888),  (38  N.  W.  ("  Sales  "). 
Rep.  43,  8  Am.  St.  Rep.  164).  ••  Kaufman  v.  Pittsburg,  etc.  R.  Co., 

Neio  Jersey:   In  Black  t>.  Delaware,  217    Pa.    .599    (1907),    (66    Atl.    Rep. 

etc.  Canal  Co.,  22  N..L  Eq.  130(1871),  1108). 

the  Chancellor  distinguished  between  '  Huntting  v.  Hartford  St.  R.  Co., 

a  primary  grant  of  franchises  and  an  73   Conn.    179   (1900),    (46   Atl.    Rep. 

act  authorizing  the  transfer  of  existing  824).      In    this  ca.se    the    Court    also 

franchises,  holding  that  the  latter  did  said  :    •'  It   was  among  the  franchises 

not  require  the  same  strict  rule  of  con-  granted  to  the  defendant  to  jjurchase 

struction  applicable  in  the  case  of  the  or   take   lca.ses   of   the    property    and 

former.     This    distinction,     however,  franchises  of  any  other  street  railway 

335 


§182 


INTERCORPORATE    RELATIONS 


[part    III 


An  Illinois  statute  ^  authorizing  domestic  railroad  com- 
panies to  make  "  contracts  and  arrangements  with  each  other, 
and  with  railroad  corporations  of  other  States,  for  leasing 
and  running  their  roads,  or  any  part  thereof,"  has  been  held 
by  the  Supreme  Court  of  the  United  States  to  include,  by  the 
use  of  the  words  "  their  roads,"  not  only  roads  of  other  do- 
mestic, but  foreign,  corporations  and  to  confer  power  to  make, 
as  well  as  to  take,  leases.^  Power  to  construct  a  branch  rail- 
road will  carry  with  it  by  implication  power  to  lease  a  branch 
already  constructed,  but  such  power  cannot  be  exercised  after 
the  right  to  construct  has  expired.  The  loss  of  the  right  in- 
volves the  deprivation  of  all  powers  flowing  from  it.^ 


companies,  with  which  its  tracks  might 
connect.  The  .  .  .  Railroad  Com- 
pany, being  one  of  these  connecting 
companies,  and  authorized  by  its 
charter  to  lay  tracks  on  Burnside 
Avenue  at  the  place  in  question, 
leased  all  its  property  and  franchises 
to  the  defendant,  for  the  term  of 
thirty  years,  shortly  before  the  latter 
constructed  its  tracks  there.  It  was 
authorized  to  make  such  a  lease  by 
the  charter  of  the  defendant." 

Where  the  charter  of  a  railroad 
company  empowers  it  to  take  a  lease 
of  the  property  of  another  company 
the  latter  has  implied  power  to  make 
the  lease  —  there  being  nothing  in 
its  charter  to  prevent. 

Kaufman  v.  Pittsburg,  etc.  R.  Co., 
217  Pa.  St.  599  (1907),  (66  Atl.  Rep. 
1108). 

'  Illinois :  Statute  of  February  12, 
1855;  Priv.  Laws  1885,  p.  304;  Rev. 
Stat.  1874,  ch.  114,  §  34. 

2  St.  Louis,  etc.  R.  Co.  v.  Terre 
Haute  R.  Co.,  145  U.  S.  393  (1892), 
(12  Sup.  Ct.  Rep.  953).  Compare 
Black  V.  Delaware,  etc.  Canal  Co.,  22 
N.  J.  Eq.  130  (1871),  reversed  in 
24    N.  J.  Eq.  455  (1873). 

Authority  granted  to  a  railroad 
corporation  to  lease  a  railroad  con- 
nected with  its  own  does  not  permit 
it  to  lease  its  own  road  to  another 
company.     Mills   v.   Central   R.   Co., 

336 


41  N.  J.  Eq.  1  (1886),  (2  Atl.  Rep. 
453). 

A  statute  conferring  authority 
upon  a  railroad  company  to  lease  its 
property  is  confined,  in  its  operation, 
to  property  within  the  State.  Briscoe 
V.  Southern  Kansas  R.  Co.,  40  Fed. 
273  (1889). 

A  Massachusetts  statute  authoriz- 
ing "any  railroad  corporation  created 
by  this  State"  to  lease  its  road  to 
another  corporation  "so  created" 
authorizes  the  making  of  a  lease  by  a 
corporation  formed  by  a  consolidation 
of  a  domestic  corporation  with  a  cor- 
poration of  another  State ;  the  con- 
solidated company  being  in  Massachu- 
setts a  corporation  of  that  State. 
Peters  v.  Boston,  etc.  R.  Co.,  114 
Mass.  127  (1873). 

A  statute  authorizing  a  railroad 
company  to  acquire  and  use  certain 
ferry  franchises  does  not  authorize  it 
to  lease  such  franchises  to  a  foreign 
railroad  company  and  thereby  relieve 
itself   from   the    attendant   liabilities. 

Brooker  v.  Maysville,  etc.  R.  Co., 
119  Ky.  137  (1904),  (83  S.  W.  Rep. 
117). 

'  Camden,  etc.  R.  Co.  v.  May's 
Landing,  etc.  R.  Co.,  48  N.  J.  L.  530 
(1886),  (7  Atl.  Rep.  523). 

A  provision  in  the  charter  of  a  rail- 
road company  authorizing  it  to 
"make    contracts    with    individuals, 


CHAP.    XVl]  NATURE    AND    AUTHORIZATION    OF    LEASE 


§182 


Under  a  statute  authorizing  railroad  corporations  to  lease 
their  properties  and  franchises  without  limiting  the  term,  a 
lease  for  nine  hundred  and  ninety-nine  years,  although 
amounting  practically  to  a  conveyance  of  the  fee,  is  valid. 
Such  leases  have  frequently  been  made  and  the  legislature  in 
enacting  the  statute  without  qualification  will  not  be  pre- 
sumed to  have  intended  to  exclude  them.' 

Power  to  "  farm  out  "  the  right  of  transportation  has  been 
held  by  the  Supreme  Court  of  North  Carolina  to  be  equivalent 
to  power  to  lease.^  The  phrase  "to  farm  out,"  however,  is 
an  English  one  and,  as  applied  to  railroads,  usually  means 
the  grant  of  running  privileges. 

When  a  corporation  is  authorized  to  take  a  lease  of  a  rail- 
road and  franchises  it  may  acquire  the  same  through  an  assign- 
ment of  the  lease  from  an  existing  lessee.^ 


corporations  and  other  railroad  com- 
panies for  the  building,  completion 
and  operating  of  said  road  or  any 
part  thereof,"  gave  it  power  to  lease 
the  road. 

McCabe's  Admx.  v.  Ma3'^sv'ille,  etc. 
R.  Co.,  112  Ky.  861  (1902),  (66  S.  W. 
Rep.   1054). 

'  Dickinson  v.  Consolidated  Trac- 
tion Co.,  119  Fed.  872  (1903)  :  "The 
suggestion  that,  'for  all  substantial 
and  practical  purposes,  a  lease  for 
999  years  is  a  conveyance  in  fee,'  is 
without  force.  The  question  is  not 
as  to  what  may  be  the  practical  effect 
of  the  particular  instrument,  but  as 
to  its  authorization  ;  and,  as  corpora- 
tion leases  for  999  years  were  well 
known  when,  by  the  statutory  pro- 
visions to  wliich  we  have  referred,  the 
power  to  lease  was  broadly  and  un- 
qualifiedly given,  we  are  not  at  liberty 
to  assume  that  the  exercise  of  that 
power  was  intended  to  be  restricted 
to  leases  for  a  term  not  to  exceed 
some  limited,  but  wholly  undefined 
and  indeterminate,  period." 

See  also  Wormser  v.  Metropolitan 
St.  R.  Co.,  98  App.  Div.  (X.  Y.)  29 
(1904),  (90  N.  Y.  Supp.  714). 


^  State  V.  Richmond,  etc.  R.  Co., 
72  N.  C.  634  (1875). 

In  Hill  V.  Atlantic,  etc.  R.  Co., 
143  X.  C.  541  (1906),  (55  S.  E.  Rep. 
854)  the  Court  said  :  "The  charter  of 
the  defendant  company  conferring 
the  right  to  transport  pas.sengers  and 
freight,  and  gi\-ing  the  power  to 
'farm  out'  the  right  of  transporta- 
tion, authorizes  the  company,  by  the 
former  decisions  of  this  Court,  to 
execute  a  valid  lease  of  its  property 
and  franchises  to  another  railroad 
companj'." 

The  same  phrase  is  used  in  a 
Georgia  statute,  and  ha-s  been  held 
to  confer  power  upon  a  railroad  com- 
pany to  lea.se  its  property  and  fran- 
chises including  the  right  to  use  and 
maintain  terminal  yards. 

Georgia  R.  Co.  v.  Maddox,  116  Ga. 
63  (1902),  (42  S.  E.  Rep.  315). 

'  Stewart  v.  Long  Island  R.  Co., 
102  N.  Y.  601  (1886),  (8  N.  E.  Rep. 
200,  55  Am.  Rep.  844). 

An  ordinance  authorizing  street 
railway  companies,  their  succcs-sors 
and  a,ssigns  to  sell  or  lea.se  their  prop- 
erties and  franchises  to  other  corpo- 
rations,  their   successors  and  assigns 

337 


§  183 


INTERCORPORATE    RELATIONS 


[part   III 


The  New  York  statute  of  1839  '  providing  that  "  it  shall  be 
lawful  for  any  railroad  corporation  to  contract  with  any  other 
railroad  corporation  for  the  use  of  their  respective  roads  and 
thereafter  to  use  the  same  in  the  manner  prescribed  in  said 
contract "  has  been  repeatedly  held  by  the  courts  of  that  State 
to  authorize  a  lease.  As  said  by  Judge  Gray  in  Beveridge  v. 
New  York  Elevated  R.  Co.  :^  "  The  act  of  1839  has  more  than 
once  been  construed  to  authorize  such  a  lease.  The  power 
therein  conferred  upon  a  railroad  corporation  to  contract  with 
another  for  the  use  of  their  respective  roads,  in  such  manner 
as  the  contract  may  prescribe,  involves  the  power  to  make  a 
lease  for  a  term  of  years."  ^ 

§  183.  Construction  of  Statutes  —  (B)  Provisions  not  author- 
izing Leases.  — -  In  contrast  to  the  construction  of  the  New 
York  sta'tute  referred  to  in  the  last  section,  an  Indiana  statute  "• 
authorizing  a  domestic  railroad  company  "  to  make  such  con- 


empowers  a  purchasing  corporation 
to  itself  exercise  the  power  to  lease 
without  obtaining  the  further  consent 
of  the  municipality,  notwithstanding 
a  constitutional  provision  forbidding 
the  transfer  of  street  railway  fran- 
chises without  such  consent. 

Moorshead  v.  United  Rys.  Co., 
119  Mo.  App.  541  (1906),  (96  S.  W. 
Rep.  261);  affirmed,  203  Mo.  121 
(1907),  (100  S.  W.  Rep.  611). 

■  Laws  of  1839,  ch.  218. 

•*  Beveridge  v.  New  York  Elevated 
R.  Co.,  112  N.  Y.  21  (1889),  (19  N.  E. 
Rep.  489). 

3  See  al.so  Day  v.  Ogdensburg,  etc. 
R.  Co.,  107  N.  Y.  129  (1887),  (13  N.  E. 
Rep.  765) ;  Woodruff  v.  Erie  R.  Co., 
93  N.  Y.  609  (1883);  People  v. 
Albany,  etc.  R.  Co.,  77  N.  Y.  232 
(1879) ;  Fisher  v.  New  York  Central, 
etc.  R.  Co.,  46  N.  Y.  644  (1871); 
Gere  v.  New  York  Central,  etc.  R.  Co., 
19  Abb.  N.  C.  193  (1885).  Compare 
Troy,  etc.  R.  Co.  v.  Boston,  etc.  R. 
Co.,  86  N.  Y.  107  (1881),  where  Judge 
Danforth  said  concerning  the  act  of 
1839:  "Assuming  that  the  statute 
permits  a  grant  of  the  exclusive  right 

338 


to  use  a  road,  and  does  not  contem- 
plate a  mere  traffic  arrangement,  by 
which  each  of  two  companies  may  use 
the  other's  road,  is  the  instrument 
called  a  lease,  a  contract  for  'use,' 
within  its  meaning?" 

In  Wormser  v.  Metropolitan  St. 
R.  Co.,  98  App.  Div.  (N.  Y.)  37 
(1904),  (90  N.  Y.  Supp.  714),  the 
Court  said  :  "It  is  well  known  that 
under  the  act  of  18.39  it  was  .strongly 
contended  that  no  larger  or  greater 
interpretation  could  be  given  to  the 
permission  thereby  conferred  than 
that  running  arrangements  might  be 
made  by  one  railroad  corporation 
with  another.  But  it  was  held,  as 
the  proper  interpretation  of  that 
statute,  that  it  permitted  the  leasing 
of  one  railroad  to  another  which  con- 
templated the  \'irtual  abandonment 
of  everything  connected  with  the 
lessor  road  and  the  vesting  of  it  in 
the  lessee."  See  also  Metropolitan 
El.  R.  Co.  V.  Manhattan  R.  Co.,  14 
Abb.  N.  C.  201  (1884). 

*  Indiana:  Rev.  Stat.  (1881), 
§   3973. 


CHAP.    XVl]  NATURE    AND    AUTHORIZATION    OF    LEASE 


§  183 


tracts  and  agreements  "  with  a  connecting  railroad  in  an  ad- 
joining State  "  for  the  transportation  of  freight  and  passen- 
gers, or  for  the  use  of  its  said  road,  as  to  the  board  of  directors 
may  seem  proper,"  was  held  by  the  Supreme  Court  of  the 
United  States  not  to  confer  authority  to  make  contracts  be- 
yond those  relating  to  forwarding  passengers  and  freight,  and. 
possibly,  to  the  use  of  the  road  of  the  one  company  by  the 
other  in  running  its  cars  to  their  destination.*  The  title  to 
this  act  included  the  clause,  "  to  connect  their  roads  with  the 
roads  of  other  companies,"  and  the  Supreme  Court  of  Indiana, 
in  construing  the  act,  said:  "To  connect  one  road  with  another 
does  not  fairly  mean  to  lease  or  sell  it  to  another."  ^ 

A  provision  in  the  charter  of  a  railroad  coi'poration  author- 
izing it  "  to  make -contracts  and  engagements  with  any  other 
corporation,  or  with  individuals,  for  transporting  or  convey- 
ing any  kinds  of  goods,  produce,  merchandise,  freight  or  pas- 
sengers," merely  authorizes  contracts  relating  to  the  carriage 
of  goods  or  passengers  and  cannot  be  construed  as  authorizing 
a    lease. ^     A    statute    authorizing    a    corporation    to    contract 


'  Pennsylvania  Co.  v.  St.  Louis,  etc. 
R.  Co.,  118  U.  S.  311  (1886),  (6  Sup. 
Ct.  Rep.  1094) ;  St.  Louis,  etc.  R.  Co. 
V.  Terre  Haute  R.  Co.,  145  U.  S.  405 
(1892),  (12  Sup.  Ct.  Rep.  59.3) ;  Com- 
mi.ssioner3  of  Tippecanoe  County  v. 
Lafayette,  etc.  R.  Co.,  50  Ind.  85 
(1875). 

2  Commissi onere  of  Tippecanoe 
County  V.  Lafayette,  etc.  R.  Co.,  50 
Iml.  110  (1875),  (per  Biddle,  J). 

3  Thomas  v.  Railroad  Co.,  101  U.  S. 
SO  (1879)  :  "The  authority  to  make 
this  lease  is  placed  by  covmscl  pri- 
marily in  the  following  language  of 
the  thirteenth  section  of  the  com- 
pany's charter:  'That  it  shall  be 
lawful  for  the  said  company,  at  any 
time  during  the  continuance  of  its 
cliarter,  to  make  contracts  and  en- 
gagements witli  any  other  corporation, 
or  with  individuals,  for  the  transport- 
ing or  conveying  of  any  kinds  of  gootls, 
produce,  merchandise,  freight,  or  pas- 
sengers, and  to  enforce  the  fulfihnent 
of  such  contracts.'     This  is  no  more 


than  say-ing,  'you  may  do  the  business 
of  carrying  goods  and  passengers,  and 
may  make  contracts  for  doing  that 
business.  Such  contracts  you  may 
make  with  any  other  corporation  or 
with  individuals.'  No  doubt  a  con- 
tract by  which  the  goods  received  from 
railroad  or  other  carrying  companies 
should  be  carried  over  the  road  of  this 
company,  or  by  which  goods  or  pas- 
sengers from  this  road  should  be  car- 
ried by  other  railroails,  whether  con- 
necting immediately  with  them  or  not, 
are  within  tliis  power,  and  are,  prob- 
ably, the  main  object  of  the  clause. 
But  it  is  impos.sible,  under  any  sound 
rule  of  construction,  to  find  in  the 
language  used  a  permis.sion  to  .lell, 
lease,  or  transfer  to  others  the  entire 
road  and  the  rights  and  franchises  of 
the  corporation.  To  do  so  is  to  de- 
prive the  company  of  the  |x>wer  of 
making  those  contracts  which  this 
clause  confers  and  of  performing  the 
duties  which  it  implies." 

339 


§   183  INTERCORPORATE   RELATIONS  [PART  III 

with  other  corporations  "  for  the  leasing  or  hiring  and  transfer 
to  them  "  of  its  "  railway  cars  and  other  personal  property  " 
authorizes  the  lease  of  such  cars  in  the  regular  course  of  busi- 
ness, but  does  not  warrant  the  corporation  in  making  a  long 
lease  to  a  single  corporation  of  its  entire  personal  property.' 

The  use  of  the  words  "assigns"  and  "successors/'  in  con- 
nection with  the  powers  granted  to  railroad  companies  in  their 
charters,  or  in  general  laws,  does  not  necessarily  imply  that 
they  may  transfer  all  their  property  by  lease.  The  use  of  such 
words  recognizes  the  possibility  of  a  transfer  under  statutory 
authority  but  does  not  itself  grant  the  authority.^  The  phrase 
"  passing  over,"  as  used  in  the  English  Railway  Clauses  Act,^ 
does  not  refer  to  a  lease  but  means  "  passing,  with  the  incidents 
which  ordinarily  attach  to  passing  over,  that  is  to  say,  the 
incidents  of  stopping  and  of  taking  up,  at  the  points  at  which 
they  do  stop,  both  passengers  and  goods."  * 

A  general  incorporation  act  authorizing  the  formation  of 
corporations  for  "  any  lawful  purpose  "  does  not  authorize  a 
corporation  created  thereunder  to  assume  to  itself  the  power 
of  leasing  railroads,  because  of  the  mere  declaration  in  its 
articles  of  association  that  it  possesses  such  power.^     A  con- 

'  Central  Transp.   Co.   v.    Pullman  legislature.     Naturally,  we  would  look 

Palace  Car  Co.,  139  U.  S.  24  (1891),  for  the  authoritj'  to  do  these  things  in 

(11  Sup.  Ct.  Rep.  478).  some  express  pro\'ision  of  law.     We 

2  Thomas  v.  Railroad  Co.,  101  U.  S.  would  suppose  that  if  the  legislature 

71    (1879)  ;    Pennsyh-ania  Co.   v.   St.  saw  fit  to  confer  such  rights  it  would 

Louis,    etc.    R.    Co.,    118    U.    S.    311  do  so   in   terms  which   could   not   be 

(1886),  (6  Sup.  Ct.  Rep.  1094)  ;    Bris-  misunderstood.     To  infer,  on  the  con- 

coe  V.  Southern  Kan.  R.  Co.,  40  Fed.  trary,  that  it  either  intended  to  confer 

278  (1889).    In  Oregon  R.,  etc.   Co.  v.  them  or  to  recognize  that  they  already 

Oregonian  R.  Co.,  130  U.  S.  30  (1889),  existed,  by  the  simple  use  of  the  word 

(9  Sup.  Ct.  Rep.  409),  Mr.  Justice  Mil-  'assigns,'  a  very  loose  and  indefinite 

ler  said  :   "One  of  the  most  important  term,  is  a  stretch  of  the  power  of  the 

powers  with  which  a  corporation  can  court  in   making   implications   which 

, be  invested  is  the  right  to  .sell  out  its  we  do  not  feel  to  be  justified." 
whole    property    together    with    the  ^  8  Vict.  ch.  20. 

franchises  under  which  it  is  operated,  *  Simpson  v.  Denison,  10  Hare,  57 

or  the  authority  to  lease  its  property  (1852),  (16  Jur.  828). 
for  a  long  term  of  years.     In  the  case  *  Oregon  R.,  etc.  Co.  v.  Oregonian 

of  a  railroad  company,  these  privileges,  R.  Co.,  130  U.  S.  1  (1889),  (9  Sup.  Ct. 

next  to  the  right  to  build  and  operate  Rep.  409). 

its  railroad,   would  be  the  most   im-  The    New    York     statute   of    1839 

portant  which  could  be  given  it,  and  which  for  a  long  time  furnished  the 

this  idea  would  impress  itself  upon  the  sole  authority  for  railroad  leases,  pro- 

340 


CHAP.    XVl]  NATURE    AND    AUTHORIZATION    OF    LEASE  §    184 

stitutional  provision  *  prohibiting  parallel  or  competing  roads 
from  being  consolidated  is  a  restriction  upon  the  powers  of 
the  corporations  owning  such  roads,  and  is  not  to  be  construed 
as  a  grant  of  authority  to  non-competing  corporations  to 
lease.^ 

§  184.  Construction  of  Statutes  —  (C)  Power  to  lease  Un- 
finished Road.  —  Power  to  construct  does  not  give  power  to 
take  a  lease  and,  conversely,  power  to  take  a  lease  does  not 
give  power  to  construct.^  Where,  therefore,  the  statute  au- 
thorizing railroad  leases  is  inapplicable  to  roads  not  yet  con- 
structed, a  lease  by  a  railroad  company  of  its  road  and  fran- 
chises before  its  road  is  completed  is  invalid,  and  the  lessee 
acquires  no  right  to  finish  the  work."*  Thus  it  was  held  that 
a  statute  authorizing  the  leasing  of  a  railroad  and  conferring 
upon  the  lessee  power  "  to  run,  use  and  operate  "  the  road 
implied  a  finished  road,  as  did  a  condition  that  the  leased 
roads  should  be  connected;  and  that,  under  such  authority, 
the  franchise  for  building  a  road  could  not  be  transferred.^ 

While  power  to  construct  will  not  be  implied  from  a  grant 
of  power  to  take  a  lease,  power  to  enter  into  an  executory  con- 
tract for  leasing,  when  completed,  a  railroad  in  process  of 
construction,  may  fairly  be  implied  from  such  a  grant  of  power.** 

vided    that    nothing    therein    should  Co.,   130  U.  S.   1   (1889),  (9  Sui>.  Ct. 

authorize  the  railroad  of  any  corpora-  Rep.  409). 

tion  to  be  used  in  a  manner  incon-  *  Wood  v.  Bedford,  etc.  R.  Co.,  8 
si-stent  with  its  charter.  The  charter  Phila.  94  (1871);  Clarke  r.  Omaha, 
of  a  railroad  company  authorized  it  to  etc.  R.  Co.,  4  Neb.  4.58  (1876),  (sale), 
construct  and  operate  its  road  be-  "  Wood  v.  Bedford,  etc.  R.  Co., 
tween  certain  termini.  It  sought  to  8  Phila.  94  (1871). 
lease  a  portion  of  its  road  to  another  "  Jones  r.  Concord  R.  Co.,  67  N.  li. 
corporation  which  would  have  ren-  234  (1892),  (30  .\t\.  Rep.  614,  (JS 
derod  it  impossible  for  the  lessor  to  Am.  St.  Rep.  650)  ;  March  v.  l']ustern 
have  constructed  and  operated  the  R.  Co.,  40  N.  H.  548  (1860),  (77  Am. 
road  between  the  termini  prescribed  Dec.  732) ;  Hazard  v.  Vermont,  etc. 
in  the  charter.  It  was  held  that  the  R.  Co.,  17  Fed.  7.53  (1883).  In  Da\ 
statute  did  not  authorize  such  a  t'.  Ogdensburg,  etc.  R.  Co.,  107  N.  Y. 
lease.  129  (1887),  (13  N.  E.  Rop.  765),  flu- 
Brooklyn,  etc.  R.  Co.  V.  Long  road  was  finished  in  jierformance  of  an 
Island  R.  Co.,  72  App.  Div.  (X.  Y.)  agreement  entered  into  at  the  .same 
496  (1902),  (76  N.  Y.  Supp.  777).  time  the  lea.se  wa-s  agreed  upon,  and 
'  Texas,  Con.st.  Art.  X.  §  5.  it  wa.s  held  that  the  lea.^e  was  valid  — 
*  Central,  etc.  R.  Co.  v.  Morris,  68  that  the  parties  intended  a  completeil 
Tex.  49  (1887),  (3  S.  W.  Rep.  457).  road  and  before  the  lea.'^e  was  executed 
^  Oregon  R.,  etc.  Co.  v.  Oregonian  the  road  was  completetl. 

341 


§    185  INTERCORPORATE    RELATIONS  [PAUT    III 

The  construction  of  a  railroad  requires  the  exercise  of  powers 
dissimilar  to  those  required  in  the  operation  of  a  leased  road. 
An  agreement  for  a  lease  —  or  a  lease  to  commence  infuturo  — 
involves  merely  the  exercise  in  an  uncommon  form  of  the  power 
conferred.  As  somewhat  broadly  stated  by  the  Supreme 
Court  of  New  Hampshire  in  Jones  v.  Concord  R.  Co.:  ^  "  What- 
ever may  be  the  practical  effect  of  a  conveyance  or  lease  of  a 
building  or  road  that  does  not  exist,  the  corporate  power  of 
hiring  a  road,  like  the  power  of  hiring  a  passenger  or  freight 
station,  includes  the  power  of  making  an  executory  contract 
for  a  lease  of  a  road  or  building  to  be  constructed  within  a  time 
or  in  a  place  or  manner  or  form,  prescribed  by  the  contract." 

§  185.  Construction  of  Statutes  —  (D)  Leases  of  Connecting 
Lines.  —  As  already  shown,  statutes  authorizing  railroad  leases 
generally  provide  that  railroad  companies  may  lease  their  roads 
to  corporations  owning  roads  which  form  continuous  or  con- 
necting lines  with  their  own.^  The  construction  of  statutes  of 
this  character  has  been  the  subject  of  extended  consideration 
in  connection  with  similar  limitations  attached  to  the  right  to 
consolidate,  and  the  principles  there  shown  to  be  established 
apply  with  equal  force  to  statutes  authorizing  leases.^ 

1  Jones  V.  Concord  R.  Co.,  67  N.  H.  caused  by  the  inclined  plane,  in  the 
243  (1892),  (30  Atl.  Rep.  614,  68  Am.  Une  of  the  former.  An  absolute  pas- 
St.  Rep.  650).  sage  for  a  car  from  one  road  to  another 

2  See  ante,  §  180  :  "  What  Railroads  without  interruption  is  not  nece.ssary 
tnay  be  leased.     Statutory  Provisions."  to   constitute   a   "connected   or   con- 

3  See  ante,  §  29:    "Construction  of  tinuous"  line  within  the  meaning  of 
Statutes    authorizing    Consolidation   of  the  statutes  in  question. 
Railroads  — -  Connecting  or  Continuous  Hampe   v.   Traction   Co.,    165    Pa. 
Lilies."  St.  468   (1895),    (30    Atl.    Rep.  931). 

Power  to  take  a  lease  from  a  con-  The   general   statutes   of   Pennsyl- 

necting     railroad     company     implies  vania    referred    to    in    the    preceding 

power  in  the  latter  to  make  a  lease.  case  requiring  the  railroads  of  le.s.sor 

Huntting  v.  Hartford  St.  Ry.  Co.,  and   lessee   to   be   connected,    do   not 

73  Conn.    179   (1900),    (46   Atl.    Rep.  apply    to    corporations    chartered    by 

824).  the    legislature    upon    which    express 

An     inclined-plane    railway    com-  power  to  merge,  consolidate  or  unite, 

pany    organized    under    the   laws   of  without  such  condition,  is  conferred 

Pennsj'lvania,    has    authority,    under  by  another  statute, 

statutes  of  that  State,  to  lease  its  entire  Kaufman  v.  Pittsburgh,  etc.  R.  Co., 

property  to  another  railway  company,  217    Pa.    599    (1907),    (66    Atl.    Rep. 

where  one  of  the  lessor's  lines  fonns  1108). 

a  continuous  route  with  the  lessee's  Under  a  Georgia  statute  a  belt  line 

road,      notwithstanding      the      break  company  may  lease  its  road  to  another 

342 


CHAP.    XVl]  NATURE    AND    AUTHORIZATION    OF    LEASE 


§  187 


§  186.  Constitutional  and  Statutory  Prohibitions  of  Leases 
of  Competing  or  Parallel  Lines.  —  The  leasing  by  railroad  com- 
panies of  competing  or  parallel  lines  of  road  is  prohibited  by 
constitutional  and  statutory  provisions  in  many  States. 

The  same  .and  similar  prohibitions,  the  considerations  of 
pubhc  policy  which  induced  their  adoption,  and  their  construc- 
tion and  application,  have  already  been  examined  at  length  in 
the  consideration  of  the  subject  of  consolidation.* 

§  187.  Long-term  Leases  not  prohibited  by  Statutes  against 
Perpetuities.  —  The  question  has  been  judicially  raised  whether 
a  lease  in  perpetuity  or  for  nine  hundred  and  ninety-nine  years 
comes  within  the  prohibition  of  statutes  against  perpetuities 
as  suspending  the  disposition  of  the  leased  property  longer 
than  the  periods  prescribed  in  such  statutes.  A  slight  ex- 
amination of  the  question,  however,  will  show  clearly  that  a 
lease  does  not  create  a  perpetuity.  A  perpetuity  was  defined, 
in  the  early  case  of  Scattergood  v.  Edge,^  to  be  an  estate  "  in- 
alienable though  all  mankind  joined  in  the  conveyance."  But 
the  interests  of  lessor  and  lessee  may  generally  be  separately 
conveyed;  and  they  can  always,  by  uniting,  freely  and  without 
restraint  convey  the  entire  estate  —  the  fee  and  the  leasehold 
interest.^ 


company  with  whose  road  it  connects 
or  forms  a  continuous  line. 

Georgia  R.  etc.  Co.  v.  Maddox,  116 
Ga.  64  (1902),  (42  S.  E.  Rep.  315). 

'  See  ante,  ch.  III.  :  "Constitutional 
and  Statutory  Restrainta  upon  Con- 
solidation. " 

The  constitutional  provisions 
against  lea.ses  of  competing  lines  — 
as  well  a.s  consolidation  and  sales  — 
are  collected,  and  many  statutes  re- 
ferred to,  in  note  to  §  32,  ante:  "Con- 
stittUional    and    Statutory    Provisions 


against  Consolidation  of  Competing 
Railroads." 

^  Scattergood  v.  Edge,  1  Salk.  229 
(1795).  In  Washburn  v.  Donnes,  1  Ch. 
Cas.  23  (1671),  it  is  said  :  "A  perpetu- 
ity is  where  if  all  that  have  interest 
join  and  yet  cannot  bar  or  pass  the 
estate." 

^  Todhunter  v.  Dcs  Moines,  etc.  R. 
Co.,  58  Iowa,  205  (1882),  (12  N.  W. 
Rep.  267,  7  .\m.  <fe  Eng.  R.  Cas.  67), 
where  the  question  stated  in  the  text 
is  considered. 


343 


§    188  INTERCORPORATE    RELATIONS  [I'ART   III 


CHAPTER    XVII 


APPROVAL  AND  EXECUTION  OP  CONTRACT  OF  LEASE 

I.    Assent  of  Stockholders  to  Railroad  Lease 

§  188.     Necessity  for  Consent  of  Stockholders  to  Lease  of  Railroad.     Power  of 

Directors. 
§  189.     Whether  Unanimous  Con.sent  is  necessary  unless  otherwise  provided. 
§  190.     Requisite  Majority  prescribe  Terms  of  Lease. 
§  191.     Remedies  of  Dissenting  Stockholders. 
§  192.     Acquiescence  and  Laches  of  Stockholders. 

II.    Method  of  approving  and  executing  Railroad  Leases 

§  193.     Statutory  Requirements. 

§  194.     Construction  of  Statutes  prescribing  Mode  of  approving  and  executing 

Leases. 
§  195.     Formalities  attending  Execution  of  Lease  of  Railroad. 
§  196.     Corporation  may  be  estopped   from  alleging   Irregular   Execution  of 

Lease. 

I.    Assent  of  Stockholders  to  Railroad  Lease 

§  188.  Necessity  for  Consent  of  Stockholders  to  Lease  of 
Railroad.  Power  of  Directors.  — The  New  York  Court  of  Ap- 
peals has  held  that  a  lease  by  one  railroad  corporation  to  an- 
other of  its  road,  property  and  franchises  for  a  term  of  years, 
under  a  statute  conferring  the  power  but  not  prescribing  its 
mode  of  exercise,  may  be  made  by  the  directors  of  the  cor- 
poration, and  that  the  concurrence  of  the  stockholders  is  not 
essential  to  its  validity.^  The  ground  upon  which  this  decision 
was  placed  was  that  all  powers  conferred  upon  a  corporation, 
unless  otherwise  expressly  prescribed,  must  be  exercised  by  its 
directors,  —  that  the  consent  of  stockholders  is  not  neces- 
sary to  the  validity  of  a  corporate  act,  unless  expressly  required 
by  statute  or  the  by-laws  of  the  corporation.  This  conclu- 
sion is,  however,  opposed  by  other  authorities  and  cannot  be 
justified  upon  principle. 

'  Beveridge  v.  New  York  Elevated       Conro   v.   Port    Henry    Iron   Co.,    12 
R.  Co.,  112  N.  Y.  1  (1889),  (19  N.  E.       Barb.  (N.  Y.)  27  (1851). 
Rep.  489,  2  L.  R.  A.  648).     See  also 

344 


CHAP.    XVIl]  APPROVAL    AND    EXECUTION    OF    I.KASR 


§  188 


The  directors  of  a  corporation  are  its  executive  agents  — 
the  corporation  acts  through  them — but  their  duties  are  to 
administer  its  affairs  in  furtherance  of  the  objects  of  its  creation.^ 
They  may  exercise  all  ordinary  and  incidental  corporate  powers 
without  the  approval  of  the  stockholders,  but  the  extraordi- 
nary power  of  leasing  the  corporate  property  and  franchises 
for  a  long  term  of  years  —  of  completely  changing  the  control 
of  the  property  and  the  administration  of  the  affairs  of  the 
corporation  —  must  be  exercised  by  the  stockholders  them- 
selves, unless  expressly  conferred  upon  the  directors.^     When 


'  The  directors  of  a  railroad  com- 
pany are  its  agents  with  limited 
powers  and  their  duties  are  to  so  con- 
duct its  affairs  as  to  further  the  ends 
of  its  creation;  they  have  no  power 
to  destroy  it  or  give  away  its  funds 
or  deprive  it  of  any  of  the  means  for 
accomplishing  the  purposes  for  which 
it  was  chartered.  Bedford  R.  Co.  v. 
Bowser,  48  Pa.  St.  29  (18G4). 

Where  an  increa.se  of  the  capital 
stock  of  a  corporation  was  authorized 
"at  the  pleasure  of  the  saitl  corpora- 
tion" and  its  charter  provided  that 
"all  the  corporate  powers  of  the  said 
corporation  shall  be  vested  in  and 
exercised  by  a  board  of  directors"  it 
was  held  that  the  directors  had  no 
authority  to  increase  the  stock,  upon 
the  ground  that  "the  general  ]>ower 
to  perform  all  corporate  acts  refers 
to  the  ordinary  busint^ss  transactions 
of  the  corporation."  Railway  Co.  v. 
Allcrton,  18  Wall.  (U.  S.)  234 
(1873). 

^  United  States:  In  Cass  v.  Man- 
chester, etc.  R.  Co.,  9  Fed.  G42  (1881), 
Judge  McKennan,  in  considering  the 
necessity  for  the  stockhohlers'  con.sent 
to  a  lease,  said:  "The  change  pro- 
posed here  is  not  organic,  it  is  true, 
but  it  is  thorough  and  fuudametital, 
as  it  affects  the  administration  of  tiie 
company's  affairs.  It  involves  a  with- 
drawal from  the  ct)ntrol  antl  manage- 
ment of  the  stockholders  of  the  entire 
proj)erty  of  the  corporation  for  a 
period  of  at  least  five  years;    it   will 


preclude  for  a  like  period  the  exerci.se 
annually  by  the  stockholders  of  their 
judgment  as  to  the  particular  char- 
acter and  method  of  conducting  the 
business  affairs  of  the  corporation; 
and  it  denies  to  the  stockholders  any 
right  of  suggestion  or  disapproval  of 
the  conditions  upon  which  a  relin- 
quishment of  important  corporate 
faculties  may  be  conceded.  Surely  a 
power  which  will  be  attended  with 
such  consequence  does  not  relate  'to 
the  ordinary  business  transactions,' 
nor  'to  the  orderly  and  proper  ad- 
ministration of  the  affairs,'  of  the 
company,  and  hence  cannot  be 
exercised  by  the  directors  without 
express  authority  to  them.'" 

Rogers  v.  Nashville,  etc.  R.  Co.,  91 
Fed.  322  (1898) :  "The  power  of  leas- 
ing out  a  railroad,  or  acquiring  an- 
other by  lea.se,  is  one  which  very 
vitally  affects  the  contract  between 
shareholders.  That  every  such  con- 
tract should  be  referred  to  the  share- 
holders is,  therefore,  most  rea.sonable ; 
and  it  should  not  be  lightly  presumed 
that  the  law-making  power  would, 
when  dealing  with  the  general  sub- 
ject, intend  to  jjrovide  that  some 
contracts  of  this  character  should  be 
submitted  to  the  sharehoUlers  for 
their  ai)]>roval,  while  others  just  as 
vital  might  be  made  without  their 
consent."  Also  Farmers  Loan,  etc. 
Co.  V.  St.  .Jo.seph,  etc.  R.  Co.,  1 
McCrary  247  (1880). 

Indiana:   Commissioners  of  Tip|>i- 

345 


§189 


INTERCORPORATE  RELATIONS 


[part  III 


the  statute  conferring  power  to  lease  is  silent  as  to  the  mode 
of  its  exercise  a  lease  of  a  railroad  must  be  authorized,  or,  what 
is  equivalent,  ratified  by  the  stockholders. 

The  right  of  the  stockholders  to  authorize  a  lease  and  the 
necessity  for  their  approval  are  in  no  way  affected  by  the  fact 
that  the  directors  have  agreed  upon  the  terms  of  the  lease.* 

§  189.  Whether  Unanimous  Consent  is  necessary  unless 
otherwise  provided.  —  As  shown  in  another  section,  statutes  au- 
thorizing leases  of  railroads  nearly  always  prescribe  the  pro- 
portion of  the  stockholders  whose  consent  is  necessary.  Where, 
however,  the  statute  contains  no  such  provision,  a  question  arises 
whether  the  unanimous  consent  of  the  stockholders  is  required 
or  whether  the  consent  of  a  majority  is  sufficient.  Thus,  on 
the  one  hand,  it  has  been  held  that  a  lease  for  a  long  term  of 


canoe  County  v.  Lafayette,  etc.  R.  Co., 
50  Ind.  85  (1875). 

New  York :  Metropolitan  El.  R. 
Co.  V.  Manhattan  El.  R.  Co.,  11  Daly 
373  (1884),  (15  Am.  &  Eng.  R.  Cas. 
55,  14  Abb.  N.  C.  103).  In  this  ca.se 
(decided  before  the  Beveridge  case 
supra)  the  Court  said:  "If  the  board 
of  directors  have  the  power,  without 
the  assent  of  the  shareholders,  to 
lease  the  properties  of  the  corpora- 
tion for  all  time,  then  the  sharehoklers 
may  be  deprived  of,  not  only  the  ad- 
ministration of  their  property  through 
its  agents,  the  directors,  but  its  very 
possession,  without  a  moment's  warn- 
ing. A  board  of  directors  are  elected 
for  one  year,  to  manage  the  business 
and  affairs  of  the  corporation,  such 
business  being  the  operating  and 
maintaining  of  a  railroad.  At  the 
time  of  their  election,  the  shareholders 
have  no  intimation  that  anything  else 
is  to  be  done  by  the  directors,  and  the 
expectation  is  that  .such  directors,  at 
the  end  of  their  year  in  office,  will 
turn  over  the  property  committed  to 
them  to  their  successors  in  office,  with 
an  account  of  their  stewardship. 
Can  it  be  possible  that  this  board, 
elected  for  only  one  year,  without 
any  notice  or  warning  has  the  power 

346 


to  terminate  the  business  of  the  cor- 
poration, and  transfer  all  the  proper- 
ties to  another  corporation  ?  It  seems 
to  me  clearly  not.  This  is  not  the 
management  of  the  business  of  the 
corporation.  It  is  terminating  the 
business  to  carry  on  which  it  was 
incorporated." 

Petmsylvania :  Kersey  Oil  Co.  ?>. 
Oil  Creek,  etc.  R.  Co.,  12  Phila.  374 
(1877).  Also  Martin  v.  Continental 
Pass.  R.  Co.,  14  Phila.  10  (1880). 

Virginia:  Stevens  v.  Davi.son,  18 
Gratt.  819  (1868),  (98  Am.  Dec.  692). 

See  also  ante,  §  112:  "Sale  of  En- 
tire Corporate  Property  by  Directors." 

It  has  been  held  that  the  consent 
of  stockholders,  necessary  for  the 
authorization  of  a  lease,  is  required 
for  its  cancelation.  Henry  v.  Pitts- 
burgh, etc.  R.  Co.,  2  Ohio  \.  P.  118 
(1895). 

A  modification  of  a  lease  must  be 
approved  by  the  same  stockholders' 
vote  as  is  required  by  the  statute  in 
the  case  of  the  original  lease.  Con- 
tinental Ins.  Co.  V.  New  York,  etc.  R. 
Co.  187  N.  Y.  225  (1907),  (79  N.  E. 
Rep.  1026). 

'  Jones  V.  Concord,  etc.  R.  Co.,  67 
N.  H.  234  (1892),  (30  .\tl.  Rep.  614, 
68  Am.  St.  Rep.  650). 


CHAP.    XVII ]  APPROVAL    AND    EXECUTION    OF    LEASE 


§  189 


years  works  such  a  complete  change  in  the  conduct  of  the  affairs 
of  a  corporation  and  the  custody  of  its  property  that  it  can 
be  brought  about  only  by  the  unanimous  consent  of  the  stock- 
holders.^ On  the  other  hand,  it  has  been  held  that  every  stock- 
holder in  joining  a  corporation  impliedly  agrees  to  be  bound 
by  the  will  of  the  majority,  and  that  it  is  the  right  of  the  majority 
to  determine  whether  or  not  a  lease  —  which  makes  no  organic 
change — shall  be   made.^     "It   is   true  this   doctrine,"   says 


»  Mills  V.  Central  R.  Co.,  41  N.  J. 
Eq.  1  (1886),  (2  Atl.  Rep.  453).  See 
also  Zabriskie  v.  Hackensack,  etc.  R. 
Co.,  18  N.  .1.  Eq.  178  (1867). 

In  Boston,  etc.  R.  Co.  v.  New 
York,  etc.  R.  Co.,  1.3  R.  I.  260  (1881), 
the  Court  said:  "Such  an  arbitrary 
deprivation  of  property  it  cannot  be 
within  the  power  of  a  majority  in  a 
corporation  to  direct  or  of  a  legisla- 
ture to  ratify.  If  this  could  be  up- 
held no  investment  in  a  corporation 
would  be  secure,  for  any  minority 
could  be  deprived  of  their  property 
by  a  vote  of  a  majority  confirmed  by 
legislative  act,  without  the  refiuire- 
ment  of  public  necessity  and  witliout 
provision  for  'just  compensation.' " 

2  Dady  v.  Georgia,  etc.  R.  Co.,  112 
Fed.  842  (1901),  (consolidation); 
Inhabitants  of  Waldoborough  v. 
Knox,  etc.  R.  Co.,  84  Me.  469  (1892), 
(24  Atl.  Rep.  942)  (sale).  See  also 
Durfee  v.  Old  Colony  R.  Co.,  5  Allen 
(Mass.)  2.30  (1862). 

In  Dickinson  v.  Consolidated  Trac- 
tion Co.,  114  Fed.  933  (1902),  affirmed, 
119  Fed.  871  (1903),  —  a  New  Jersey 
case,  —  the  Court  followed  the  princi- 
ple of  the  New  .Icrsoy  decisions  cited 
in  the  preceding  note  in  holding  that 
where  authority  to  lease  is  not  con- 
ferred imtil  njter  the  organization  of 
the  corporation  unanimous  consent  is 
necessary  to  authorize  a  lease;  but 
that  when  such  power  existed  at  the 
time  the  corporation  was  organized, 
a  majority  vote  is  sufficient.  .Judge 
Gray  .said  (p.  2.53):  "The  objection 
most  strenuously  and  seriously  urged, 


is  that  although  express  power  may 
be  given  to  a  corporation  to  Iea.se, 
that  power  cannot,  in  the  absence  of 
express  legislative  authority  to  the 
contrary,  be  exercised  without  the 
consent  of  all  the  stockholders.  It  is 
urged  with  .some  plausibility,  that 
without  express  legislative  authority, 
a  corporation  could  not  make  a  lea-se 
of  its  property  and  franchi.ses,  even 
with  the  a.ssent  of  all  its  stockholders, 
and  that  express  legislative  authority 
to  make  a  lea.se  is  only  a  conferring 
of  a  power  not  existent  without  such 
legislative  grant,  iij^on  the  whole 
body  of  stockholders.  Many  cases 
have  been  cited  in  the  brief  and  in 
the  argument,  to  support  these  propo- 
sitions. The  distinction,  however, 
between  these  ca.ses  and  the  one  at 
bar,  is,  that  the  former  concern  grants 
of  legislative  power  to  lea.se,  to  cor- 
porations already  in  existence,  and 
whose  stockholders  have  subscribed 
under  the  contlitions  of  the  original 
charter,  by  which  no  such  power  was 
given.  The  implied  contract  between 
the  stockholders,  inter  scuc,  in  such 
cases,  is,  as  already  stated,  that  no 
such  additional  ])ower,  so  radical  in 
its  nature,  though  conferred  by  legi.s- 
lative  authority,  shall  be  capable  of 
being  exercised  without  the  assent  of 
all  the  stockholders.  In  the  case 
before  us,  however,  the  power  to 
lease  was  conferred  by  the  act  under 
which  both  corporations  were  formeil. 
It  was  inherent  in  their  organization 
and  corporate  existence,  and  wa.s  a 
condition    upon    which    every    stock- 

347 


§190  INTERCORPORATE    RELATIONS  [PART   III 

the  Supreme  Court  of  Maine/  "subjects  minorities  to  the 
will  of  majorities;  but  it  is  equally  true  that  the  contrary 
doctrine  subjects  majorities  to  the  will  of  minorities;  and 
since  one  side  or  the  other  must  yield,  it  seems  to  us  more  in 
harmony  with  the  principles  of  natural  justice  that  it  should 
be  the  minority." 

Upon  principle,  it  seems  the  better  view  that  where  author- 
ity to  make  or  take  a  lease  is  expressly  granted  to  an  existing 
railroad  company  and,  a  fortiori,  where  it  appears  in  the  laws 
under  which  the  corporation  is  organized,  the  authority  be- 
comes a  power  of  the  corporation  which,  in  the  absence  of  a  con- 
trolling statutory  provision,  may  be  exercised  in  the  same 
manner  as  other  powers  requiring  action  by  the  stockholders  — 
by  a  majority  vote. 

§  190.  Requisite  Majority  prescribe  Terms  of  Lease.  —  Where 
the  charter  of  a  corporation  or  a  general  law  authorizes  it, 
by  a  vote  of  a  prescribed  majority  of  its  stockholders,  to  lease 
its  property  and  franchises,  and  contains  no  restrictions  as  to 
the  terms  of  the  lease  or  the  rent  to  be  reserved,  the  majority 
may  agree  upon  such  provisions  and  rental  as  they  see  fit,  and 
the  minority  stockholders  have  no  remedy,  except  in  case  of 
fraud.^ 

Thus,  where  the  charter  of  a  railroad  corporation  authorized 
it,  without  restriction,  by  a  vote  of  three-fourths  of  its  stock- 
holders to  lease  its  railroad,  it  was  held  that  a  lease  so  entered 
into  for  ninety-nine  years,  at  a  rent  not  exceeding  the  amount 
needed  to  pay  fixed  charges  and  dividends  on  the  preferred 
stock  was,  in  the  absence  of  fraud,  valid,  although  the  possi- 

holder  received  his  stock.  It  was  Stockholders.  —  Whether  Approval  of 
competent  for  the  legislature  to  have  Majority  is  sufficient." 
imposed  in  its  creative  act  any  con-  '  Inhabitants  of  Waldoborough  v. 
ditions  it  pleased  upon  the  stock-  Knox,  etc.  R.  Co.,  84  Me.  469  (1892), 
holders  of  the  corporation  which  it  (24  Atl.  Rep.  942). 
had  called  into  existence.  The  power  ~  Where  the  majoritj'^  are  au- 
to lease  having  been  so  given,  with-  thorized  to  lease  the  property  and 
out  prescribing  any  mode  in  which  franchises  of  a  corporation  and  no 
it  was  to  be  exercised,  it  must  be  limitation  is  placed  upon  the  term  of 
classed  with  the  general  powers  con-  the  lease,  a  lease  for  so  long  a  term 
ferred  by  a  charter,  which  are  to  be  as  to  amount  practically  to  a  con- 
exercised  by  the  majority  of  the  cor-  vej'ance  of  the  fee  may  be  executed, 
porators  or  stockholders."  Dickinson  v.  Consolidated  Trac- 
See    also  ante,    §    149:    "Assent  of  tion  Co.,  119  Fed.  871  (1903). 

348 


CHAP.    XVIl]  APPROVAL    AND    EXECUTION'    OF    LEASE 


§  191 


bility  of  any  dividend  being  paid  on  the  common  stock  was 
tliereby  excluded  for  the  entire  term.' 

The  conckision  reached  in  the  case  referred  to,  while  the 
logical  outcome  of  the  application  of  fixed  principles  to  the  pro- 
visions of  the  charter,  was  most  inequitable.  The  rule  that 
the  majority  may  prescribe  the  terms  and  conditions  of  a  lease 
is  founded  upon  an  elementary  principle  in  corporation  law, 
and  where  there  is  only  one  class  of  stockholders  works  fairly. 
But  that  preferred  stockholders,  interested  in  securing  a  certain 
payment  of  their  limited  dividends,  may  with  the  aid  of  a 
minority  of  the  holders  of  the  common  stock  obtain  a  perpetual 
guaranty  of  their  dividends  and  dej)rive  the  common  stock- 
holders of  any  chance  of  return  from  the  enhanced  value  of 
their  property,  is  opposed  to  principles  of  natural  justice.  A 
rule  producing  such  result,  under  forms  of  law,  should  be 
the  subject  of  legislative  enactment.  Selfishness  may  work  as 
grievous  wrongs  as  fraud. 

§  191.  Remedies  of  Dissenting  Stockholders. — The  pro- 
tection of  the  interests  of  minority  stockholders  from  the  un- 


'  Town  of  Middletown  v.  Boston, 
etc.  R.  Co.,  53  Conn.  .358  (1885),  (5 
Atl.  Rep.  706),  where  .Judge  Bcardsley 
said :  "  But  it  is  claimed  that  although 
there  is  no  restriction  in  the  language 
of  the  charter  as  to  the  term  for 
which  the  companj'  may  lease  its 
road,  or  as  to  the  rent  to  be  received, 
yet  it  is  unreasonable  so  to  construe 
it  as  to  enable  three-fourths  of  the 
stockholders  to  make  a  lease  which 
deprives  the  other  fourth  of  any 
chance  for  dividends  for  so  long  a 
period,  and  hence  that  the  lease  in 
question  is  not  a  rightful  and  lawful 
exercise  of  the  power  given  by  the 
charter.  We  .see  no  ground  for  this 
claim,  especially  in  view  of  the  fact 
that  leases  of  railroads  are,  and  from 
the  nature  of  the  case  must  generally 
be,  made  for  long  terms.  Railroads 
are  Icaseil,  as  they  are  built,  with  a 
view  to  the  advantages  to  arise  in  the 
distant  future  from  the  tlevelopment 
of  populatiDii  and  lousiness  in  the 
neighborhood    by    the    facilities    for 


transjrortation  which  they  afford. 
The  complaint  also  charges  that,  by 
the  provision  of  the  lease,  the  entire 
resources  of  the  defendant  company 
from  which  income  can  be  derived 
are  fraudulently  appropriated  for  the 
benefit  of  the  holders  of  the  preferred 
stock.  This  is  not  a  charge  of 
fraudulent  conduct  or  intent  in  the 
making  of  the  lease,  but  only  that,  by 
its  operation,  the  income  will  be 
fraudulently  appropriated  for  the 
benefit  of  the  preferred  stockholders. 
This  is  simply  an  allegation  that  this 
appropriation  of  the  income  will  be 
disastrous  to  the  common  siock- 
holders  and  wrongful ;  not  that  the 
preferred  stockholders  have  acted 
fraudulentl}'.  If  the  company  had 
the  right,  as  it  clearly  had  by  its 
charter,  to  niake  the  lea.se  upon  a 
three-fourths  vote,  the  Court  cannot 
regard  the  effect  of  tlie  lease  as 
wrongful,  or  in  any  iirojier  sense 
fraudulent." 

349 


§192 


INTERCORPORATE    RELATIONS 


[part    III 


authorized  acts  of  the  majority,  and  of  the  interests  of  every 
stockholder  from  the  unlawful  acts  of  those  intrusted  with 
the  management  of  the  affairs  of  a  corporation,  is  peculiarly 
within  the  province  of  ecjuity.^  Upon  this  principle  a  court 
of  equity  at  the  instance  of  a  stockholder  in  a  corporation 
which  has,  without  authority,  agreed  to  lease  its  property  and 
franchises,  or  which  has  agreed  to  accept  an  unauthorized 
lease  from  another  corporation,  will  grant  an  injunction  against 
both  corporations,  parties  to  the  agreement,  restraining  the 
execution  of  the  lease.^  Thus,  where  the  directors  of  a  rail- 
road company,  without  the  approval  of  its  stockholders  and 
without  sanction  of  law,  made  a  lease  of  its  railroad  for  ninety- 
nine  years,  it  was  held  that  such  lease  was  ultra  vires  and  void, 
and  tliat  an  action  would  lie  in  behalf  of  any  stockholder  against 
both  corporations  for  an  injunction  and  for  the  cancellation 
of  the  lease.^ 

§  192.    Acquiescence    and    Laches    of    Stockholders.  —  Upon 


1  In  Pond  V.  Vermont  Valley  R.  Co., 
12  Blatch.  (U.  S.)  287  (1874),  upon  a 
stockholder's  bill  to  restrain  an  un- 
authorized lease  of  a  railroad,  about 
to  be  consuminated  by  directors, 
Judge  Woodruff  said:  "It  is  not  in- 
sisted, and  cannot  be  successfully 
claimed,  that  the  matters  complained 
of  are  not  of  equity  cognizance ;  or 
that  a  court,  having  general  jurisdic- 
tion in  equity,  has  no  jurisdiction,  at 
the  instance  of  stockholders,  to  re- 
strain a  corporation,  or  those  engaged 
in  the  control  and  management  of  its 
affairs,  from  acts  tending  to  the  de- 
struction of  its  franchises,  or  viola- 
tions of  the  charter  or  from  misuse 
or  misappropriation  of  the  corporate 
powers  or  property,  or  other  acts 
prejudicial  to  the  stockholders, 
amounting  to  a  breach  of  trust  on 
the  part  of   the  managers." 

^  Winch  V.  Birkenhead,  etc.  R.  Co., 
5  De  Gex  &.  Sm.  562  (1852),  (16  Jur. 
1035,  13  Eng.  L.  &  Eq.  506);  Com- 
missioners of  Tippecanoe  County  v. 
Lafayette,  etc.  R.  Co.,  50  Ind.  85 
(1875);    Mills  v.   Central   R.   Co.,   41 

350 


N.  J.  Eq.  1  (1886),  (2  Atl.  Rep.  453); 
St.  Louis,  etc.  R.  Co.  v.  Terre  Haute, 
etc.  R.  Co.,  33  Fed.  447  (1888),  s.  c. 
on  appeal,  145  U.  S.  393  (1892),  (12 
Sup.  Ct.  Rep.  953).  See  also  post, 
§  248:  "Voidable  Railroad  Leases" 
and  cases  cited,  for  consideration  of 
remedies  of  minority  stockholders  in 
case  of  unfair  leases. 

3  Commissioners  of  Tippecanoe 
County  V.  Lafayette,  etc.  R.  Co.,  50 
Ind.  85  (1875). 

Where,  however,  the  directors  of  a 
corporation  with  the  approval  of  the 
majority  of  the  stockholders  leased 
its  property  for  a  long  term  of  years 
to  another  corporation  in  which  they 
became  interested,  it  was  held  that  a 
court  of  equity  would  not,  at  the 
suit  of  a  minority  stockholder,  annul 
the  lease,  in  the  absence  of  proof  of 
fraud  or  that  the  lease  was  detri- 
mental to  the  interests  of  the  lessor 
corporation. 

Dickinson  v.  Consolidated  Trac- 
tion Co.,  114  Fed.  232  (1902); 
affirmed  119  Fed.  871  (1903). 


CHAP.    XVIl]  APPROVAL    AND    EXECUTION    OF    LEASE 


§  192 


principles  similar  to  those  already  considered  in  connection 
with  the  subjects  of  consolidation  and  sale,  a  stockholder  bv 
his  acquiescence  may  waive  irregularities  in  the  execution  of 
a  lease  of  a  railroad  and  may  be  estopped  l)y  his  laches  from 
taking  steps  to  have  it  set  aside.'  Statutes  providing  that  a 
prescribed  majority  of  stockholders  must  assent  to  a  lease  in 
a  particular  manner,  and  other  provisions  of  a  similar  char- 
acter, are  enacted  in  the  interest  of  the  stockholders.  The 
compliance  with  these  regulations  may  be  a  condition  prece- 
dent to  the  validity  of  the  lease  as  against  a  stockholder,  but 
he  may  be  estopped  by  acquiescence  and  delay  from  setting 
up   the   invalidity.^     Thus   an    Illinois   statute    requiring   the 


'  See  ante,  §  49:  "Laches  of  Stock- 
holders";  ante,  §  116:  "Defences  to 
Stockholders'  Actions.  Estoppel "  ;  ante, 
§  150 :    "  Acquiescence  of  Stockholders." 

Although  a  stockholder  in  a  rail- 
road company,  by  voting  for  the  lease 
of  its  road  to  another  company,  is 
estopped  —  as  between  himself  and 
his  corporation  —  from  attacking  its 
validity,  the  corporation  is  not  es- 
topped to  proceed  against  the  lessee 
for  the  avoidance  of  the  lease ;  and 
the  estoppel  against  the  stockholder 
does  not  prevent  him  from  instituting 
proceedings  for  such  purpose  in  the 
name  of  the  corporation  when  such 
procedure  is  otherwise  permissible. 
Memphis,  etc.  R.  Co.  v.  Grayson,  88 
Ala.  572  (1889),  (7  So.  Rep.  122,  IG 
Am.  St.  Rep.  G9). 

^  St.  Louis,  etc.  R.  Co.  v.  Terre 
Haute,  etc.  R.  Co.,  145  U.  S.  393 
(1892),  (12  Sup.  Ct.  Rep.  953),  (s.  c. 
33  Fed.  447  (1888)).  Citing  Za- 
briskic  v.  Cleveland,  etc.  R.  Co.,  23 
How.  (U.  S.)  381  (1859);  Central 
Transportation  Co.  v.  Pullman  Car 
Co.,  139  U.  S.  60  (1891),  (11  Sup.  Ct. 
Rep.  478) ;  Davis  v.  Old  Colony  R. 
Co.,  131  Mass.  258  (1881),  (41  Am. 
Rep.  221);  Bcecher  v.  Mar^iuette,  etc. 
R.  Co  45  Mich.  103  (1881),  (7  N.  W. 
Rep.  695) ;  Thomas  v.  Citizens  R.  Co., 
104  111.  462  (1882).  See  also  Taylor 
V.  Railroad  Co.,  4  Woods  (U.  S.),  575 


(1882).  In  the  Terre  Haute  case  supra 
Mr.  Justice  Gray  .said  (p.  403):  "  .\1- 
though  this  statute,  in  terms,  declares 
that  any  such  iea.se,  made  without  the 
written  consent  of  the  Illinois  stock- 
holders, 'shall  be  null  and  void,'  it 
would  seem  to  have  been  enacted 
for  the  protection  of  such  stock- 
holders alone,  and  intended  to  be 
availed  of  by  them  only.  It  did  not 
limit  the  scope  of  the  powers  con- 
ferred upon  the  corporation  by  law, 
an  excess  of  which  could  not  be 
ratified  or  be  made  good  by  estoppel ; 
but  only  prescribed  regulations  as  to 
the  manner  of  exercising  corporate 
powers,  compliance  with  which  the 
stockholders  might  waive,  or  the 
corporation  might  be  estopped,  by 
lapse  of  time,  or  otherwise,  to  deny." 
Hill  V.  Atlantic,  etc.  R.  Co.,  143 
N.  C.  539,  558  (1906),  (.55  S.  E.  Rej). 
854):  "While  a  court  of  equity  will 
interpose  at  the  suit  of  a  single  stock- 
holder to  enjoin  acts  done  by  the 
officers  of  a  corjioration  irregularly 
or  in  excess  of  their  powers,  which 
are  injurious  to  his  rights,  or  acts 
idtra  vires,  yet  if  he  has  stood  by 
until  the  transaction  to  which  he 
objects  has  become  executed,  he  will 
not  afterwards  be  heard  to  complain  : 
and  this  is  so  although  the  party 
who  may  have  dealt  with  the  corpora- 
tion  in  the   particular  case  knew   of 

3.")1 


§192 


INTERCORPORATE    RELATION'S 


[part    III 


written  consent  of  all  the  Illinois  stockholders  to  a  lease  of  a 
railroad  in  that  State  to  a  foreign  corporation,  was  held  to  be 
for  the  personal  benefit  of  the  stockholders  which  they  could 
waive  by  acquiescence.  Judge  Gresham  said:^  "The  silence 
of  the  stockholders  for  almost  twenty  years  was  equivalent  to 
their  written  consent.  Any  resident  stockholder  might  have 
enjoined  the  execution  and  performance  of  the  contract  by  a 
suit  brought  in  due  time,  but  no  such  suits  could  be  main- 
tained after  an  acquiescence  for  the  period  stated,  and  no  one 
but  a  stockholder  could  object  to  the  contract  on  that 
ground." 


the  irregularity  of  the  proceedings  or 
the  invalidity  of  the  transaction." 

In  this  case  (Hill  v.  Atlantic,  etc. 
R.  Co.,  supra)  a  stockholder  with 
knowledge  of  the  execution  of  a  lease 
maintained  silence  for  more  than  a 
year,  during  which  time  the  lessee 
expended  large  sums  of  money  in 
carrying  out  its  part  of  the  agree- 
ment, and  it  was  held  that  bj'  such 
delay  he  had  lost  the  right  to  object 
to  the  lease. 

A  stockholder's  action  to  set  aside 
an  alleged  illegal  lease  will  not  be 
sustained  where  there  is  no  charge 
that  the  directors  or  stockholders 
had  been  requested  to  take  action 
to  have  it  declared  void,  and  it  has 
been  acquiesced  in  for  five  years. 

Latimer  v.  Richmond,  etc.  R.  Co., 
39  S.  C.  44  (1892),  (17  S.  E.  Rep. 
258). 

A  delay  of  three  months,  however, 
is  not  laches.  Mills  i\  Central  R.  Co., 
41  N.  .1.  Eq.  1  (1886),  (2  Atl.  Rep. 
453). 

As  to  what  constitutes  acquiescence, 
see  Kersey  Oil  Co.  v.  Oil  Creek,  etc. 
R.  Co.,  12  Phila.  374  (1877),  where 
the  Court  said  (p.  376) :  "It  is  further 
contended  that  the  contract  and  lease 
cannot  be  rescinded  because  the  plain- 
tiff companj'  is  estopped  by  its  ac- 
quiescence    and     silence.     What     is 


acquiescence?  It  is  something  more 
than  non-resistance.  It  is  more  than 
mere  passiveness,  unless  the  passive- 
ness  induces  belief  in  error,  and  then 
it  becomes  an  act." 

See  also  Boston,  etc.  R.  Co.  v.  New 
York,  etc.  R.  Co.,  13  R.  I.  260 
(1881). 

A  statute  ratifj'ing  an  important 
railroad  lease  provided  that:  "Every 
stockholder  of  either  the  lessor  or 
the  les.see  shall  be  deemed  to  consent 
to  the  contract  of  lease  authorized 
by  this  act,  unless  he  shall  file  with 
tlie  clerk  of  the  lessee  a  writing  de- 
claring his  dissent  therefrom.  .  .  . 
The  shares  of  any  stockholder  dis- 
senting as  above  specified  shall  be 
acquired  by  the  lessee  and  shall  be 
valued  and  the  value  thereof  be  paid 
or  tendered  or  deposited  to  or  for 
the  account  of  such  stockholder." 
It  was  held  that  this  provision  did 
not  require  the  lessee  to  buy  the 
shares  of  stockholders  who  had  voted 
for  the  lease  and  then,  after  the  enact- 
ment of  the  ratification  statute,  had 
filed  declarations  of  dissent. 

Boston,  etc.  R.  Co.  v.  Graham,  179 
Mass.  62  (1901),  (60  X.  E.  Rep.  405). 

'  St.  Louis,  etc.  R.  Co.  v.  Terra 
Haute,  etc.  R.  Co.,  33  Fed.  447 
(1888),  affirmed  145  U.  S.  393  (1892), 
(12  Sup.  Ct.  Rep.  953). 


352 


CHAP.    XVIl]  AI'PROVAL    AND    EXECUTION    OF    LEASE 


§  193 


II.    Method  of  approving  and  executing   Railroad   Leases 

§  193.  Statutory  Requirements.  —  The  uniforni  policy  in- 
dicated in  statutes  authorizing  leases  of  railroads  is  to  place 
restrictions  upon  the  exercise  of  the  power  granted,  to  require 
the  formal  approval  of  a  prescribed  majority  of  the  stock- 
holders of  the  contracting  corporations,  and  to  prescribe  the 
method  to  be  followed  in  the  adoption  of  the  lease. ^     Thus  it 


^Alabama.  Code  1896,  §  1170: 
Approval  of  proposed  lease  by  holders 
of  majority  in  value  of  stock  of  both 
corporations  at  meetings  called  for 
the  purpose  required. 

Arizona.  R.  S.  1901,  par.  864: 
Assent  of  holders  of  two-thinls  of  en- 
tire capital  stock  of  each  corporation 
—  by  vote  or  in  writing  —  necessary 
to  contract  of  lease. 

Arkansas.  Kirby's  Dig.  1904,  §§ 
6742,  6752,  6762:  Proposed  lease 
must  be  assented  to  by  holders  of 
two-thirds  of  capital  stock  of  each 
corporation  after  contlitions  and 
terms  arc  agreed  to  by  directors. 

Colorado.  Mills'  Anno.  Stat.  1891, 
§  612  (as  amended  by  Sess.  Laws 
1899,  p.  163):  Assscnt  of  holders  of 
two-thirds  of  capital  stock  of  each 
company  required  to  proposed  lease. 

Connecticut.  G.  S.  1902,  §  3703: 
"No  lease  of  any  railroad  shall  be 
binding  on  either  of  the  contracting 
parties  for  a  period  of  more  than 
twelve  months,  unless  approved  of 
by  the  stockholders  of  the  companies 
that  are  parties  to  the  lease,  by  a 
vote  of  two-thirds  of  the  stock  repre- 
sented at  a  meeting  of  the  stock- 
holders called  for  that  purpose." 

Georgia.  Code  1895,  §  2179,  p. 
128:  Terms  of  lease  are  such  as 
may  be  agreed  upon.  No  particular 
method  provided. 

Kansas.  G.  S.  1897,  §  95:  Terms 
and  conditions  of  lca.se  must  be  agreed 
to  by  directors  and  must  be  ratified 
by  vote  of  the  holders  of  two-thirds 
of  capital  stock  of  each  companj'  or 


approved  by  such  holders  in  writing. 
See  also  ib.  ch.  70,  §  94. 

Massachusetts.  Supp.  to  Rev. 
Laws  1906,  ch.  112,  §  209:  Directors 
agree  upon  the  terms  which  must  be 
"approved  by  a  majority  in  interest 
of  the  stockholders  of  both  corpora- 
tions at  meetings  called  for  that 
purpose." 

Michigan.  P.  .\.  1901,  Act  No. 
30,  p.  50:  "Stockholders  owning  a 
majority  of  stock  of  said  companies 
shall  consent  thereto." 

Minnesota.  G.  S.  1894,  §§  721, 
2736:  Lease  mu.st  be  assented  to  by 
holders  of  two-thirds  of  capital  stock 
of  each  company  at  meetings  called 
for  the  purpose. 

Missouri.  R.  S.  1899,  §  1060: 
Holders  of  a  majority  of  stock  of  each 
comjjany  must  assent  in  writing  to 
lease  proposed  by  directors  before  it 
can  be  perfected. 

Montana.  Code  1895,  §  912  re- 
quires approval  of  three-fifths  of  stock- 
holders. Ib.  §  923  requires  approval 
by  majority  vote  or  by  majority  in 
writing.  These  provisions  apply  to 
leases  authorized  by  different  stat- 
utes. 

Nebraska.  Comp.  Stat.  1901,  § 
1769 :  No  lease  shall  be  perfected  imtil 
assented  to  bj'  vote  of  holders  of  two- 
thirds  of  capital  stock;  (ib.  §  4020), 
by  vote  or  written  approval  of  like 
number.  Ib.  §§  4018,  4019,  authorize 
approval  of  certain  leases  by  majority 
vote. 

New  Hampshire.  See  statute  in 
note   to    §    180,    ante:     "What    Rail- 

353 


§    194  INTERCORPORATE    RELATIONS  [I'AUT    III 

is  generally  provided  that  the  proposed  lease  shall  not  become 
effective  until  it  shall  have  been  approved  by  a  vote  of  the 
holders  of  a  designated  majority  of  the  capital  stock  of  each 
corporation.  In  several  States,  however,  formal  action  by  the 
stockholders  may  be  dispensed  with  if  the  specified  number 
give  their  assent  in  writing  and  certificates  showing  the  ap- 
proval of  the  lease  are  filed  in  the  office  of  the  Secretary  of 
State. 

Some  of  these  statutoiy  requirements  constitute  conditions 
precedent  to  the  validity  of  the  lease.  Others  are  directory 
only. 

§  194.  Construction  of  Statutes  prescribing  Mode  of  approv- 
ing and  executing  Leases.  Ratification.  —  Statutes  prescrib- 
ing the  method  of  approving  and  executing  leases  of  railroads 
are,  in  the  essential  elements,  mandatory  and  must  be  strictly 
complied  with. 

A  provision  that  no  lease  of  a  railroad  shall  be  perfected 
until  the  stockholders  of  the  contracting  corporations  shall 
have  approved  it  by  their  votes  at  stockholders'  meetings 
requires  their  approval  in  that  form.  Their  consent  obtained 
individually,  outside  of  the  meetings,  is  not  sufficient.  Delib- 
erate action  as  stockholders  is  necessary.^  Conversely,  a  pro- 
roods  may  he  leased.  Statutory  Pro-  same  manner  as  consolidation.  See 
visions."  ante,  §  52:   " Formal  Statutory  Requi- 

New  Jersey.     See  statute  in   note       sites"  ("Consolidation"), 
to  §  22,  ante.  Tennessee.     Code     1896,     §     1540 : 

New  Mexico.     Comp.   Laws   1897,       Lease  must  be  appro%'ed  by  votes  of 
§    3891  :     Holders    of    at    least    two-       holders    of    three-fourths    of    capital 
thirds   of   capital   stock   must   assent       stock, 
to  proposed  lease.  West     Virginia.     Code     1899,     ch. 

New  York.  See  statute  in  note  to  54,  §  82a :  Lease  requires  approval 
§  180,  ante:  "What  Railroads  may  he  of  holders  of  two-thirds  of  capital 
leased.     Statutory  Provisi/jus."  stock  at  meeting  called  for  the  pur- 

North  Dakota.     Rev.   Codes    1899,       pose. 
§  2954:    Lease  must  be  approved  in  Wyoming.     R.    S.    1899,    §    3206: 

same  manner  as  consolidation.  See  Lease  must  be  approved  by  vote  of 
ante,  §  52:  "Formal  Statutory  Req-  holders  of  a  majority  of  stock,  or 
uisites"  ("  Consolidation").  their  written  approval  may  be  given. 

Ohio.     Bates'   Anno.    Stat.,    1787-  '  In  Peters  v.  Lincoln,  etc.  R.  Co., 

1906,  §  3301  :  Two-thirds  of  stock-  2  McCrary  275  (12  Fed.  514)  (1881), 
holders  must  approve  proposed  lease  Judge  McCrary  said  :  "The  legislature 
at  meeting  called  by  each  corporation.       has  seen  fit  to  provide  that  no  lease 

South  Dakota.  Anno.  Stat.  1901,  of  a  railroad  in  this  State,  executed 
§  3906  :    Lease  must  be  approved  in       by  one  railroad  company  to  another, 

354 


CHAP.    XVIl]  APPROVAL    AND    EXECUTION    OF   LEASE 


§  104 


vision  that  a  proposed  lease  may  be  executed  if  a  majority  of 
the  stockholders  have  assented  in  writing  is  not  complied  with 
by  the  casting  of  ballots  in  its  favor  by  a  majority  of  stock- 
holders at  a  meeting  where  it  has  been  the  subject  of  considera- 
tion. Ballots  do  not  contain  the  signatures  of  stockholders. 
They  are  cast  to  accomplish  corporate,  and  not  individual, 
action.* 

Where  an  act  of  Parliament  authorized  one  railroad  com- 
pany to  grant,  and  another  railroad  company  to  accept,  a  lease 
of  a  railroad  upon  such  terms  as  should  be  agreed  upon,  but 


shall  be  completed  until  a  meeting 
of  the  stockholders  of  both  companies 
shall  have  been  called  by  the  directors 
thereof  or  until  such  lease  has  been 
assented  to  by  the  votes  of  at  least 
two-thirds  of  the  stock  represented. 
In  our  judgment  the  stockholders' 
meeting  and  the  vote  in  such  meeting 
upon  the  cjuestion  of  assenting  to  the 
proposctl  lease  are  matters  of  essence, 
of  substance  and  not  of  mere  form. 
.  .  .  The  action  of  stockholders 
outside  of  such  meeting  is  individual 
action  only.  It  is  not  such  action 
as  the  law  requires.  It  does  not 
bind  the  corporation."  See  also 
same  case  upon  amended  bill,  14 
Fed.  319  (1882). 

In  Smith  v.  Hurd,  12  Met.  (Ma.ss.) 
385  (1847),  (46  Am.  Dec.  690),  Chief 
.Ju-stice  Shaw  thus  stated  the  relation 
of  a  stockholder,  in  his  indixidual 
capacity,  to  his  corporation  :  "Should 
all  the  stockholders  join  in  a  power 
of  attorney  to  any  one,  he  could  not 
take  possession  of  any  real  or  personal 
estate,  any  security  or  chose  in  action  ; 
covild  not  collect  a  debt,  or  discharge 
a  claim  or  release  damage  arising 
from  any  default ;  simply  because 
they  are  not  the  legal  owners  of  the 
property,  and  damage  done  to  such 
property  is  not  an  injury  to  them. 
Their  rights  and  their  powers  arc 
limited  antl  well  defined." 

See  also  Humphreys  v.  McKis.sock, 
140  U.  S.  304  (1891),  (11  Sup.  Ct. 
Rep.  779). 


'  Humphreys  v.  St.  Louis,  etc.  R. 
Co.,  37  P^ed.  313  (1889)  :  "No  vote  at 
anj^  meeting  was  required  by  the  laws 
of  Missouri,  if  the  holders  of  a  majority 
of  the  stock  as.sented  to  the  lease  in 
writing,  and  the  proper  certificates 
were  filed  in  the  office  of  the  Secre- 
tary of  State.  The  propositions  voted 
upon  were  in  writing,  anil  the -voting 
was  by  written  ballots.  This  is  argued 
to  have  been  an  assent  in  writing  to 
the  lease;  but  the  ballots  were  not 
signatures,  and  were  cast  to  accom- 
plish corporate,  and  not  individual, 
action.  This  does  not  seem  to  amount 
to  the  assent  in  writing  contemplated 
by  the  statute." 

Under  a  New  York  statute,  how- 
ever, requiring  the  written  consent  of 
two-thirds  of  the  stockholders  to  a 
mortgage,  it  was  held  that  a  resolu- 
tion passed  at  a  stockholders'  meet- 
ing by  the  vote  of  stockholders  holding 
two-thirds  of  the  stock  amounted  to 
the  written  a.ssent  rcfjuired.  liecbe 
V.  Richmond  Light,  etc.  Co.,  13  Misc. 
Rep.   737   (1895),    (35    N.    Y.    Supp. 

1). 

A  statute  authorized  a  railroa«l 
company  to  enter  into  an  agreement 
for  a  lease  with  the  assent  of  two-thirds 
of  its  shareholders.  Held,  that  liohl- 
ers  of  registered  bonds,  having  voting 
powers,  might  vote  upon  the  (jues- 
tion.  Hendrie  v.  Cranil  Trunk  R. 
Co.  (Ont.),  13  .Am.  &  Hng.  R.  Cas. 
62  (1883). 

355 


§    195  INTERCORPORATE    RELATIONS  [PART    III 

provided  that  the  power  should  not  ])e  exercised  until  tlie  Board 
of  Trade  had  certified  that  it  had  been  proved  to  its  satisfac- 
tion that  half  the  capital  of  the  leasing  company  had  been 
raised  and  applied  for  the  purposes  of  the  act,  it  was  held  that 
no  lease  or  binding  agreement  for  a  lease  could  be  made  before 
the  certificate  had  been  obtained.^ 

Where  power  to  make  a  lease  is  vested  in  the  stockholders 
and  they  have  agreed  upon  its  terms  and  conditions,  the  direct- 
ors have  no  power,  without  the  consent  of  the  stockholders, 
to  make  any  material  change  in  the  terms  agreed  upon.^ 

Irregularities  in  a  stockholders'  meeting  at  which  a  lease  is 
authorized  may  be  cured  by  appropriate  action  at  a  subse- 
quent meeting.  Thus  where  a  railroad  company  voted  to 
lease  its  road  at  a  special  stockholders'  meeting  of  which  one 
stockholder  had  no  notice,  but  at  the  annual  meeting  held 
subsequently,  of  which  he  had  due  notice,  a  resolution  to  set 
aside  the  lease,  introduced  at  his  instance,  was  defeated,  it 
was  held  that  this  action  constituted  a  ratification  of  the  lease 
and  relieved  it  of  any  irregularity  by  reason  of  the  want  of 
notice  of  the  first  meeting.^ 

§  195.  Formalities  attending  Execution  of  Lease  of  Railroad. 
—  When  the  statutory  requirements  essential  to  the  authori- 
zation of  a  railroad  lease  have  been  complied  with,  the  matter 
of  its  formal  execution  is  governed  by  principles  applicable 
to  corporations  generally  in  the  execution  of  conveyances.^ 

'  Kent  Coast,  etc.  R.  Co.  v.  London,  Regarding  the  formalities  required 

etc.    R.   Co.,   L.    R.   3   Ch.   App.    656  in  jnudifying  the  provisions  of  a  duly 

(1868).  executed  lease,  the  New  York  Court 

2  Met.  El.  R.  Co.  V.  Man.  El.  R.  of  Appeals  in  the  recent  case  of  Con- 
Co.,  11  Daly,  373  (1884),  (14  Abb.  N.  tinental  Ins.  Co.  v.  New  York,  etc. 
Cas.  103,  15  Am.  &  Eng.  R.  Cas.  51).  R.  Co.,  187  N.  Y.  225,  242  (1907), 
Compare,  however.  People  v.  Met.  (79  N.  E.  Rep.  1026)  -said:  "It  is 
El.  R.  Co.,  26  Hun,  82  (1881).  urged    that    the    compromise    agree- 

^  Hill  V.   Atlantic,  etc.  R.  Co.,  143  ment  was  in  effect  a  new  lease  modi- 

N.  C.  539  (1906),  (55  S.  E.  Rep.  854).  fying  the  provision  for  rent  reserved 

*  That  an  agreement  to  give  a  in  the  old  lease,  and  that  not  suffi- 
lease  does  not  require,  in  its  execu-  cient  in  amount  of  the  Central  stock- 
tion,  the  formalities  necessary  in  the  holders  voted  for  its  adoption  to 
execution  of  the  lease  itself,  and  that  render  the  agreement  valid  in  law  as 
a  decree  of  specific  performance  may  a  lease.  We  concede  that  a  modi- 
be  entered  against  a  corporation,  see  fication  of  a  lease  must  be  executed 
Conant  v.  Bellows  Falls  Canal  Co.,  with  the  same  formalities  and  with 
29  Vt.  263  (1857).  the  same  vote  as  required    by  stat- 

356 


CHAP.    XVIl]  APPKOVAL   AND    EXECUTION    OF    LEASE 


§  105 


1.  Place  of  Execution.  The  meeting  of  the  stockholders 
for  the  authorization  of  a  proposed  lease  must  be  held  within 
the  State  where  the  corporation  is  chartered.  When  the 
lease  is  authorized,  it  may  be  executed  by  the  proper  officers 
within  or  without  the  State.  ^ 

2.  Authority  of  Officers  or  Agents.  While  the  authority  of 
the  officers  or  agents  of  a  corporation  to  execute  a  lease  must 
be  shown,  written  evidence  of  a  formal  vote  is  not  necessary, 
and  it  may  be  implied  from  facts  and  circumstances.  In  the 
absence  of  proof  to  the  contrary,  the  law  presumes  that  the 
acting  officers  of  a  corporation  are  rightfully  in  office,  and  it  is 
not  necessary  to  prove  their  election  to  establish  the  validity 
of   their   acts.^ 


ute     in     the     case     of     an      original 
lease." 

'  Pittsburgh,  etc.  R.  Co.  v.  Colum- 
bus, etc.  R.  Co.,  8  Diss.  (U.  S.)  456 
(1879). 

In  Wright  V.  Bundy,  11  Ind.  404 
(1858),  the  Court  said:  "Tlie  mere 
place  where  the  active  agents  of  a 
corporation  enter  into  a  contract 
must,  in  general,  be  immaterial. 
The  important  question  arising  mu.st 
be  one  of  power,  not  of  place.  The 
exercise  of  the  power  has  relation 
to  the  place  of  their  legal  establish- 
ment, where  the  contract  may  be 
subsequently  acted  under.  The  meet- 
ings of  the  directors  of  a  business 
corporation  are  not  analogous  to  the 
sessions  of  a  judicial  tribvmal.  The 
corporation  is  organizetl  bj'  the  elec- 
tion of  directors  ;  but  the  mere  organ- 
ization of  the  directors  into  a  cor- 
poration for  business  aftcrwariN,  is 
•  luite  a  different  thing." 

Whore  the  president  of  a  railroad 
company  operating  a  railroad  in  Ken- 
tucky acknowledged  the  execution 
of  a  mortgage  tiiereof  in  Ohio  it 
was  held  that  the  mortgage  wa.s 
properly  executed.  Ilodder  v.  Ken- 
tucky, etc.  R.  Co.,  7  Fed.  793  (1881), 
affirmed  sub  nom.  ^^'right  v.  Ken- 
tucky, etc.  R.  Co.,  117  U.  S.  72  (188G), 
(G  Sup.  Ct.  Rep.  697). 


For  principle  applicable  to  inter- 
state consolidated  corporation,  see 
Graham  v.  Boston,  etc.  R.  Co.,  14 
Fed.  7.53  (1883),  affirmed  118  U.  S. 
IGl  (1886),  (G  Sup.  Ct.  Rep.  1009). 

^  In  Union  Pacific  R.  Co.  r.  Chicago, 
etc.  R.  Co.,  51  Fed.  327  (1892),  af- 
firmed 163  U.  S.  5G4  (1896),  (16  Sup. 
Ct.  Rej).  1173\  .Judge  Sanborn  said: 
"The  Pacific  Company  delivered  this 
contract,  signed  by  its  president  and 
secretary,  to  the  Rock  Island  Com- 
pany. This  was  prima  facie  evidence 
that  it  was  executed  in  behalf  of  the 
corporation  by  lawful  authority." 
See  also  Susquehanna  Bridge,  etc. 
Co.  V.  General  Ins.  Co.,  3  Md.  305 
(1852),  (56  Am.  Dec.  740) ;  Jackson- 
ville, etc.  R.  Co.  V.  Hooper,  160  U.  S. 
519  (189.5),  (16  Sup.  Ct.  Rep.  379). 

Where  a  committee  of  three  ilirect- 
ors  were  given  di.scretionary  [)Ower  to 
execute  a  lea.se  of  corporate  ))roperty, 
it  was  held  that  two  of  the  members 
had  power  to  affix  the  corporate  seal, 
the  third  member  being  absent  but 
having  approved  the  execution  of 
the  lease.  Union  Bridge  Co.  r. 
Troy,  etc.  R.  Co.,  7  Lans.  (N.  Y. 
240  (1872)). 

Where,  however,  a  resolution  pro- 
vided "  that  the  presitlent  and 
treasurer  of  this  a.ssociation  be,  and 
they   are   hereby   authorized    to  exe- 

3r)7 


§  105 


INTERCORPORATE    RELATIONS 


[part    III 


3.  Seals.  A  seal  is  necessary  upon  a  written  lease  made 
by  a  corporation  only  when  it  is  required  upon  a  similar  lease 
made  by  a  natural  person.^  When  a  seal  is  necessary,  and 
a  contract  purporting  to  be  sealed  is  shown  to  have  been  duly 
signed  and  executed  by  the  proper  officers,  the  law  will  pre- 
sume that  the  seal  was  affixed  by  proper  authority.^ 

4.  Acknowledgment,  Witnesses,  etc.  Statutory  provisions 
concerning  the  execution  of  a  lease  of  real  estate  adopted  in 
the  State  where  the  railroad  is  situated,  prescribing  the  num- 
ber of  witnesses,  form  of  acknowledgment,  etc.,  are,  undoubt- 
edly, applicable  to  railroad  companies  in  the  execution  of 
leases  of  their  roads.  Failure  to  comply  with  such  provisions, 
however,  does  not,  as  a  general  rule,  affect  the  validity  of  the 
lease  between  the  parties. 

5.  Record.  A  failure  to  record  the  lease  of  a  railroad  in  the. 
office  of  the  Secretary  of  State  or  otherwise  as  the  statute  may 
prescribe  will  not,  unless  expressly  so  provided,  affect  its  valid- 
ity as  between  the  parties.^ 


cute  and  deliver  ...  a  lease,"  it 
was  held  that  the  authority  of  the 
two  officers  was  joint,  and  that  a 
lease  executed  by  one  of  them  alone 
was  invalid.  Pond  v.  Vermont  Val- 
ley R.  Co.,  Fed.  Cas.  No.  11,  263 
(1876). 

'  United  States  Bank  v.  Dand- 
ridge,   12  Wheat.  (U.  S.),  64  (1828). 

2  Fidelity  Insurance,  etc.  Co.  v. 
Shenandoah  Valley  R.  Co.,  32  W.  Va. 
224  (1889),  (9  S.  E.  Rep.  180,  38  Am. 
&  Eng.  R.  Cas.  577).  Also  Jackson- 
\dlle,  etc.  R.  Co.  v.  Hooper,  160  U.  S. 
519  (1895),  (16  Sup.  Ct.  Rep.  379). 

^  The  general  principle  that  the 
recording  of  a  deed  or  lease  is  only 
necessary  for  the  purpose  of  giving 
notice,  and  that  an  unrecorded  lease 
is  as  valid  between  the  lessor  and 
lessee  as  if  recorded,  is  undoubtedly 
as  applicable  to  leases  of  railroad  and 
other  corporations  as  to  those  of 
natural  persons.  The  following  cases 
illustrate  this  general  principle  :  Cole- 
son  V.  Blunton,  3  Haywood  (Tenn.), 
152    (1816)  ;     Galpin     v.     Abbot,    6 

358 


Mich.  17  (1858);  Lawry  v.  Williams, 
13  Me.  281  (1836);  Stearns  v.  Morse, 
47  N.  H.  532  (1867) ;  Turner  v.  Stip. 
1  Wash.  (Va.)  319  (1794);  Cooper 
V.  Day,  1  Rich.  Eq.  Rep.  (S.  C.)  26 
(1844). 

A  State  statute  providing  that 
every  corporation  operating  a  rail- 
road within  the  State  under  lease 
shall  have  the  lease  recorded  is  not 
invalid  as  an  interference  with  inter- 
state commerce.  Commonwealth  v. 
Chesapeake,  etc.  R.  Co.,  101  Ky.  159 
(1897),  (40  S.  W.  Rep.  250). 

Under  statutes,  requiring,  under 
penalties,  the  lessee  in  every  railroad 
lease  to  have  it  recorded  in  the  office 
of  the  Secretary  of  State,  and  of  the 
county  clerk  of  every  county  in  which 
the  road  lies,  an  indictment  stating 
the  offence  of  operating  a  railway  in 
the  State  under  a  lease  without  ha\'ing 
the  same  recorded  in  said  offices  is 
sufficient. 

Commonwealth  v.  Chesapeake,  etc. 
R.  Co.,  115  Ky.  57  (1903),  (72  S.  W. 
Rep.  361). 


CHAP.    XVIl]  APPROVAL    AND    EXECUTION    OF    LEASE 


§    190 


§  196.  Corporation  may  be  estopped  from  alleging  Irregular 
Execution  of  Lease.  —  ^^'heIl  a  railroad  company,  acting  within 
the  scope  of  its  corporate  powers,  executes  a  lease  of  its  rail- 
road to  another  corporation,  and  permits  the  lessee  to  take 
possession  of  the  leased  property  and  make  improvements 
thereon,  or  when  such  a  railroad  company  takes  a  lease  and 
assumes  control  of  the  leasehold  estate,  it  is  estopped  to  allege 
irregularities  in  its  own  execution  of  the  lease.^  In  Unioti 
Pacific  R.  Co.  V.  Chicago,  etc.  R.  Co.,-  Judge  Sanborn  said: 
"  Under  these  circumstances,  to  permit  this  company  now 
to  repudiate  this  contract  would  violate  every  principle  of 
equity  and  fair  dealing.  By  its  presentation  to  the  Rock 
Island  Company  of  this  contract  and  this  resolution,  acts  ap- 
parently official,  by  its  acceptance  of  a  part  of  the  benefits 
of  the  contract,  by  its  silence  for  seven  montiis  while  this  large 
expenditure  of  money  was  being  made  in  reliance  on  this  con- 
tract, it  is  estopped  to  declare  it  void,  either  because  its  board 
of  directors  failed  to  pass  a  formal  resolution  approving  it,  or 
because  its  secretary  failed  to  state  in  its  calls  that  this  con- 
tract would  be  considered  at  the  meetings  that  unanimously 
authorized  and  ratified  it." 


As  to  allegation  and  jrroof  of  exe- 
cution of  lease  see  George  i-.  Central 
R.,  etc.  Co.,  101  Ala.  607  (1893), 
(14  So.  Rop.  752).  See  also  Hawley 
V.  Gray  Bros.,  etc.  Co.,  106  Cal.  337 
(1895)^^  (39   Pac.   Rep.   609). 

A  certified  copy  of  a  lease  of  a 
railroad  is  admissible  in  e\-idcnce  under 
Illinois  statutes. 

Chicago,  etc.  R.  Co.  v.  Weber,  219 
Til.  372  (1905),  (76  N.  E.  Rep.  498). 

'  Union  Pacific  R.  Co.  t\  Chicago, 
etc.  R.  Co..  51  Fed.  309  (1892), 
affirmed  163  U.  S.  564  (1896),  (16  Sup. 
Ct.  Rep.  1173);  Humphreys  v.  St. 
Loui.s,  etc.  R.  Co.,  37  Fed.  307 
(1889). 


In  Pittsburgh,  etc.  R.  Co.  v. 
Keokuk,  etc.  Bridge  Co.,  131  U.  S. 
381  (1889),  (9  Sup.  Ct.  Rep.  770),  the 
Supreme  Court  of  the  United  States 
said:  "When  a  contract  is  made  by 
any  agent  of  a  corporation  in  its 
behalf,  and  for  a  purpo.se  authorized 
by  its  charter,  and  the  corporation 
receives  the  benefit  of  the  contract, 
without  objection,  it  may  be  presumed 
to  have  authorized  or  ratified  the 
contract  of  its  agent." 

2  Union  Pacific  R.  Co.  r.  Chicago, 
etc.  R.  Co.,  51  Fed.  328  (1892),  af- 
firmed 163  U.  S.  564  (1896),  (16  Sup. 
Ct.  Rep.  1173).  Same  case  in  Cir- 
cuit Court,  47  Fed.  15  (1891). 


359 


§    197  INTERCORPORATE    RELATIONS  [PART    III 


CHAPTER  XVIII 


THE    CONTRACT    OF    LEASE 

I.    Form  and  Construction  of  Railroad  Leases 

§  197.  Form  of  Lease. 

§  198.  Consideration. 

§  199.  Rule  of  Construction  of  Leases. 

§  200.  Construction  of  Particular  Leases. 

§  201.  Lease  for  Longer  Term  than  Existence  of  Corporations  may  be  Valid. 

§  202.  Partial  Invalidity  of  Leases.     Void  Restrictions. 

§  203.  Dependent  and  Independent  Contracts. 

§  203a.  Assignments  of  Leases. 

II.    Covenants  in  Railroad  Leases 

§  204.  Covenant  to  pay  Rent.     Assumption  of  Interest  Payments. 

§  205.  Covenant  to  pay  Taxes. 

§  206.  Covenant  not  to  Assign. 

§  207.  Covenant  to  make  Repairs. 

§  208.  Covenant  to  pay  Damages  and  defend  Suits. 

§  209.  Miscellaneous  Covenants. 

I.    Form  and  Construction  of  Railroad  Leases 

§  197.  Form  of  Lease.  —  The  formal  parts  of  a  lease  exe- 
cuted by  a  railroad  company  of  its  road  and  franchises  gener- 
ally and  properly  follow,  so  far  as  applicable,  the  form  of  a 
lease  of  real  estate. 

While  any  form  expressing  the  intention  of  the  parties  may 
be  adopted,  there  is  an  advantage  in  the  use  of  the  ordinary 
covenants  and  conditions  in  that  they  have  acquired  a  recog- 
nized judicial  construction. 

A  lease  commences  with  the  premises,  the  object  of  which 
is  to  state  (1)  the  parties  —  the  corporations,  lessor  and  lessee 
—  (2)  the  grant  and  (3)  the  description  of  the  property  leased  — 
the  railroad,  franchises,  appurtenances  and  personal  property  — 
which  may  be  particularly  set  forth  in  the  lease  itself,  or  re- 
ferred to  in  an  attached  schedule. 

The  habendum  follows  the  premises,  the  object  of  which  is 
to  limit  the  grant. 
360 


CHAP.    XVIIl]  THE    CONTRACT   OF   LEASE  §    199 

After  the  habendum  the  term  — •  the  commencement  and 
duration  of  the  lease  —  is  stated,  and  lastly  the  reddendum, 
which  fixes  the  amount  of  rent  to  be  paid,  specifies  the  manner 
and  form  of  payment,  and  the  periods  at  which  the  payments 
are  to  be  made. 

Following  these  formal  parts,  the  ordinary  covenants,  con- 
ditions and  provisions  of  leases  so  far  as  applicable  to  railroads 
are  inserted,  together  with  any  special  provisions  agreed  upon 
in  the  particular  case.^ 

§  198.  Consideration.  —  The  consideration  of  a  lease  is  the 
rent.  The  rent  is  due  primarily  to  the  lessee,  but,  in  the  case 
of  an  individual,  he  may  stipulate  that  it  be  paid  to  another 
person.  The  stipulation  does  not  affect  the  validity  of  the 
lease. 

The  only  reason  why  a  similar  contract  might  not  be  made 
by  the  officers  —  or  by  a  majority  of  the  stockholders  of  a  cor- 
poration —  is  that  they  are  trustees  for  the  whole  body  of 
stockholders,  and  may  not  alienate  corporate  property  unless 
the  accruing  benefit  enures  to  their  beneficiaries.  But  where 
one  railroad  company  owns  substantially  all  the  stock  and 
bonds  of  another  company,  a  lease  of  the  railroad  of  the  latter 
for  rent  to  be  paid  to  the  former  company  is  not  void  for  want 
of  consideration.  In  such  a  case,  the  rent  is  paid  directly  to 
the  corporation  ultimately  entitled  to  it — the  real  owner.^ 

§  199.  Rule  of  Construction  of  Leases.  —  Leases  of  railroads 
being  executed  in  pursuance  of  express  legislative  authority 
receive  a  reasonably  strict  construction,  but  the  object  of  the 
construction,  as  in  the  case  of  other  leases  and  contracts,  is  to 
ascertain  and  effectuate  the  intention  of  the  parties.  In  ascer- 
taining the  meaning  to  be  given  to  any  particular  clause  in  a 
lease  the  Court,  as  said  by  Mr.  Justice  Brown  in  Chicago,  etc. 
R.  Co.  v.  Denver,  etc.  R.  Co.,^  is  "  required  to  examine  the 
entire  contract,  and  may  also  consider  the  relations  of  the  par- 

•  As  to    form   of    railway   lease   in  Sup.  Ot.   Rep.    1173).      Same  case   in 

England,  when   authorized,  see    Rail-  Circuit  Court,  47  Fed.  15  (1891). 

way  Clauses  Act  1845  (8  Vict.  ch.  20,  '  Ciiicago,   etc.    R.   Co.   v.    Denver, 

§  112).  etc.    R.   Co.,    143   U.   S.   609   (1892), 

2  Union  Pacific  R.   Co.   r.   Chicago,  (12    Sup.    Ct.    Rep.    479),    affirming 

etc.    R.    Co.    51     Fed.     309     (1892),  45  Fed.  .304  (1801). 
affirmed    163  U.    S.    564    (1890),    (16 

3G1 


§  200  INTERCORPORATE   RELATIONS  [pART  III 

ties,  their  connection  with  the  subject-matter  of  the  contract, 
and  the  circumstances  under  which  it  was  signed." 

When  a  lease  consists  of  several  distinct  writings,  the  differ- 
ent provisions  of  all  the  parts  must  be  considered  in  order  to 
ascertain  the  intention  of  the  parties  as  evidenced  by  the  in- 
strument as  a  whole.  Words  and  expressions  must  be  given 
plain  meanings  which  the  context  requires  in  order  to  make, 
if  possible,  all  the  parts  consistent.* 

While  the  rule  is  that  where  a  lease  is  susceptible  of  two 
constructions,  that  most  favorable  to  the  lessee  must  prevail, 
such  rule  cannot  be  invoked  where  the  intention  of  the  parties 
can  be  ascertained  from  the  language  of  the  instrument  when 
examined  in  the  light  of  the  surrounding  circumstances.^ 

In  case  of  ambiguity,  the  court  may  consider  the  practical 
construction  given  b}^  the  parties  to  tlw  particular  provisions 
in  question.^ 

§  200.  Construction  of  Particular  Leases.  —  Where  a  lease  of 
a  railroad  provided  that  the  lessee  was  "  to  have  and  to  hold  " 
the  demised  property  during  the  term  "  paying  the  rents  and 
keeping  and  performing  the  covenants"  therein  contained,  it 
was  held  that  any  agreements  and  stipulations,  the  keeping  of 
which  was  reasonably  essential  to  the  performance  by  the 
lessee  of  its  part  of  the  contract,  should  be  treated  as  "  cove- 
nants "  whether  so  designated  or  not.^ 

A  provision  in  such  a  lease  that  in  case  the  lessee  corpora- 
tion "shall  at  any  time  fail  to  pay  to  the  lessor  such  sums  of 
money  as  may  be  due  under  the  contract,  or  shall  fail  to  per- 
form any  other  covenant  herein,  and  such  default  or  failure  to 
perform  shall  continue  for  thirty  days  after  written  notice  re- 
quiring such  performance,  then  ...  it  shall  be  la^vful  for  the 

'  Cincinnati,  etc.  R.  Co.  v.  Indiana,  *  South    Carolina,    etc.    R.    Co.    v. 

etc.  R.  Co.,  44  Ohio  St.  287  (1886),  Augasta,    etc.    R.    Co.,    Ill    Ga.    420 

(7  N.  E.  Rep.  139,  26  Am.  &  Eng.  R.  (1900),  (36  S.  E.  Rep.  593). 
Cas.  615).  A  demise  of  a  .street  railway  not  in 

2  Pere  Marquette  R.  Co.  v.  Wabash  existence  and  the  right  to  construct 

R.   Co.,    141    Mich.    215   (1905),    (104  which    depends    upon    the    obtaining 

N.  W.  Rep.  650).  of  consents  from  abutting  proprietors 

'  Chicago,   etc.    R.   Co.   i\    Denver,  is    an    executory  contract.      Atlantic 

etc.  R.  Co.,  46  Fed.  145  (1890),  s.  c.  Ave.  R.  Co.  v.  Johnson,  134  X.  Y.  375 

143   U.    S.   596   (1892).    (12   Sup.   Ct.  (1892),  (31  X.  E.  Rep.  903). 
Rep.  479),  45  Fed.  304  (1891). 

3G2 


CHAP.    XVIIl]  THE    CONTRACT   OF   LEASE  §   200 

[lessor],  at  its  option,  to  reenter,"  gives  the  lessor,  upon  a  breach 
by  the  lessee  of  any  agreement  or  stipulation,  the  right  to  en- 
force the  forfeiture  of  the  lease. ^ 

Where  a  lease  provided  that,  upon  its  expiration,  the  lessee 
should  return  the  road  in  as  good  condition  as  when  received, 
and  where,  under  a  statute,  failure  to  operate  the  road  would 
work  a  forfeiture  of  the  lessor's  charter,  it  was  held  that  the 
lessee  was  bound  to  keep  the  road  in  operation.^ 

A  railroad  company  demised  its  railroad  and  railroad  prop- 
erty of  every  description  "  including  "  its  railroad,  rights  and 
appurtenances;  "  and  also  "  all  buildings  and  equipment 
and  all  personal  property  belonging  to  it;  "and  also"  all  fran- 
chises, etc.  It  was  held  that  the  words  "and  also"  related 
back  to  the  words  of  demise  and  were  not  restrained  by  the 
word  "including"  to  distinctively  railroad  property.^ 

A  provision  in  a  lease  that  the  lessee  shall  pay  a  definite  sura 
for  the  expenses  of  keeping  up  the  organization  of  the  lessor 
imposes  an  obligation  of  a  specific  nature  which  the  lessee 
is  bound  to  perform,  and  against  which  it  cannot  set  off  the 
amount  of  a  judgment  which  it  holds  against  the  lessor.^ 

'  South    Carolina,    etc.    R.    Co.    v.  Michigan   Central    R.    Co.    v.    Vbre 

Augusta,    etc.    R.    Co.,    Ill    Ga.    420  Marquette    R.     Co.,    128    Mich.    333 

(1900),  (36  S.  E.  Rep.  593).  (1901),   (87  N.  ^Y.  Rep.  271). 

*  Southern  R.  Co.  v.  Franklin,  etc.  *  Louis\-ilIe,  etc.  R.  Co.  v.  Cuniber- 

R.  Co..  96  Va.  693  (1899),  (32  S.  E.  land,  etc.   R.  Co.,  21   Ky.   Law  Rep. 

Rep.  485,  44  L.  R.  A.  297).  1126    (1900),    (54    S.    W.    Rep.    5); 

'  Gray   v.   Ma.s.sachusetts  Cent.    R.  rehearing  denied,   21    Ky.   Law   Rep. 

Co.,  171  Mass.  116  (1898),  (50  N.  E.  140  (1900),  (55  S.  W.  Rep.  884). 
Rep.  549).  In  a  street  railway  lea.se  the  lessee 

One  railroad  company  granted  to  agreed    to    pay    an     annual     rental ; 

another    the    right    in   porpetuit}'   to  to    operate    the    railway    at    its    own 

use  in  common  with  itself  a  portion  expense  and  make  necessary  repairs; 

of  its  road.     This  contract  was  held  to  pay  the  floating  debt  of  the  les.sor 

to  be  a  lca.sc.     The  contract  contained  and    all    assessments,    and    to    apply 

stipulations  concerning  the  character  all   moneys  not   required   for  current 

of  the  business  to  be  done  upon  the  liabilities  or  interest  to  the  improvc- 

road,  but    pro\ndcd   that   such   stipu-  ment     of    the     leased     proi>erty.      It 

lations  should    not  aj^ply  in  case  tiie  was    held    tliat    the    lessor    wa.s    not 

lessee    made    a    certain    extension    of  bound  to  turn  over  to  the  lessee  any 

its   lines.     It    was    held    that    a    pur-  moneys  received  by  it  and  that  tlio 

chasing  corporation  diil  not  take  the  rent  paitl  by  the  lessee  would  not  be 

lessee's   rights   free    from   the   restric-  repaid  to  it. 

tions,   although    its    own    lines    were  Moorshead     v.     United    Rys.    Co., 

extended  to  the  designated  points.  119  Mo.  App.  541   (1906),  (96  S.  W. 

3r>3 


§201 


INTERCORPOHATE    RELATIONS 


[part  m 


The  phrase  "  terminal  facilities/'  as  understood  by  persons 
operating  railroads,  includes  only  tracks  used  in  making  up 
trains.  A  lease  of  such  facilities  does  not  include  a  track  used 
only  for  the  purpose  of  reaching  car  works. ^ 

§  201.  Lease  for  Longer  Term  than  Existence  of  Corpora- 
tions may  be  valid.  —  A  lease  for  a  time  certain  provided  the 
lessee  live  so  long  is  valid,  and,  extending  this  principle,  it  has 
been  held  that  a  lease  to  a  railroad  company  for  nine  hundred 
and  ninety-nine  years  is  not  invalid  although  the  charter  of 
the  corporation  will  expire  long  before  the  termination  of  the 
lease,  for  the  reason  that  the  existence  of  the  corporation  may 
be  prolonged  by  law  for  the  entire  term.^     A  fortiori  is  this 


Rep.     261),     affirmed    203     Mo.     121 
(1907),  (100  S.  W.  Rep.  611). 

A  railroad  company  agreed  with 
another  company  to  construct  and 
build  its  road  with  suitable  terminals 
at  a  designated  city  and  immediately 
thereafter  took  a  lease  of  the  road, 
for  a  period  of  ninety-nine  years  with 
power  to  complete  it  as  pre\iously 
agreed  upon,  at  a  fixed  rental,  and 
with  a  further  provision  that  all 
taxes  upon  the  property  and  fran- 
chises of  the  lessor  might  be  paid  by 
the  lessee  but  should  be  deducted 
from  the  rent.  The  lessee  purchased 
real  estate  outside  but  adjoining 
the  lessor's  location  at  said  terminal, 
and  erected  sidings  and  buildings 
thereon.  It  was  held  that  the  lessee 
had  no  right  to  deduct  taxes  paid  upon 
this  last-mentioned  property  from  the 
rent.  The  lessee  also  paid  a  franchise 
tax  assessed  upon  the  basis  of  the 
gross  earnings  of  all  the  Unes  operated 
by  it  within  the  State,  di\'ided  by  the 
total  number  of  miles  so  operated. 
It  was  held  that  this  was  not  a  tax 
upon  the  franchises  of  the  leased 
lines  alone ;  that  it  was  either  a  tax 
upon  the  lessee's  franchises  alone  or 
upon  its  franchises  and  those  of  the 
leased  road.  In  the  latter  case  it 
could  not  be  apportioned  and  de- 
ducted from  the  rent.  Lemston, 
etc.   R.  Co.  V.  Grand  Trunk  R.  Co., 

364 


97  Me.  261  (190.3),  (.54  Atl.  Rep. 
7.50). 

'  .Jackson^^lle,  etc.  R.  Co.  v.  Louis- 
ville, etc.  R.  Co.,  47  111.  App.  414 
(1893). 

The  rights  of  a  railroad  company 
under  a  lease  of  terminal  facilities 
from  a  station  company  cannot  be 
affected  by  a  subsequent  lease  exe- 
cuted by  the  station  company  to 
another  railroad  companj'.  Pere 
Marquette  R.  Co.  v.  Wabash  R.  Co., 
141  Mich.  215  (1905),  (104  N.  W. 
650). 

See  this  case  also  for  examination 
of  many  questions  relating  to  ter- 
minal agreements. 

For  construction  of  a  series  of 
leases  and  renewals  between  a  ter- 
minal company  and  its  constituent 
corporations  as  tenants  —  rental 
being  paid  on  a  wheelage  basis  — 
see  Grand  Trunk  West.  R.  Co.  v. 
Chicago,  etc.  R.  Co.,  141  Fed.  785, 
(1905). 

2  Hill  V.  Atlantic,  etc.  R.  Co.,  143 
N.  C.  241  (1906),  (55  S.  E.  Rep.  854) : 
"Where  the  term  of  a  lease  of  the 
property  of  a  railroad  company 
extends  beyond  the  time  fixed  by 
its  charter  for  the  corporate  existence 
of  the  lessor,  such  a  lease  is  valid 
for  the  period  of  the  corporate  hfe 
of  the  lessor,  and  will  extend  beyond 
that  period  if  the  charter  is  renewed, 


CHAP.    XVIIl]  THE    CONTRACT    OF    LEASE  §    202 

principle  applicable  in  a  case  where  the  lease  provides  that  it 
shall  bind  the  successors  and  assigns  of  the  parties  thereto  and 
the  charter  of  the  lessee  corporation  contains  a  provision  for 
its  continued  renewal.  As  said  by  Judge  Sanborn  in  Union 
Pacific  R.  Co.  V.  Chicago,  etc.  R.  Co}  "  The  contingency  that 
this  corporation  will  cease  to  exist,  and  leave  neither  assigns 
nor  successors,  is  far  too  remote  to  have  any  influence  upon 
the  validity  of  this  contract." 

Upon  the  same  principle,  a  lease  by  a  corporation  for  a  longer 
period  than  its  own  existence  is  not  void  where  the  laws  of  the 
State  creating  the  corporation  permit  an  extension  of  its  charter.- 

§  202.  Partial  Invalidity  of  Leases,  Void  Restrictions.  —  A 
conveyance  of  property  which  a  corporation  is  authorized  to 
make  is  not  rendered  wholly  void  by  including  therein  prop- 
erty and  franchises  which  the  corporation  is  without  authority 
to  alienate.  It  is  valid  as  to  the  former  property  and  invalid 
as  to  the  latter.^     This  principle  is  applicable  to  leases. 

A  lessor  railroad  corporation  can  impose  upon  the  use  of  its 
railroad  by  the  lessee  only  such  restrictions  as  are  consistent 
with  the  discharge  by  the  lessee  of  those  obligations  which,  as 
common  carrier  and  otherwise,  it  owes  to  the  State  and  to  the 
public.  In  Metropolitan  Trust  Co.  v.  Columbus,  etc.  R.  Co.,* 
Judge  Taft  said:  "  Restrictions  in  the  nature  of  conditions 
subsequent,  which  in  respect  to  the  demised  premises  forbid 
the  lessee  to  do  its  public  duties  as  a  common  carrier,  would, 
if  enforced,  prevent  the  lessee  from  enjoying  the  demised  prem- 
ises at  all  in  a  lawful  manner,  and  are,  therefore,  repugnant 

and   by   this   process   it   may   endure  A  railroad  company  cannot  prolong 

for  the  full  term."  its    existence,    which    depends    upon 

'  Union  Pacific  R.  Co.  v.  Chicago,  the  user  of  its  franchises,  by  leasing 

etc.  R.  Co.,  51  Fed.  329  (1892).     Af-  them    to    another   corporation    which 

firmed    1G3    U.    S.    592    (1895),    (16  uses    them    for   its   own    benefit.     Re 

Sup.  Ct.   Rep.   1173),  where  the  Ian-  Brooklyn,  etc.   R.   Co.,  81   N.   Y.   C.9 

guage    of    Judge    Sanborn    stated    in  (18S1). 

the    text    is    quoted    with    approval  '    Butler    v.   Rahen,     46     Md.     541 

by    Chief    Justice    Fuller.     The    con-  (1877) ;      Hendee    v.     Pinkerton,     14 

tract  denominated  a  "lease"  in  this  Allen   (Mii-ss.)   381    (1SG7) ;  Gloninger 

case   was  really  a  trackage  contract,  v.  Pittsburgh,  etc.  R.  Co.,  139  Pa.  St. 

but    the    principles    are    equally    ap-  13   (1891),  (21  Atl.  Rep.  211). 

plicable  to  a  lease.  *  Metropolitan  TriLst  Co.  v.  Colum- 

2  Gere     v.      New      York     Central,  bus,     etc.      R.     Co.,     95      Fed.      22 

etc.  R.  Co.,  19  Abb.  N.  C.  193  (188.5).  (1899). 

365 


§    203  INTERCORPORATE    RELATIONS  [PART    III 

to  the  grant  and  void.  When  one  takes  an  estate  upon  condi- 
tion subsequent,  which  is  void  as  against  public  policy  or  for 
any  other  reason,  the  estate  continues  in  the  lessee  or  grantee 
freed  from  the  condition."  * 

§  203.  Dependent  and  Independent  Contracts.  —  Where  a 
contract  of  lease  is  invalid,  the  question  whether  other  con- 
tracts in  a  measure  connected  with  and  referring  to  it  are  also 
void,  depends  upon  whether  such  contracts  are  dependent 
upon  the  lease  or  independent  of  it. 

While  sometimes  "  by  referring  in  a  document  signed  by 
the  party  to  another  document,  the  person  so  signing  in  effect 
signs  a  document  containing  the  terms  of  the  one  referred 
to  "  ^  and  a  contract  referring  to  an  invalid  lease  may  fall  with 
it,  such  is  not  always  the  case.  The  effect  of  a  reference  de- 
pends upon  the  language  of  the  instrument  containing  it. 
Thus,  a  lease  of  A's  railroad  to  B  is  not  made  dependent  upon 
the  validity  and  continuing  existence  of  a  lease  of  C's  road  to 
B  by  a  covenant  that  A  shall  receive  from  B  a  monthly  state- 
ment of  the  gross  receipts  of  C's  road  and  shall  have  an  oppor- 
tunity to  inspect  its  books  and  accounts,  which  are,  however, 
important  only  in  case  B  seeks  a  reduction  of  the  rental  from 
the  maximum  amount  stated  in  the  lease.^     So,  it  was  held 

■Railroad  Co.   v.   Mathers,   71    111.  lease  was  made  dependent.     Ifthepar- 

592  (1874);    1  Story  Eq.  Jur.  §  288;  ties  had  intended  this  lease  should  ter- 

2  Washb.  Real  Prop.  (5th  ed.),  8.  minate  in  case  the  Lowell  voluntarily 

*  Fitzmaurice  v.    Bayley,   9   H.    L.  or  involuntarily  ceased  to  operate  or 

Cas.  99  (1860).  control  the  Northern,  their  accidental 

^  Boston,    etc.    R.    Co.    v.    Boston,  failure  to  put  that  important  part  of 

etc.    R.    Co.,    65    N.    H.    393    (1888),  their  contract  in  the  lease  could  have 

(23  Atl.  Rep.  529),  where  Doe,  C.  J.,  been  cured  in  a  suit  for  the  reformation 

said   (p.   402)  :    "There   has  been   no  of  the  defective  instrument.     In  the 

breach    of   the    express    covenant    to  lease  there  is  no   express  stipulation 

pay  rent,  or  the  express  agreement  to  of    that    kind,    and    no    evndence    on 

render  to  the   plaintiffs  a  statement  which  it  can  be  found  that  such  a  con- 

of  the  gross  receipts  of  the  five  roads,  dition     (which    would    naturally    be 

or  the   express  cov^enant   that  books  expressed     in     direct     and     distinct 

and    accounts    relating    to    the    busi-  terms)    was   intentionally   left    to    be 

ness  of  the  five   roads   shall  be   open  implied  from  the   mode  in  which  the 

to  the  plaintiff's  inspection.     But  the  lessees    are    to    ascertain    and    show 

lease  of  the  Northern  and  its  branches  the  amount  of  rent  to  be  paid  if  they 

to  the  defendants  has  been  judicially  seek    to    avoid    the    payment    of   the 

annulled ;    and  the  plaintiffs  contend  largest  sum   named  in   the  contract, 

that  upon  the  validity  and  continuing  .   .   .     The  lease  of  the  Montreal  was 

existence  of  that  lease  the  Montreal  not  made  dependent  upon  the  valid- 

366 


CHAP.    XVIIl] 


THE   CONTRACT   OF    LEASE 


§  203a 


that  a  bridge  contract,  referring  to  certain  articles  in  a  lease 
for  the  purpose  of  defining  the  extent  of  liabilities  and  benefits 
assumed,  did  not  make  the  bridge  contract  a  part  of  the  lease. 
The  vahdity  of  the  contract  was  entirely  independent  of  the 
validity  or  invalidity  of  the  lease.' 

§  203a.  Assignments  of  Leases.  —  Where  there  is  no  covenant 
not  to  assign  in  a  lease  of  a  railroad  the  lessee  corporation  may 
assign  it  to  another  corporation  authorized  to  take  it,  and 
the  rights  of  the  three  parties  —  lessor,  lessee  and  assignee  — 
will  be  governed  by  principles  similar  to  those  applicable  in 
the  case  of  ordinary  assignments  of  leases.  Where  possession 
of  the  leased  property  is  taken  without  an  express  covenant 
to  assume  the  rent,  the  assignee  is  liable  for  it  through  privity 
of  estate.  Where  the  assignee  promises  to  pay  the  rental  it 
is  liable  through  privity  of  contract. 

No  particular  form  is  necessary  for  the  assignment  of  a 
railroad  lease.^  Thus  where  a  lessee  of  a  railroad  itself  executed 
a  lease  of  all  the  property  embraced  therein  to  another  corpora- 
tion, it  was  held  to  operate  as  an  assignment  of  the  original 
lease  for  its  entire  term.^ 


ity  and  continuing  existence  of  the 
lease  of  the  Northern." 

*  Railway  Co.  v.  Keokuk  Bridge 
Co.,  131  U.  S.  371  (1889),  (9  Sup.  Ct. 
Rep.  770,  39  Am.  &  Eng.  R.  Cas.  213). 

2  Frank  v.  New  York,  etc.  R.  Co., 
122  N.  Y.  197  (1890),  (25  N.  E.  Rep. 
332). 

Where  a  lessee  sold  tlie  right  to  use 
and  possess  the  leased  property  as 
long  as  the  lessee  could,  the  rent  to  be 
paid  to  the  lessee  and  the  lessee  to  pay 
lessor,  it  was  held  that  tlie  arrange- 
ment was,  in  legal  effect,  an  assign- 
ment of  the  lease.  Indianapolis  Mfg. 
Union  v.  Cleveland,  etc.  R.  Co.,  4.5 
Ind.    281    (1873). 

A  contract  whereby  a  railroad  com- 
pany —  lessee  of  a  railroad  —  agr(>es 
with  another  company  for  the  opera- 
tion of  the  leased  road,  the  latter 
company  receiving  the  income,  pay- 
ing tlie  expenses  and  fixed  charges 
and   turning  over  the  surplus  to  the 


former  company,  is  an  operating 
contract  and  not  an  assignment  of  the 
lease. 

St.  Joseph,  etc.  R.  Co.  v.  St. 
Louis,  etc.  R.  Co.,  135  Mo.  173  (1896), 
(36  S.  W.  Rep.  602,  33  L.  R.  A.  607). 

*  Frank  v.  New  York,  etc.  R. 
Co.,  122  N.  Y.  197,  214  (1890),  (25 
N.  E.  Rep.  332):-  "By  the  agree- 
ment ...  a  leasehold  estate  was 
carved  out  of  the  fee  belonging  to  the 
former,  and  the  consideration  agreed 
to  be  paid  therefor  by  tlie  latter  was 
tlie  rent  reserved,  although  in  an 
unusual  form.  As  the  lease  from 
WoodnifT  to  the  Erie  Company  em- 
braced all  that  he  had  acquired  from 
his  lessor,  it  operated  as  an  assign- 
ment in  fact,  aitiiougli  not  such  in 
form,  of  the  entire  term  granted  by  tin- 
original  lease.  Thenceforward  the 
legal  relations  of  tiie  three  parties 
named  were  those  of  lessor,  Ie.s.see  and 
assignee    under    a    lease.     The     Erie 

.307 


§  204 


INTERCOUPORATE    RELATIONS 


[part    III 


The  lessor,  lessee  and  assignee  of  a  lease  of  a  railroad  may 
modily  its  provisions  and  reduce  the  rent,  notwithstanding 
there  is  a  mortgage  upon  the  road,  where  there  is  no  covenant 
on  the  part  of  the  assignee  for  the  benefit  of  the  mortgagee.^ 

The  assignee  of  a  railroad  lease  may  be  required,  in  equity, 
to  specifically  perform  its  terms. ^ 


II.    Covenants  in  Railroad  Leases 

§  204.  Covenant  to  pay  Rent.  Assumption  of  Interest  Pay- 
ments. —  A  lessee  is  liable  for  rent  during  his  occupancy  with- 
out an  express  covenant  to  pay  it,  and,  therefore,  the  special 
covenant  to  pay  rent  may  be  termed  a  precautionary  covenant, 
since  its  office  is  to  prevent  a  lessee  from  assigning  his  lease 
perhaps  to  an  irresponsible  person  and  thereby  releasing  him- 
self from  further  responsibility.  When  such  special  covenant 
appears  in  a  lease  a  lessor  has  double  security.     There  is  priv- 


Company  become  liable  for  the  inter- 
est and  principal,  as  it  fell  due,  both 
by  privity  of  contract  and  by  privity 
of  estate.  The  former  liability  de- 
pended upon  its  express  promise  to 
pay,  whether  it  entered  into  possession 
OT  not,  and  could  be  discharged  only 
by  pajinent,  while  the  latter  depended 
upon  entry  into  possession  under  the 
lease,  and  could  be  avoided  by  assign- 
ing the  entire  term  and  relinquishing 
possession." 

'  Frank  v.  New  York,  etc.  R.  Co., 
122  N.  Y.  197  (1800),  (25  N.  E.  Rep. 
332):  "It  is  clear  that,  ordinarily, 
the  lessor,  lessee  and  assignee  of  a 
lease  may  modify  its  terms  by  re- 
ducing the  amount  of  rent.  Can 
they  do  so  when  there  is  a  mort- 
gage upon  the  property  covered  bj^ 
the  lease,  but  not  upon  the  leasehold 
estate  itself?  Why  can  they  not  in 
the  absence  of  fraud  and  when,  as  in 
this  case,  there  is  no  covenant  on  the 
part  of  the  assignee  for  the  benefit 
of  the  mortgagee?  Without  such  a 
covenant,  or  some  express  promise, 
the  assignee  of  a  lease  is  under  no 
more  obligation  to  the  mortgagee  of  a 

368 


lessor,  than  a  grantee  is  to  the  mort- 
gagee of  a  grantor." 

^  One  railroad  company  purchased 
all  the  property  of  another  railroad 
company,  including  a  lease  held  by  it 
of  still  another  railroad,  and  took 
charge  of  and  operated  the  latter  road 
for  a  long  time.  It  then  brought  suit 
to  recover  from  the  lessor  corporation 
under  said  lease  sums  of  money  due 
to  the  said  selling  corporation  —  the 
original  lessee  —  under  the  terms  of 
the  lease.  It  was  held  that  such 
purchasing  corporation  thereby  as- 
sumed the  obligation  of  the  selling 
corporation  under  the  lease  and  was 
not  a  tenant  by  sufferance,  and  that 
specific  performance  of  tlie  terms  of 
the  lease  by  it  would  be  adjudged, 
notwithstanding  the  original  lessor 
had  failed  to  perform  its  undertaking 
to  provide  means  for  completing  the 
construction  of  the  road. 

Schmidtz  v.  l/ouisville,  etc.  R.  Co., 
101  Ky.  441  (1897),  (41  S.  W.  Rep. 
101.5,  38  L.  R.  A.  809).  See  also 
Southern  R.  Co.  v.  Franklin,  etc.  R. 
Co.,  96  Va.  693  (1899),  (33  S.  E.  Rep. 
485,  44  L.  R.  A.  297). 


CHAP.    XVIIl] 


THE    CONTRACT   OF    LEASE 


§204 


ity  of  estate  between  him  and  the  assignee  ;   privity  of  contract 
between  him  and  the  lessee. 

This  covenant  has  a  proper  place  in  railroad  leases  and  may 
contain  provisions  for  the  payment  of  rent  in  various  ways 
and  forms.  It  may  stipulate  that  a  fLxed  sum  shall  be  paid 
at  stated  intervals;  that  prescribed  dividends  on  the  shares 
of  the  lessor  corporation  shall  be  provided  for;  or  that  a  portion 
of  the  gross  or  net  earnings  arising  from  the  operation  of  the 
leased  railroad  shall  be  turned  over  to  the  lessee  or  expended 
in  its  behalf.  Thus,  under  a  statute  authorizing  railroad  com- 
panies to  lease  and  operate  the  roads  of  other  companies,  a 
covenant  in  a  lease  by  which  the  lessee,  in  lieu  of  directly  paying 
rent,  guaranteed  the  payment  of  interest  accruing  upon  bonds 
of  the  lessor  was  held  valid.'     Where  such  a  covenant  takes 


*  Eastern  Townships  Bank  v.  St. 
Johnsbury,  etc.  R.  Co.,  40  Fed.  424 
(1889).  Judge  Wheeler  said:  "The 
laws  of  Vermont,  under  which  the  de- 
fendant has  and  exercises  its  corporate 
powers,  provide  that  'railroad  com- 
panies in  this  State  may  make  con- 
tracts and  arrangements  with  each 
other,  and  with  railroad  corporations 
incorporated  under  the  laws  of  other 
of  the  United  States,  or  under  the 
authority  of  the  government  of 
Canada,  for  leasing  and  running  the 
roads  of  the  respective  corporations, 
or  parts  thereof,  by  either  of  their 
respective  companies.'  R.  L.  Vt. 
§  3303.  This  statute  conferred  ample 
power  upon  the  defendant  corporation 
to  take  the  lease,  and  to  agree  to  pay 
the  rent  as  it  shoukl  fall  due,  and 
doubtless  to  arrange  for  paying  the 
rent,  by  paying  coupons  of  the  same 
amount  or  guarantying  their  pay- 
ment." 

A  railroad  lease  provided  that  the 
lessee  should  pay  the  lessor's  bond 
interest  as  a  jiart  of  the  aiuiual  rental ; 
that  if  the  lessor  should  pay  its  bonds 
when  they  matured,  the  lessee  should 
pay  to  it  a  sum  equal  to  the  interest 
so  savetl,  but  that  if  the  lessor  should 
not  pay  them,  the  lessee  should  issue 


new  bonds.  The  lessor  did  not  pay 
an  issue  of  bonds,  and  the  lessee  re- 
funded them  at  a  lower  rate  of  inter- 
est. A  question  arose  as  to  which 
part}'  was  entitled  to  the  benefit  of 
the  refunding,  concerning  which  the 
New  York  Court  of  Appeals  said 
(Continental  Ins.  Co.  v.  New  York 
and  Harlem  R.  Co.,  187  N.  Y.  225 
(1907),  (79  N.  E.  Rep.  1026)):  "The 
distinguished  jurist  before  whom,  as 
referee,  this  case  was  tried,  was  of  the 
opinion  that  by  the  terms  of  the  origi- 
nal lease  the  Harlem  Company  was 
entitled,  if  it  coidd  procure  the  neces- 
sary funds,  to  pay  off  the  consolidated 
mortgage  bonds  and  thus  secure  to 
itself  any  advantage  in  the  reduction 
in  the  interest  charged  on  its  road. 
We  think  that  in  this  view  he 
was  clearly  right.  By  the  first  clause 
of  the  lease  all  payments  to  be  made 
by  the  lessee  were  reserved  as  rent, 
and  by  the  second  subdivision  of  tiie 
clause  that  rent  was  to  be  paid  by  pay- 
ing certain  si)ecific  interest  charged 
to  the  holder  of  the  bonds.  This  pro- 
A'ision  did  not  change  the  character 
of  the  paj-ment,  but  merely  the 
method  of  the  paj'ment.  The  pay- 
ment was  still  to  be  of  rent." 

A  lease  of  a  railroad  in  i>eri)etuity 

369 


205 


INTERCORPORATE    RELATIONS 


[part   III 


the  form  of  an  agreement  to  pay  to  the  trustees  of  the  lessor's 
mortgage  interest  thereon  as  it  accrues,  the  lessee  corporation 
is  directly  liable  to  the  mortgagees  therefor  although  they  are 
not  parties  to  the  lease,  since  the  agreement  shows  that  it  was 
intended  for  their  benefit.* 

§  205.  Covenant  to  pay  Taxes.  —  In  this  country,  as  distin- 
guished from  England,  lands  and  property  are  generally  as- 
sessed in  the  name  of  the  owner,  so  that  the  lessee  is  under  no 
obligation  to  pay  taxes  unless  he  assume  them  as  a  part  of  the 
rent.     Covenants  wherein  the  lessee  assumes  the  taxes  are  not 


provided  that  the  lessee  should  pay  an 
annual  rental  of  the  specified  sum  by 
paying  interest  on  certain  bonds  and 
dividends  at  a  stated  rate  upon  the 
stock.  The  lessee  also  had  the  right 
to  take  stock  for  improvements  upon 
the  road  without  limitation  as  to 
total  amount.  A  sinking  fund  was 
provided  for  to  pay  off  certain  bonds. 
A  supplemental  agreement  was  en- 
tered into  limiting  the  amount  of 
stock  to  be  issued  and  providing  for  a 
higher  dividend  in  view  of  the  saving 
of  interest  caused  by  the  operation  of 
the  sinking  fund.  The  bonded  debt 
was  refunded  at  its  maturity  at  a 
lower  rate  of  interest.  The  Circuit 
Court  held  that  the  lessor  was  en- 
titled to  the  benefit  of  the  saving  by 
the  refunding. 

^tna  Ins.  Co.  v.  Albany,  etc.  R. 
Co.,  156  Fed.  132  (1907).  The  ap- 
peal in  this  case  to  tlie  United  States 
Circuit  Court  of  Appeals  has  not  yet 
been  decided. 

>  Welden  Nat.  Bank  v.  Smith,  86 
Fed.  398  (1898),  s.  c.  svb  nom. 
Grand  Trunk  R.  Co.  v.  Central  Ver- 
mont R.  Co.,  78  Fed.  690  (1897).  In 
this  case  where  a  lessee  under  a  rail- 
road lease  covenanted  to  pay  all  ob- 
ligations of  the  lessor  incurred  "as 
common  carriers,  warehousemen,  or 
otherwise,"  and  thereafter  to  pay 
the  interest  on  certain  mortgage 
bonds  of  the  lessor,  it  was  held,  that 
"or  otherwise"  referred  only  to  obli- 
gations  of   the   same    class    as   those 

370 


enumerated,  and  that  earnings  accru- 
ing in  the  hands  of  receivers  of  the 
lessee  were  applicable  to  interest  on 
the  bonds,  rather  than  to  judgments 
on  claims  not  falling  within  that  class. 
In  Day  v.  Ogdensburgh,  etc.  R. 
Co.,  107  N.  Y.  129  (1887),  (13  N.  E. 
Rep.  765),  an  agreement  between  two 
railroad  companies  and  others  pro- 
vided that  one  company  should  issue 
so  many  of  its  first  mortgage  bonds, 
not  e.xceeding  a  sum  specified,  as 
should  be  sufficient  to  construct  its 
road ;  that  these  .should  be  purchased 
by  the  parties  to  the  agreement,  other 
than  the  two  corporations.  De- 
fendant corporation  agreed  when  the 
road  was  completed  to  take  a  lease  of 
it  on  terms  and  conditions  specified. 
After  the  completion  of  the  road  a 
lease  was  executed  as  agreed  upon. 
By  the  terms  of  the  lease  defendant 
agreed  to  maintain  and  operate  the 
demised  road  as  a  part  of  its  line,  to 
pay  taxes  and  certain  other  expenses, 
and  to  pay  at  maturity  the  principal 
and  interest  of  the  bonds ;  also,  that 
the  gross  earnings  of  the  road  should 
be  applied,  first,  to  pay  the  interest 
accruing,  and  second,  for  the  creation 
of  a  sinking  fund  for  the  payment  of 
the  principal  of  the  bonds.  It  was 
held  that  the  agreement  and  lease 
were  within  the  power  of  the  two  cor- 
porations to  make  and  were  valid. 
See  post,  §  212:  "Rights  of  Stock- 
holders when  Rent  is  payable  in  Form 
of  Dividends." 


CHAP.    XVIIl]  THE   CONTRACT    OF    LEASE  §    205 

uncommon  in  leases  of  real  estate  and  are  general  in  leases  of 
railroads,  although  the  systems  of  taxing  that  class  of  property 
vary  widely  in  the  different  States. 

Upon  the  principle  that  a  tax,  in  the  sense  in  which  the  word 
is  ordinarily  used,  is  "  something  exacted  for  public  service 
and  not  by  way  of  compensation  for  benefits  conferred,"  it 
is  held  that  a  covenant  to  pay  "  all  taxes*"  does  not  include 
an  assessment  for  benefits,  or  other  special  rates  of  a  similar 
nature.^  The  application  of  this  principle  is,  however,  readily 
and  commonly  avoided  by  the  use  of  the  phrase,  "  all  taxes 
and  assessments." 

Where  a  railroad  lease  provided  that  the  lessee  should  pay  all 
taxes  and  assessments  imposed  during  the  term  by  any  govern- 
mental or  lawful  authority  on  the  railroad  and  leased  property, 
or  on  any  business,  earnings  or  income  of  the  same  or,  "  liy 
reason  of  the  ownership  thereof,"  it  was  held  that  the  lessee 
was  bound  to  pay  a  tax  imposed  upon  the  franchise  of  the 
lessor,  it  being  a  tax  imposed  "  by  reason  of  the  ownership  " 
of  the  road.^ 

A  general  covenant  to  pay  all  taxes  relates  only  to  future 
taxes  imposed  during  the  term  of  the  lease  and  involves  no 

'  Wood's    Landlord    and    Tenant,  tion.     The    Court    said  :     "Tlie    leasee 

p.  685,  and  cases  there  cited.  sued  on  did  not  stipuhite  for  the  pay- 

^  Thomas    v.    Cincinnati,    etc.     R.  ment  by  the  lessee  of  all  taxes  imposed 

Co.,  93  Fed.  587  (1899).  on    the    lessor    company,    but    of    all 

A  lessee  corporation   which   cove-  taxes   on   the   property   demi.sed   and 

nants  to  pay  all  taxes  a.ssessed  upon  was  so  understooil  and  acted  upon  by 

"the     real     and     personal     property,  the  parties  for  thirty  years." 
franchises,  capital  stock  or  gross  re-  Erie,  etc.  R.  Co.  i\  Pennsylvania  R. 

ceipts"  of  the  lessor  during  the  term  Co.,  208  Pa.  506  (1904),  (57  Atl.  Rep. 

is  not  bound  to  pay  a  tax  le\ncd  on  980). 

"di^^dends."     Jersey  City  Gas  Light  Where  the  lessee  of  a  railroad  was 

Co.  V.  United  Gas  Imp.  Co.,  58  Fed.  to    pay   all    taxes    and    deduct    them 

323  (1893),  s.  c.  46  Fed.  264  (1891).  from  the  rent,  it  had  no  right  to  de- 

Where  a  lea-se    pro\ided  that  the  duct   taxes  upon   land   which   it    had 

lessor  should  pay  "all  taxes  now  or  itself   purcha.seil    outside    the    lo.s.s()r'.s 

liereinafter  imposed  by  law  upon  the  location    and    used    for    sidings    and 

Iiropcrtj'    hereby    demised    and    the  buildings     in     connection     with     the 

earnings  from  or  business  thereof   it  railroad  ;    nor  could  it  deduct  a  fran- 

was    lield    that    the    covenant    would  chise    tax    which    wa.s    incapable    of 

not  be  construed  to  cover  a  tax  on  the  apportionment  a.s  against  the  lessor, 
capital  stock  of  the  lessor,  particularly  Lewiston,    etc.    R.    Co.    v.    Grand 

as    the    parties    for   manj-^   years   liad  Trunk    R.    Co.,    97     Me.    2G1    (1903), 

acted  under  the  contrary  interpreta-  (54  Atl.  Rep.  750). 

371 


I    206  INTERCORPORATE    RELATIONS  [PART   III 

assumption  of  past  due  taxes.  Thus,  a  covenant  ))y  the  les- 
see in  a  raih'oad  lease  that  it  "  will  pay,  as  operating  ex- 
penses, all  taxes  and  assessments  .  .  .  which  may  be  law- 
fully levied  or  assessed  "  upon  the  demised  property,  is  not 
an  assumption  of  liabiUty  for  taxes  already  assessed  and 
levied.^ 

The  covenant  to  pay  taxes  and  assessments  is  for  the*  sole 
benefit  of  the  lessor  corporation.  It  confers  no  right  of  action 
against  the  lessee  in  favor  of  the  municipality  levying  the 
assessment,  because  there  is  no  privity  between  them.^ 

§  206.  Covenant  not  to  Assign.  —  The  covenant  not  to  assign 
or  sublet  the  demise  1  premises  without  the  written  consent  of 
the  lessor  used  in  ordinary  leases  of  real  estate  is  generally 
inserted  in  railroad  leases,  and  is  of  the  utmost  importance 
when  so  employed,  in  safe-guarding  the  interests  of  the  lessor 
corporation.  As  observed  by  Judge  Clark  in  Boston,  etc.  R. 
Co.  V.  Boston,  etc.  R.  Co.^:  "  The  lessor  had  the  right  to  choose 
its  tenant,  and,  whatever  may  have  been  its  purpose  in  doing 
it,  the  conclusion  is  irresistible  that  the  stipulation  against 
assigning,  underletting  or  parting  with  the  possession  of  the 
demised  premises,  was  inserted  in  the  lease  to  secure  the  ex- 
ercise of  the  personal  integrity,  discretion,  and  judgment  of 

'  If  there  is  any  contract  implied  ment  upon  the  property  of  the  lessor, 

by  law  whereby  one  railroad  company,  including  the  leased  line,  having  been 

acquiring  the  control  of  the  property,  raised,    it    was   contested,    but,    after 

income,    etc.,    of    another,     becomes  extended    litigation,    was    sustained, 

directly  liable  for  taxes  already  due,  In  the  meantime,  receivers  had  been 

and  constituting  a  lien  thereon,  for  the  appointed    for    the    lessee,    and    they 

fiscal  year  then  current,  such  liability  took  possession  of  the  leased  line  and 

is  only  in  proportion  to  the  part  of  the  paid  other  taxes  through  the  issue  of 

fiscal  year  remaining  after  the  assump-  receivers'    certificates.     It    was    held 

tion    of    such    control.     Cleveland    v.  that  they  were  bound  to  repay  to  the 

Spencer,  73  Fed.  559  (1S96).  lessor   the   proper   proportion   of  the 

A  railroad  compan}^  leased  part  of  judgment    for    the    contested    taxes, 

its  road  to  another  company,   which  United   States  Trust   Co.   v.   Mercan- 

agreed     to    pay    all     taxes     assessed  tile  Co.,  88  Fed.  140  (1898). 

against  the  leased   property.     Under  ^  Chicago,    etc.    R.   Co.   v.   City   of 

the  statute,  taxes  on  the  leased  line  Ottumwa,  112  Iowa,  300  (1900),  (83 

were   assessed   against    the   lessor,    as  N.  W.  Rep.  1074,  51  L.  R.  A.  763). 

ownef,   in   the   same    manner   as   the  ^  Boston,  etc.  R.  Co.  v.  Boston,  etc. 

taxes  upon  the  part  of  its  road  not  R.  Co.,  65  N.  H.  448  (1888),  (23  Atl. 

leased,  and  were  paid,  reimbursement  Rep.  529). 
being  made  by  the  lessee.     The  assess- 

372 


CHAP.    XVIll]  THE    CONTRACT   OF    LEASE  §   206 

the  lessee,  in  shaping  the  policy  and  controlling  the  manage- 
ment and  operation  of  the  road." 

Therefore,  when  a  lessee  corporation  voluntarily  parts  with 
its  power  to  control  the  operation  of  the  railroad  leased  and 
becomes  the  mere  agent  of  a  third  corporation  in  the  opera- 
tion of  the  road,  the  covenant  not  to  assign  is  broken  in  sub- 
stance and  the  estate  granted  by  the  lease  is  forfeited.' 

The  covenant  not  to  assign  as  usually  drawn,  however,  is, 
under  certain  conditions,  of  no  benefit  to  the  lessor  corporation 
and  may  be  broken  by  indirection  without  incurring  a  for- 
feiture. Thus,  upon  the  principle  that  a  mortgage,  outside 
of  the  New  England  States,  is  not  a  transfer  of  the  legal  title 
or  possession,  it  is  held  that  the  giving  of  a  mortgage  of  a  lease- 
hold interest  without  the  consent  of  the  lessor  is  not  a  violation 
of  the  covenant  not  to  assign;  and,  upon  the  further  principle 
that  an  assignment  or  transfer,  hy  operation  of  law,  does  not 
constitute  a  breach  of  the  covenant,  it  is  held  that  a  sale  of  the 
leasehold  interest  in  foreclosure  proceedings  is  not  a  breach 
because  it  is  in  invitum?  A  lessee  railroad  company  may, 
therefore,  mortgage  its  lease  and  the  leasehold  interest  may 
be  sold  to  a  corporation  objectionable  to  the  lessor  without  a 
breach  of  the  covenant  not  to  assign.  The  position  of  the 
lessor  may  be  protected,  however,  by  providing  in  the  cove- 
nant that  the  lease  hold  interest  shall  not  be  mortgaged  with- 
out the  lessor's  consent,  or  by  adding  a  provision   that  the 

1  A  covenant  by  the  lessee  of  a  rail-  ^  Riggs   v.    Piir.scll,    06    N.    Y.    193 

road  not  to  assign  the  lease  is  broken  (1876).     This    deci.sion     is    expressly 

by  its  assignment  of  the  future  gross  put  upon  the  ground  (p.  200)  that  "a 

earnings  of  the  road  to  a  third  person  mortgage  in  this  State  of  land  is  not 

and  contracting  to  use  anil  operate  it  a  transfer  of  the  legal  title,  or  the  pos- 

vmder   tlie  direction   of  the   assignee.  session,   but   a  mere  security,"  citing 

Boston,  etc.  R.  Co.  v.  Boston,  etc.  II.  Trimni  r.  Marsh,  54  N.  Y.  59'.)  (1874), 

Co.,65N.H.  393(1888),  (23  Atl.  Rep.  (13   .\m.    Rep.   623),   where  the  New 

529).  York  rule,  a.s  distiiiguislied   from  the 

The  assignee  of  the  lease  of  a  rail-  rule  in  Eiiglan*!  and  the  Xew  lOngland 

road   cannot   take   advantage   of   the  States,    is    discu-ssed    at    length.      It 

fact  that  the  lea.se  was  not  consented  may,  therefore,   be  doubtful  whether 

to   by   the   lessor   corporation    as   re-  a  mortgage  in  those  States  where  it  is 

quired    by    its    terms.     Schmidt     v.  regarded,    between    the    parties,   a.s  a 

Louisville,  etc.   R.  Co.,   101    Ky.   441  conveyance  of  the  fee,  wouhl  not  con- 

(1897),   (41    S.  W.   Rep.    1015,   38  L.  stitute  a  breach  of  the  covenant  not 

R.  .A..  809).  to  assign. 

373 


§   207  INTERCORPORATE    RELATIONS  [PART    III 

lessor  may  terminate  the  lease  if  transferred  by  operation  of 
law. 

The  general  rules  of  law  relating  to  this  covenant,  as,  for 
example,  that  where  consent  has  once  been  given  to  an  assign- 
ment the  restriction  is  gone  forever,  and  that  the  lessor  may 
waive  the  forfeiture  occasioned  by  a  breach  of  the  covenant  by 
accepting  rent,^  are  applicable  to  leases  of  railroads  only  as 
they  apply  to  leases  in  general,  and  are  fully  considered  in 
treatises  upon  the  general  subject  of  the  relation  of  landlord 
and  tenant. 

§  207.  Covenant  to  make  Repairs.  —  The  covenant  upon  the 
part  of  the  lessee  corporation  to  make  repairs  is  usually  in- 
serted in  railroad  leases.  It  often  appears  in  conjunction 
with  the  covenant  —  of  an  analogous  nature  —  to  preser\^e  the 
leased  personal  property  and  to  substitute  new  for  old. 

A  covenant  in  a  railroad  lease  that  the  lessee  corporation 
shall  "  return  said  road  and  property,  both  real  and  personal, 
at  the  termination  of  this  lease,  in  as  good  condition  and  re- 
pair in  all  respects  as  it  is  now  in,  natural  wear  only  excepted," 
binds  the  lessee  to  keep  the  road  in  good  running  condition, 
and  to  renew  all  structures  which  by  decay  or  accident  become 
unsafe.^ 

1  A  lessor  corporation  may  waive  a  store  the  leased  railroad  in  good  repair 
breach  of  a  covenant  not  to  assign  or  at  tlie  termination  of  the  lease  is  quali- 
sublet,  by  acquiescing  and  by  failing  tied  by  the  words,  "unless  prevented 
to  object  within  a  reasonable  time  by  unavoidable  casualty,  legal  pro- 
when  the  leased  property  is  turned  ceedings  or  operation  of  law,"  a 
over  to  another  without  its  consent.  lessee  is  bound  to  turn  over  the  prop- 
"The  Elevator  Case,"  17  Fed.  200  erty  in  good  repair,  where  the  lease 
(1881).  is  terminated  by  a  sale  in  foreclosure 

Where  a  lease  contains  a  covenant  proceedings.     It  was  also  held  in  this 

not  to  assign  without  the  written  con-  case  that  a  trustee  under  a  mortgage 

sent    of    the    lessor,    the    assignee    is  to    secure    the    bondholders    of    the 

chargeable    with  notice   of   its   terms,  lessor  corporation   might   sue  the  les- 

and  if  rent  is  not  accepted  after  an  see     upon     such     a     covenant,      the 

assignment  the  lessor  is  not  estopped  undertaking       being,      according     to 

from  claiming  a  forfeiture.  the    agreement,    for    the     benefit    of 

Indianapolis   Mfg.  Union  v.  Cleve-  the  bondholders. 

land,  etc.  R.  Co.,  45  Ind.  281  (1873).  Louisville,  etc.  R.  Co.  v.  Schmidt, 

2  Sturges  V.  Knapp,  31  Vt.  1  (1858).  112  Ky.  717  (1902),  (66  S.  W.  Rep. 
See  also  Southern  R.  Co.  i\  Franklin,  629). 

etc.  R.  Co.,  96  Va.  693  (1899),  (32  S.  For  consideration  of  the  rights  of  a 

E.  Rep.  485,  44  L.  R.  .\.  297).  trustee    for     bondholders    in    a    suit 

Notwithstanding  a  covenant  to  re-       against  a  lessee  corporation  for  failure 

374 


CHAP.    XVIIl]  THE    CONTRACT   OF   LEASE  §   208 

Under  a  covenant  in  a  lease  to  make  "necessary  repairs,"  it 
has  been  held  that  a  lessee  is  obliged  only  to  make  such  repairs 
as  its  own  use  of  the  premises  requires.  In  so  holding  the  Court 
said:  "  The  word  '  necessary  '  applied  to  repairs,  may  well  be 
understood  to  denote  such  repairs  as  were  necessaiy  to  the  defend- 
ants, and  not  such  as  might  be  necessary  for  some  future  or 
different  use  of  the  property,  after  their  lease  had  expired."  ' 

§  208.  Covenant  to  pay  Damages  and  defend  Suits.  —  While 
upon  considerations  of  public  policy  the  courts  of  several 
States  hold  that  a  lessor  railroad  company  cannot  by  leasing 
its  railroad,  even  with  legislative  sanction,  absolve  itself  from 
liability  to  third  persons  for  the  negligence  of  the  lessee  in  the 
operation  of  the  road,  and  while  it  is  unquestioned  that  the 
liability  of  the  lessor  for  the  proper  discharge  of  its  primary 
obligations  continues  after  a  lease  as  before,  yet  as  between 
themselves  the  liability  to  pay  damages  and  the  obligation  to 
defend  suits  may  be  the  subject  of  agreement  between  the 
lessor  and  lessee,  and  covenants  relating  tiiereto  are  usual  in 
railroad  leases.  "  Similar  provisions,"  said  Judge  Brawley  in 
a  recent  case,^  "  will  doubtless  be  found  in  every  contract 
whereby  one  railroad  company  undertakes  to  lease  or  operate 
another.  Suits,  actions,  or  damages  are  incidental  to  the 
operation  of  every  railroad,  and  provision  must  always  be  made 
whereby  one  or  the  other  of  the  contracting  corporations  as- 
sumes such  burdens." 


to  keep  the  roadbed  of  a  leased  road  (41  Pac.  Rep.  783,  50  Am.  St.  Rep. 

in  repair  as  stipulated    in    the   lease,  17,  29  L.  R.  A.  751). 

sec  First  National  Bank  v.  Louisville,  A  lease  by  a  railroad  company  of  a 

etc.  R.  Co.  (Ky.  1904),  79  S.  W.  Rep.  portion  of  its  right  of  way,  upon  con- 

280.     In  this  case  it  was  also  held  that  <lition  that  the  company  shall  not  be 

the  fact  that  tlie  le.s.see  denied  any  ob-  liable  for  any  damage  to  buiklings  or 

ligation  to  keep   the    roa<l    in    repair  personal    property    situated    thereon, 

did  not  prevent  its  recovering  back,  as  by  reason  of  fire  originating  from  its 

one  of  the  bondholders,  its  projiortion-  locomotives,  or  for  damages  resulting 

ate  share  of  what  it   was  obliged   to  from  the  negligence  of  its  employees 

pay  as  lessee.  or    agents,    is    not    void,    as    against 

'  White  V.  .\lbany  R.  Co.,  17  Hun  public   policy,  either  under  the   Iowa 

(N.  Y.),  98  (1879).  decisions  or  upon   general   principles. 

*  South    Carolina,    etc.    R.    Co.    v.  Hartford  Fire  Ins.  Co.  r.  Chicago,  etc. 

Carolina,    etc.    R.   Co.,   93    Fed.   557  R.  Co.,  70  Fed.  201  (1895),  (30  L.  R. 

(1899).     See  also  Stephens  v.  South-  A.  193). 
crn   Pacific  Co.,   109  Cal.  86  (1896), 

375 


209 


INTERCOUPOHATE    RELATIONS 


[part  hi 


As  the  corporations  —  lessor  and  lessee  —  stand  upon  the 
same  plane,  such  covenants  as  they  may  agree  upon  regarding 
the  assumption  of  liabilities  are  not  opposed  to  public  policy, 
and  are  valid  and  enforceable. 

§  209.  Miscellaneous  Covenants.  ^  In  addition  to  the  cove- 
nants already  considered,  the  contracting  parties  to  a  railroad 
lease  authorized  by  legislative  authority  have,  as  incident  to 
the  power  conferred,  the  right  to  include  in  the  lease  such 
other  covenants  usual  in  leases  as  may  be  agreed  upon  in  the 
particular  case.^  Thus,  a  corporation  authorized  to  lease  a 
building  may  covenant  to  keep  it  insured;^  and  a  railroad 
company  as  lessee  may  properly  covenant  "  to  use  all  proper 
and  reasonable  means  to  maintain  and  increase  the  business  " 
of  the  leased  railroad.' 


'  Abby  V.  Billups,  35  Miss.  618 
(1858),  (72  Am.  Dec.  143). 

An  arbitration  clause  in  a  railroad 
lease  pro-\ading  that  in  case  of  dispute 
each  party  ' '  shall  select  a  referee  of 
experience  and  skill  in  railroad  man- 
agement, and  the  said  referees  shall 
select  another  of  like  skill  and  ex- 
perience "  is  vaUd  and  is  not  rendered 
unlawful  by  the  fact  that  the  lessee 
company  owns  a  majority  of  the 
stock  of  the  lessor  company. 

Wolf  V.  Pennsylvania  R.  Co.,  195 
Pa.  St.  91  (1900),  (45  Atl.  Rep. 
936). 

*  A  corporation  with  power  to 
lease  a  building  may,  in  consideration 
of  the  lessor's  obligation  to  rebuild  in 
case  the  building  should  be  burned 
down,  covenant  to  keep  the  same  in- 
sured. Jacksonville,  etc.  R.  Co.  v. 
Hooper,  160  U.  S.  514  (1896),  (16  Sup. 
Ct.  Rep.  379). 

'  Where  a  lessee  corporation  en- 
tered into  such  a  covenant  and  sub- 
sequently became  the  practical  owner 
of  another  railroad  hav^ing  the  same 
general  direction  as  the  leased  road 
and  practically  the  same  terminals, 
it  was  held  that  while  the  lessee  had 
no  right  to  violate  either  the  letter  or 
spirit  of  the  lease,  yet  that  the  cove- 

376 


nant  was  not  broken  by  shipping 
freight  over  its  parallel  road,  where 
the  carrvnng  of  such  freight  over  the 
leased  road  would  have  been  imprac- 
ticable on  account  of  its  heavy  grades. 

Catawissa  R.  Co.  v.  Philadelphia, 
etc.  R.  Co.,  168  Pa.  St.  544  (1894), 
(32  Atl.  Rep.  62). 

A  railroad  company  leased  to  an- 
other company  the  right  to  use  a  por- 
tion of  its  road  for  ninety-nine  years, 
renewable  forever.  The  lease  pro- 
vided that  the  lessee  should  not  ex- 
tend its  road  into  certain  coal  territory, 
or  receive  coal  for  transportation  from 
any  connecting  lines,  and  that,  in 
case  of  violation  of  such  conditions, 
the  right  of  the  lessee  to  use  the  de- 
mised road  should  be  suspended  dur- 
ing its  continuance.  The  successor 
of  the  lessee  acquired,  by  purchase, 
certain  connecting  lines  extending 
into  the  prohibited  territory,  which  it 
operated  in  connection  with  its  origi- 
nal road  for  nine  years,  without  ob- 
jection from  the  lessor.  Held,  that 
conceding  the  provision  against  ex- 
tension to  have  been  valid,  it  was 
waived  by  the  lessor  by  acquiescence, 
and  with  it  the  right  to  object  to  the 
transportation  by  the  lessee  of  coal 
received  for  shipment  on  its  purchased 


CIIAl".    XIX]  RIGHTS    AND    LIABILITIES    OF    LESSOR  §   210 


CHAPTER    XIX 


RIGHTS    AND    LIABILITIES    OF    LESSOR    CORPORATION 

I.    Rights  and  Remedies  of  Lessor  Corporation 

§  210.     Lessor  Corporation   retains   Prerogative   Powers  —  Right  of  Eminent 

Domain. 
§  211.     Rights  of  Lessor  when  entitled  to  Share  of  Earnings  —  Equitable  Lien. 
§  212.     Rights  of  Stockholders  when  Rent  is  payable  in  Form  of  Dividends. 
§  213.     Mortgage  of  Rent  Charge. 
§  214.     Remedies  of  Lessor  Corporation. 

II.    Liabilities  of  Lessor  Corporation 

§  215.     Obligations  of  Lessor  Corporation  to  State. 

§  216.     Lessor  Corporation  cannot  avoid  Statutory  Obligations  unless  exempted. 

§  217.     Lessor  cannot  avoid  Primary  Obligations  unless  exempted. 

§  218.     Liability  of  Lessor  for  Negligent  Operation  of  Railroad  —  (A)  Under 

Unauthorized  Lease. 
§  219.     Liability  of  Lessor  for  Negligent  Operation  of  Railroad  —  (B)  Under 

Authorized  Lease. 
§  220.     Liability    of    Lessor    for    Negligent    Operation    of    Railroad  —  (C)    To 

Employees  of  Lessee. 
§  221.     Liability  of  Lessor  for  Negligent  Operation  of  Railroad  —  (D)  When  it 

shares  in  Control. 
§  222.     Liability  of  Lessor  upon  Contracts  of  Lessee. 
§  223.     Liability  of  Lessor  for  Rccon.struction  and  Repairs. 
§  224.     Taxation  of  Leased  Railroads. 

I.    Rights  and  Remedies  of  Lessor  Corporation 

§  210.  Lessor  Gorporation  retains  Prerogative  Powers  — 
Right  of  Eminent  Domain.  —  A  lease  of  a  railroad  executed  with 
legislative  sanction  carries  with  it  the  right  to  exercise  the 
franchises  necessary  for  its  maintenance  and  operation.'  Ex- 
traordinary powers  and  privileges  are,  however,  not  included 
unless  the  State  expressly  approve  their  transfer  and  the  lease 
clearly  embrace  them. 

As  a  general  rule,  a  lessor  corporation  retains  its  preroga- 
tive powers.^     Thus,  the  lease  of  a  railroad  does  not  divest  a 

linos.      Mctropolifan      Trust      Co.      v.  ^  Sco  tmtr,  §  1.57:    " /•^sscritini  Fnin- 

Columbus,     etc.    R.   Co.,   95    Fed.    18       chises  pasH  upon  Sale  of  Railroad." 
(1899).  *  A  street  railway  company  which 

377 


§  210 


INTERCORPORATE    RELATIONS 


[part  III 


lessor  corporation  of  the  right  of  eminent  domain.  The  same 
necessity  for  taking  kinds  may  exist  when  a  railroad  is  in  the 
hands  of  a  lessee  as  when  in  the  hands  of  its  owner,  and  pend- 
ing condemnation  proceedings  are  not  abrogated  by  a  lease 
but  may  be  continued  in  the  name  of  the  lessor.^ 

As  the  right  of  eminent  domain  remains  in  the  lessor,  it 
cannot,  manifestly,  be  exercised  by  the  lessee  in  its  own  name,^ 
although  when  duly  authorized  the  lessee  may  institute  and  pros- 
ecute condemnation  proceedings  in  the  name  of  the  lessor,  but 
for  its  own  benefit.^     These  principles  do  not  prevent  a  lessee 


has  leased  its  property  to  another 
company  for  999  years,  and  prac- 
tically all  of  the  stock  of  which  is 
owned  by  the  latter  company,  has  no 
standing  to  maintain  a  suit  in  equity 
against  a  third  corporation  to  restrain 
an  alleged  unlawful  use  of  its  tracks, 
especially  where  it  has  failed  to  ob- 
ject to  such  use  for  fourteen  years. 

South  Side  Pass.  R.  Co.  v.  Second 
Ave.  Pass.  R.  Co.,  191  Pa.  St.  492 
(1S99),  (43  Atl.  Rep.  346). 

'  Kip  V.  New  York,  etc.  R.  Co.,  67 
N.  Y.  229  (1876),  per  Church,  J.:  "In 
the  supplemental  complaint  the  plain- 
tiffs allege  the  leasing  of  the  defend- 
ant's road  and  property  to  the  New 
York  Central  and  Hudson  River 
Railroad  Company  for  401  years, 
and  claim  that  such  lease  operated 
to  abrogate  the  pending  proceedings 
to  condemn  the  land  in  question,  and 
terminated  and  removed  all  necessity 
for  the  acquisition  thereof  for  the 
corporate  use  of  the  defendant.  In 
this  I  think  the  learned  counsel  for 
the  defendant  is  mistaken.  The 
lease  did  not  affect  the  defendant 
corporation  in  its  relation  to  the 
State.  The  same  necessity  existed 
for  the  land  proposed  to  be  con- 
demned after  as  before  the  lease  for 
the  purpose  of  the  defendant  as  a 
corporation." 

See  also  Matter  of  Petition  of  New 
York,  etc.  R.  Co.,  99  N.  Y.  21  (1885) 
(1  N.  E.  Rep.  27). 

In  Chicago,  etc.  R.  Co.  v.  Illinois 

378 


Central  R.  Co.,  113  111.  156  (1885),  it 
was  held  that  it  was  immaterial  that 
the  increase  of  the  right  of  way  for 
which  property  was  sought  to  be 
condemned,  was  occasioned  by  the  use 
of  the  road  by  a  lessee;  that  the  u.se 
was  a  public  use,  and  that  the  need 
of   the  lessee  was   that   of   the  leasor. 

2  Mayor,  etc.  of  Worcester  v.  Nor- 
wich, etc.  R.  Co.,  109  Mass.  113 
(1871):  "None  of  these  leases  or 
assignments  can  be  construed  to 
extend  to  the  lessees  or  assignees  the 
power  to  exercise  the  right  of  eminent 
domain,  or  to  restrict  the  right  of  the 
legislature  to  alter  or  repeal  the 
charters.  Their  rights  are  subordi- 
nate to  that  right;  and  if  the  legis- 
lature shall  see  fit  to  exercise  it,  they 
are  not  bound  to  give  notice  to  any 
of  these  parties.  .  .  .  The  lease  by 
tlie  Norwich  and  Worcester  Railroad 
Company  did  not  make  the  lessees, 
or  their  representatives,  parties  to 
the  grant  of  power  to  exercise  the 
right  of  eminent  domain.  That  right 
remained  in  the  original  corporation, 
and  the  legislature  might  properlj- 
deal  with  it  exclusively  in  amending 
their  charter." 

^  Chicago,  etc.  R.  Co.  v.  Illinois 
Central  R.  Co.,  113  111.  156  (1885). 

See  also  Kip  v.  New  York,  etc.  R. 
Co.,  67  N.  Y.  227  (1876);  Dietrichs  v. 
Lincoln,  etc.  R.  Co.,  13  Neb.  361 
(1882),  (13  N.  W.  Rep.  624);  Gott- 
schalk  V.  Lincoln,  etc.  R.  Co.,  14  Neb. 
389  (1883),  (15  N.  W.  Rep.  695). 


CHAP.    XIX]  RIGHTS    AND    I.IAniLITIES   OF    LESSOR  §211 

corporation  from  exercising  in  its  own  name,  for  proper  pur- 
poses, the  power  of  eminent  domain  conferred  upon  it  by 
statute.  In  such  a  case,  it  exercises  an  original  and  not  a 
derivative  power  which  might  be  broad  enough  to  authorize  the 
condemnation  of  h^nds  connected  with  the  lessor's  road.' 

§  211.  Rights  of  Lessor  when  entitled  to  Share  of  Earnings  — 
Equitable  Lien.  —  It  is  competent  for  two  railroad  corpora- 
tions, parties  to  a  lease  of  a  railroad,  to  agree  that  the  lessee 
company  shall  pay  a  fixed  rental  to  the  lessor  or  that  the  earn- 
ings of  the  leased  road,  gross  or  net,  shall  be  divided  in  pre- 
scribed proportions  between  the  parties. 

Where  the  lease  expressly  provides  that  the  share  of  the 
earnings  payable  to  the  lessor  is  in  lieu  of  rent  —  a  measure  of 
the  rental  —  or  where  it  may  be  plainly  inferred  that  such  is 
the  case,  the  remedies  of  the  lessor  are  confined  to  the  enforce- 
ment of  the  covenants  of  the  lease.  Thus,  in  a  case  where  a 
lease  provided  that  "  as  rental  for  the  said  demised  premises  " 
the  lessee  company  should  pay  a  percentage  of  its  gross  earn- 
ings in  excess  of  a  fixed  sum  to  the  lessor.  Judge  Lurton  said:  ^ 
"  The  rental  is  determined  by  the  amount  of  gross  earnings. 
These  earnings  belong  to  the  lessee  company.  The  complain- 
ant has  no  right  to  any  specific  dollar  or  part  of  a  dollar." 

Where,  however,  it  is  clear  from  the  language  of  the  lease 
that  a  division  of  earnings,  as  earnings,  is  contemplated,  the 
duty  of  the  lessee  does  not  arise  from  its  mere  covenant,  but 
the  share  of  the  lessor  becomes  in  equity  its  property  imme- 
diately upon  its  receipt  by  the  lessee.  The  lessor  has  an  equi- 
table lien  upon  such  share  and  it  is  held  in  trust  by  the  lessee 
for  the  benefit  of  the  lessor  and  may  be  followed  in  equity.^ 

A  Michigan  statute   (P.   A.    1001,  Chattanooga     Terminal     R.     Co.     v. 

p.  117,  §  19  of  Act.  No.  80)  aiithorizes  Felton,  60  Fed.  273  (1S05). 

a  lessee  of  a  railroad  to  institute  con-  It  is    provided  by  statute    in    Ar- 

denination  proceedings  witii  the  con-  kansna  (S.   &    H.  Dig.  1804,  §   6342), 

sent,  and  in  the  name,  of  the  lessor.  Ohio  (Bates'  Anno.  Stat.  (1787-1002), 

'  Whether  the  lessee  of  a  railroad  §  3300),  Wyominq  (R.  S.  1800,  §  3206), 

can    exercise    the    right    of    eminent  that  a  lessee  of  a  railroad  may  exer- 

domain   to   build   switches   and   spur  cise  the  right  of  eminent  domain, 

tracks   to   the   lea-sed   line,    which   do  ^  Xew   York,    etc.    R.    Co.    v.    New 

not    connect    with    its    own    line,    or  York,  etc.  R.  Co.,  58  Fed.  282  (1803). 

whether  such  right  must  be  exercised  '  Terre  Haute,  etc.  R.  Co.  i\  Cox, 

by     the      lessor      company, — qufere.  102  Feil.  825  (1000). 

370 


§  211 


INTERCORPORATE    RELATIONS 


[part   III 


In  case  of  the  appointment  of  a  receiver  for  the  lessee,  he 
may  be  compelled  to  restore  any  portion  of  the  earnings  due 
the  lessor  and  raisapphed  by  the  lessee,  even  if  it  be  necessary 
to  appropriate  the  earnings  of  the  road  during  the  receivership 
for  that  purpose.^  Thus,  a  provision  in  a  railroad  lease  that 
the  "  lessee  shall,  in  each  and  every  year  of  the  term  demised, 
pay  or  cause  to  be  paid  to  said  [lessor]  in  the  manner  and  at 
the  times  hereinafter  specified,  thirty  per  centum  of  the  gross 
earnings,  of  the  demised  property,"  provides  for  a  division  of 
the  earnings,  as  such,  and  vests  in  the  lessor  the  equitable  title 
to  its  share  of  such  earnings  upon  their  receipt  by  the  lessee. 
Where  the  lessee,  under  such  a  lease,  has  failed  to  pay  over 
the  lessor's  share  of  the  earnings  and  has  mingled  the  same 
vi^ith  its  own  funds,  bondholders  of  the  lessor,  the  interest  on 
whose  bonds  is  required  by  the  terms  of  the  lease  to  be  paid 
from  such  share,  are  entitled  to  have  the  amount  so  misap- 
plied by  the  lessee  restored  by  its  receiver.^ 


In  Bank  v.  Smith,  86  Fed.  398 
(1898),  where  the  lease  provided  that 
"all  gross  earnings,  income  and  re- 
ceipts," should,  in  each  year,  after 
payment  of  expenses  of  operation  be 
expended,  among  other  things,  for 
payment  of  interest  on  bonds  of  the 
lessor  company,  Judge  Wallace  said, 
with  reference  to  the  cov^enant  to 
pay  the  interest  upon  the  bonds  (p. 
401):  It  "gave  to  the  bond  holders 
an  equitable  lien  upon  the  earnings, 
because  the  trustee  could  have  com- 
pelled the  lessee  to  apply  the  earnings 
to  the  payment  of  the  interest." 

The  general  principle  upon  which 
the  rule  stated  is  based  is  thus  stated 
in  Pomeroy's  Equity  Jurisprudence 
(vol.  3  (2ded.),  §  1236):  "The  doc- 
trine is  carried  still  further  and  applied 
to  property  not  yet  in  being  at  the 
time  when  the  contract  is  made.  It 
is  well  settled  that  an  agreement  to 
charge,  or  to  assign,  or  to  give  security 
upon,  or  to  effect  property  not  yet 
in  existence,  or  in  the  ownership  of 
the  party  making  the  contract,  or 
property   to   be   acquired   by   him   in 

380 


the  future,  although,  with  the  excep- 
tion of  one  particular  species  of  things, 
it  creates  no  legal  estate  or  interest 
in  the  things  when  they  afterwards 
come  into  existence  or  are  acquired 
by  the  promisor,  does  constitute  an 
equitable  lien  upon  the  property  so 
existing  or  acquired  at  a  subsequent 
time,  which  is  enforced  in  the  same 
manner  and  against  the  same  parties 
as  a  lien  upon  specific  things  existing 
and  owned  by  the  contracting  party 
at  the  date  of  the  contract." 

1  Terre  Haute,  etc.  R.  Co.  v.  Cox, 
102  Fed.   825  (1900). 

^  In  Terre  Haute,  etc.  R.  Co.  v. 
Cox,  102  Fed.  833  (1900),  Judge 
Grosscup  said:  "There  is  no  word 
respecting  rentals ;  there  is  no  plain 
inference  that  the  thirty  per  centum 
thus  agreed  upon  shall  be  a  mere 
measure  of  rentals.  It  is,  as  indis- 
putably as  language  can  make  it,  a 
plain  division  of  the  earnings  be- 
tween the  parties  whose  properties, 
taken  together,  produce  the  earnings. 
Unless  an  arrangement  for  division 
of  earnings,  as  earnings,  is  in  law  an 


CHAP.    XIX] 


RIGHTS   AND    LIABILITIES    OF    LESSOR 


§  212 


§  212.  Rights  of  Stockholders  when  Rent  is  payable  in  Form 
of  Dividends.  —  A  distinct  provision  in  a  lease  that  the  lessee 
shall  pay  directly  to  the  stockholders  of  the  lessor  corporation 
as  rental  specified  dividends  upon  their  shares,  enures  to  their 
benefit  and  gives  them  individual  rights  of  action  —  either 
at  law  or  in  equity  —  against  the  lessee.^     This  is  upon  the 


impossibility,  the  language  emploj^ed 
can  bear  no  interpretation,  other  than 
a  contemplated  division  of  earnings, 
as  earnings.  ...  It  is  clear  to  us, 
then,  that,  in  the  case  under  considera- 
tion, the  duty  of  the  Indianapolis 
Company,  in  respect  to  the  thirty  per 
centum  of  gross  earnings,  does  not 
arise  out  of  its  mere  promise;  it  is 
an  equity  growing  out  of  the  con- 
ditions from  which  the  unified  rail- 
way lines  arose.  The  division  of 
the  earnings  does  not  rest  in  an  in- 
tention merely  to  be  executed  in  the 
future;  it  is  to  be  regarded,  in  equity, 
as  a  present  fact,  made  so  by  the  cir- 
cumstances, together  with  the  agree- 
ment that  brought  about  the  means 
creating  such  earnings." 

'  It  does  not  follow  from  the  fact 
that  the  stockholders  as  the  parties 
beneficially  interested  mmj  maintain 
an  action  for  the  recovery  of  dividends 
that  the  lessor  corporation  —  the 
party  to  the  contract  —  niay  not 
likewise  bring  suit  to  enforce  it.  In 
fact  .Judge  Nelson,  in  Pacific  R.  Co. 
V.  Atlantic,  etc.  R.  Co.,  20  Fed.  280 
(1884),  said  that  the  lessor  corpora- 
tion was  the  proper  party  to  enforce 
a  claim  for  unpaid  dividends  payable 
under  a  lease  directly  to  the  stock- 
holders. This  decision,  however,  in 
so  far  as  it  .seems  to  deny  any  right 
in  the  stockholders  to  sue  in  such  a 
case,  cannot  be  justified  upon  prin- 
ciple. See  cases  cited  in  the  note 
following. 

A  railroad  comp.iny  leased  its 
railroad  to  another  cnr|)oratioii  for  a 
rental  which  the  lease  jjrovided  should 
be  distributed  directly  among  the 
stockholders  of  the  lessor  in  the  form 


of  dividends.  The  lessee  corpora- 
tion went  into  the  hands  of  a  receiver 
who  took  po.ssession  of  the  leased 
road  and  operated  it  but  paid  no 
rental.  Thereupon  the  lessor  com- 
pany intervened  in  the  receivership 
proceedings  and  a  settlement  was 
finally  arranged  providing  that  the 
lessor  should  receive  the  net  earn- 
ings of  its  road  during  the  contin- 
uance of  the  receivership;  that  upon 
the  reorganization  of  the  les.see  cor- 
poration the  new  company  should 
assume  the  lease,  and  in  addition 
should  pay  the  lessor  a  certain  sum  of 
money.  This  settlement  was  &\>- 
proved  by  the  court  in  the  receivership 
proceedings  and  was  carried  out  — 
the  lessor  company  receiving  monej's 
thereunder  a  part  of  which  it  distrib- 
uted as  dividends  among  its  stock- 
holders, and  the  remainder  of  which  it 
used  for  other  purposes.  This  action 
of  the  lessor  company  was  apjiroved 
by  a  majority  vote  of  its  .stockholders. 
Some  years  afterwards  certain  stock- 
holders of  the  lessor  instituted  proceed- 
ings against  it  and  the  new  corpora- 
tion upon  the  theory  that  the  entire 
sum  paid  by  the  reorganized  company 
for  the  renewal  was  rental  and  belonged 
to  its  stockholders  instead  of  to  the  les- 
sor corporation  and  charging  that  that 
corporation  held  the  same  in  trust  for 
the  stockholders.  It  was,  however, 
helfl  that  even  if  the  entire  sum  paid 
for  the  renewal  of  the  lea.se  was  rental, 
yet  the  bill  showed  that  more  than 
that  amount  had  been  distributed 
among  the  stockholders  and  accejited 
by  them. 

Central    R.     etc.    Co.     v.    Farmers 
Loan,  etc.  Co.   112  Fed.  81   (1001). 

381 


§  212 


INTERCORPORATE    RELATIONS 


[part  hi 


principle  that  "  when  one  person  makes  a  promise  to  another 
for  the  benefit  of  a  third  person,  that  person  may  maintain 
an  action  based  on  such  promise."  ^ 

It  is  essential,  however,  in  actions  depending  upon  this 
principle,  that  a  distinct  provision  for  the  direct  benefit  of  the 
third  person  be  shown.  An  agreement  wherein  a  lessee  cor- 
poration guarantees  the  lessor  a  specified  annual  dividend 
upon  its  capital  stock,  free  from  taxes,  payable  to  the  lessor, 
is  not  a  guarantee  to  the  stockholders  individually,  although 
evidently  intended  to  enable  the  lessor  corporation  to  make 
that  dividend  to  its  stockholders.^  Similarly,  a  provision  in  a 
lease  that  the  lessee  corporation  shall  pay  to  the  lessor  a  sum 
equal  to  a  fixed  percentage  upon  its  capital  stock  is  an  agree- 
ment for  the  direct  benefit  of  the  corporation  and  gives  a  stock- 
holder no  right  of  action.  The  rental  is  due  and  payable  to 
the  corporation.  It  may  or  may  not  be  appropriated  for  the 
payment  of  dividends  to  stockholders.^ 


'  Schermerhorn  v.  Vanderheyden, 
1  Johns.  (N.  Y.)  139  (1806).  See  also 
Welden  National  Bank  v.  Smith,  86 
Fed.  402  (1898).  In  Austin  v.  Selig- 
man,  1 8  Fed.  522  ( 1 883) ,  Judge  Wallace 
said:  "The  result  of  the  better-consid- 
ered decisions  is  that  a  third  person 
may  enforce  a  contract  made  by  others 
for  his  benefit,  whenever  it  is  manifest 
from  the  nature  or  terms  of  the  agree- 
ment that  the  parties  intended  to  treat 
him  as  the  person  primarily  inter- 
ested." See  also  Mr.  Wharton's  elab- 
orate note  to  this  case  for  full  con- 
sideration of  the  general  subject  and 
citation  of  many  authorities. 

2  In  Flagg  V.  Manhattan  R.  Co.,  10 
Fed.  430  (1881),  Judge  Blatchford 
said:  "The  language  of  article  2  of 
the  lease  is  that  the  Manhattan 
guarantees  to  the  Metropolitan  an 
annual  dividend  of  ten  per  cent  on 
the  capital  stock  of  the  Metropolitan. 
.  .  .  There  is  no  agreement  either 
by  the  Manhattan  or  the  Metropolitan 
that  these  sums  shall  be  paid  to  the 
stockholders  of  the  Metropolitan. 
.   .   .     The  case,  therefore,  is  not  one 

382 


of  any  vested  right  in  the  stock- 
holders of  the  Metropolitan  to  the 
ten  per  cent  payments." 

For  other  eases  of  leases  providing 
for  the  pajTnent  of  rentals  directly 
to  the  stockholders  of  the  lessor 
corporation  in  the  form  of  dividends, 
see  ^tna  Ins.  Co.  v.  Albany  etc.  R. 
Co.,  156  Fed.  132  (1907);  McLeary 
V.  Erie  Tel.,  etc.  Co.,  38  Misc.  (N.  Y.) 
3  (1902),  (76  N.  Y.  Supp.  712). 

^  In  Beveridge  v.  New  York 
Elevated  R.  Co.,  112  N.  Y.  24  (1889), 
(19  N.  E.  Rep.  489,  2  L.  R.  A.  648), 
the  New  York  Court  of  Appeals  said 
{per  GrayJ  J.):  "Regarding  then, 
the  lease  itself  and  the  so-called 
guaranty  which  is  contained  among 
its  provisions,  I  find  therein  no 
contract  made  with  individual  stock- 
holders, but  only  one  made  with  the 
New  York  Company  which  stipulates 
for  the  payment  of  a  sum  of  money 
equal  to  ten  per  cent  upon  the  capital 
stock  of  that  company.  There  is 
no  contract  to  pay  ten  per  cent 
dividends  to  individual  stockholders 
upon   their   holdings;     nor   any   con- 


CHAP.    XIX] 


RIGHTS    AND    LIABILITIES    OF   LESSOR 


§214 


§  213.  Mortgage  of  Rent  Charge.  — The  execution  of  a  lease 
of  a  railroad  for  a  limited  term  does  not  affect  the  right  of  the 
lessor  to  mortgage  the  remainder  estate.  .  But  a  perpetual 
lease,  without  a  clause  of  reentry  for  non-fulfilment  of  its  con- 
ditions, leaves  nothing  in  the  lessor  corporation  but  a  claim 
against  the  lessee  for  rent.^  This  rent  may  be  a  charge  xipoii 
the  income  of  the  leased  property.  In  such  a  case,  the  lessor 
may  mortgage  the  rent  charge.^ 

§  214.  Remedies  of  Lessor  Corporation.  — The  remedies  of 
a  railroad  company  to  enforce  its  demands  against  third  per- 
sons are  in  no  way  affected  by  the  fact  that  it  has  leased  its 
railroad. 

The  remedies  of  a  railroad  company,  as  lessor,  against  its 
lessee,  to  recover  damages  for  breach  of  covenant  or  to  enforce 
a  forfeiture  are,  in  general,  those  which  are  available  to  a  le.s- 
sor  under  an  ordinary  lease  of  real  estate.' 

Where  an  action  at  law  will  furnish  a  lessor  corporation 
adequate  relief  resort  cannot  be  had  to  equity.'*     Thus,  where 


tract  that  the  New  York  company 
will  pay  it  out  in  the  shape  of  ten 
per  cent  dividends  to  its  stockholders. 
Payments  under  that  contract  are 
to  and  for  the  lessor  corporation  and 
go  into  its  treasury,  as  would  any 
other  moneys  or  revenues  derived 
from,  or  produced  by,  corporate 
property."  See  also  Harkness  v. 
Manhattan  El.  R.  Co.,  54  N.  Y.  Super. 
Ct.  174  (188G). 

'  Hazard  v.  Vermont,  etc.  R.  Co., 
17  Fed.  75.3  (1883);  Vermont,  etc. 
R.  Co.  V.  Vermont  Cent.  R.  Co.,  34 
Vt.  1  (1861).  See  also  Langdon  v. 
Vermont,  etc.  R.  Co.,  54  Vt.  593 
(1882). 

"  In  Hazard  v.  Vermont,  etc.  R. 
Co.,  17  Fed.  756  (1883),  .Judge 
Wheeler  said:  "The  disposition  of 
the  rent  and  the  claim  for  it  in  future 
is  the  principal  thing,  for  that  rep- 
resents substantially  the  corporate 
assets  of  the  Canada  company,  and 
when  that  is  gone  the  transfer  or 
surrender  of  tlie  stock  would  be  a 
mere    nominal    formality.     Power    to 


deal  with  the  rent  is  implied  in  the 
power  to  make  the  lease  and  reserve 
the  rent,  whicli  it  was  held  the  cor- 
poration had.  (Vermont,  etc.  R.  Co. 
V.  Vermont  Cent.  R.  Co.,  34  Vt.  1 
(1861).)  And  powers  necessarily  im- 
plied from  those  expressly  granted 
are  as  well  granted  as  the  express 
powers." 

*  Where  a  lease  of  a  railroad  con- 
tained a  covenant  on  the  part  of  the 
lessee  that  it  would  not  at  anj'  time 
"during  the  continuance  of  said 
term  fix  or  establish  a  rate  on  local 
freight  at  a  higher  average  rate  than 
the  average  tariff  rate  for  local  freight 
as  established  by  the  lessor  at  the 
time  of  the  e.xecution  of  the  lease," 
but  did  not  provide  for  a  forfeiture 
for  breach  of  such  covenant,  it  was 
held  tliat  an  action  for  damages  for 
such  breacli  and  not  to  enforce  a 
forfeiture,  was  the  proper  remedy. 

Hill  V.  Atlantic  etc.  R.  Co.,  143 
N.  C.  539  (1906),  (55  S.  E.  Rep.  854). 

*  In  Hoston,  etc.  R.  Co.  v.  Boston, 
etc.    R.    Co.,    65    N.    H.    393    (1S8S), 

383 


§214 


INTERCORPORATE    RELATION'S 


[part    III 


a  legal  action  against  a  responsible  corporation  is  an  adequate 
remedy  for  neglect  to  keep  a  railroad  in  repair,  in  violation  of 
a  covenant,  the  remedy  of  a  receivership  will  be  denied.^ 

The  circumstances  may  be  such,  however,  that  a  remedy  at 
law  will  be  inadequate.  In  such  a  case  equity  will  afford  re- 
lief. Thus,  where  a  lessee  railroad  company  covenanted  to 
keep  the  line  in  as  good  repair  as  when  received,  and  where 
its  abandonment  of  the  road  before  the  expiration  of  the  lease 
would  result  in  loss  of  traffic,  deterioration  of  the  road  and, 
possibly,  forfeiture  of  the  lessor's  charter  for  non-user,  it  was 
held  that  the  lessor  was  entitled  to  a  mandatory  injunction 
preventing  a  threatened  abandonment.^ 

A  lessor  corporation  has  a  right  to  reenter  for  condition 
broken,  according  to  the  terms  of  the  lease.  It  may  also,  under 
such  conditions,  maintain  ejectment  and  similar  actions  for 
the  recovery  of  the  possession  of  the  leased  property. 


(23  Atl.  Rep.  529),  the  Court  said: 
"In  this  suit  at  law  the  rights  of  the 
parties  depend  upon  no  general  or 
special  question  of  an  equitable, 
as  distinguished  from  a  legal,  char- 
acter. This  case  is  a  simple  one  of 
breach  of  contract.  The  Lowell 
agreed  that  if  it  transferred  the  plain- 
tiff's road  to  another  company  the 
plaintiff  might  take  it  back;  and  the 
Lowell  has  made  the  transfer  it  agreed 
not  to  make." 

'  Boston,  etc.  R.  Co.  v.  Boston,  etc. 
R.  Co.,  65  N.  H.  393  (1888),  (23  Atl. 
Rep.  529).  That  a  lessor  railroad 
company  has  no  lien  upon  the  rolling 
stock  of  the  lessee  under  the  Iowa 
statute  relating  to  landlord's  liens, 
see  Trust  Co.  of  North  America  v. 
Manhattan  Trust  Co.,  77  Fed.  82 
(1896). 

2  Southern  R.  Co.  v.  Franklin,  etc. 
R.  Co.,  96  Va.  693  (1899),  (32  S.  E. 
Rep.  485,  44  L.  R.  A.  297).  In  this 
case  the  Court  said:  "It  was  objected 
that,  conceding  the  remedy  at  law  to 
be  inadequate,  equity  will  neverthe- 
less not  compel  specific  performance  of 
a  contract  having  some  j^ears  to  run, 

384 


which  is  practically  what  is  sought  by 
the  mandatory  injunction,  that  re- 
quires continuous  acts  involving  the 
exercise  of  skill  and  judgment.  It  may 
be  admitted  that  the  authorities  are 
not  uniform,  and  that  tliere  are 
decisions  which  sustain  the  objection, 
but  an  examination  of  the  decided 
cases  will  disclose  the  fact  that  the 
great  weight  of  authority,  and  espe- 
cially the  recent  decisions  of  the 
highest  respectabilit}'^  and  influence, 
maintain  the  jurisdiction  of  equity  in 
a  case  like  that  at  bar.  The  courts 
are  constantly  called  upon  to  exer- 
ci.se  the  very  jurisdiction  here  called 
in  question  in  operating  railroads 
through  receivers.  No  particular  dif- 
ficulty is  encountered  in  doing  so, 
although  the  operation  of  the  road 
in  such  case  requires  a  continuous 
series  of  acts,  involving  the  exercise 
of  skill  and  judgment;  and  if  the 
court  can  do  this  through  its  receiver, 
no  good  reason  is  perceived  why  it 
may  not  compel  a  railroad  company 
to  operate  a  road  in  performance  of 
its  contract  to  do  so." 


CHAP.    XIX]  RIGHTS    AND    LIABILITIES    OF    LESSOR  §   215 

There  is  a  dictum  to  the  effect  that  "  when  either  party, 
lessor  or  lessee,  claims  that  acts  have  been  done  which  render 
the  continuing  of  the  relation  no  longer  proper,  such  party 
can  go  into  a  court  of  equity,  on  general  principles,  and  ask 
to  have  that  lease  set  aside,  cancelled  and  amended.  .  .  .  And 
the  court  will  declare  the  agreement  at  an  end,  and  set  aside 
and  cancelled,  and  will  make  such  orders  as  will  seem  proper 
and  right."  ^  Courts  of  equity  have  power,  within  well-defined 
limits,  to  annul  written  instruments,  but  that  they  have  any 
such  broad  power  as  stated  in  this  dictum  would  probably 
not  have  been  the  more  deliberate  opinion  of  the  learned  judge 
who  wrote  it. 

II.    Liabilities  of  Lessor  Corporation 

§  215.  Obligations  of  Lessor  Corporation  to  State.  — A  lease 
of  its  railroad  does  not  affect  a  railroad  company  in  its  rela- 
tions with  the  State.  Its  duties  as  a  corporation  exist  after 
the  execution  of  a  lease  to  the  same  extent  as  before.  It  must 
fulfil  the  obligations  imposed  by  its  charter  and,  except  when 
relieved  by  the  State,  must  discharge  all  the  duties  to  the  State 
required  of  railroad  companies  generally.^ 

'  "The    Elevator    Case,"    17    Fed.  A  corporation  upon  which  a  public 

204  (1881).  duty  is  imposed  by  its  charter,  can- 

^  In  Netv  Hamp'thire  (Pub.  Stat.  &  not    relieve    itself    of    that    duty    by 

Sess.  Laws  1901,  ch.  15G,  §  45,  p.  50G),  leasing    its    proj^erty    and    franchises, 

and  Texas  (Saylcs'  Civ.  Stat.   (Supp.  Upon  this  princij>le  it  is  held  that  a 

to  1900),  vol.  ii.,  ch.   15a),  it   is   pro-  canal  comjiany  which  is  required  to 

vided    that    a   lea.se    shall    not    affect  maintain  sufficient  briilges  across  its 

the    public    obligations    of    a    lessor  canal,   and   to    keep   them   in    repair, 

corporation.  cannot   relieve   itself  of   that   obiiga- 

An  act  authorizing  a  railroad  com-  tion  by  leasing  its  canal   and  all  its 

pany  to  lease  its  railroad  to  another  property  to  a  railroad  company, 
corporation,    and    requiring    the    cor-  Ryerson  v.  Morris  Canal,  etc.  Co., 

poration    lessee    to    be    liable    in    the  71    N.    J.    L.   381     (1904),     (50    Atl. 

same  manner  as  though  the  railway  Rep.  29). 

belonged    to    it,    imposes    a    liability  A  railroad  company  owes  a  public 

as    to    its   leased    property   upon    the  duty    to    have    the    trains    upon    its 

lessee    while    operating    it,    but    docs  railroad    .stop    at    .stations    to    which 

not  discharge   the  lessor  corporation  tickets    are    sold    and    a    lessor    com- 

from   its   corporate   liabilities.  pany   is   liable   for  a  breach   of  that 

Chicago,  etc.  R.  Co.   v.   Crane,  113  duty  on  the  jiart  of  its  lessee. 
U.   S.   424   (1885),    (5   Sup.   Ct.    Rep.  Pickens  v.  Georgia  R.,  etc.  Co.,  120 

578).  Ga.  517  (1906),  (55  S.  E.  Rep.  171). 

385 


§   216  INTERCORPORATE    RELATIONS  [PART    III 

The  right  of  the  State,  in  the  exercise  of  its  reserved  power, 
to  alter,  amend  or  repeal  the  charter  of  a  railroad  company, 
is  not  restricted  by  a  lease  of  its  railroad,  and  the  State  will 
deal  with  the  lessor  corporation  exclusively  in  withdrawing  or 
limiting  any  special  powers  or  privileges  theretofore  granted.^ 

The  obligation  to  pay  taxes  upon  a  railroad  and  other  prop- 
erty, when  leased,  is  considered  in  another  section.^ 

§  216.  Lessor  Corporation  cannot  avoid  Statutory  Obliga- 
tions unless  exempted.  —  Statutes  imposing  obligations  upon 
railroad  companies  in  safeguarding  their  tracks  are  designed 
to  protect  the  interests  of  the  pubhc.  Public  safety  demands 
their  obser\'ance. 

Statutes  of  this  character  are  generally  construed  to  apply 
as  well  to  the  lessor  as  to  the  lessee  corporation.  Especially 
is  the  lessor  liable  w^here  the  statute  imposing  the  obligation, 
expressly  or  by  necessary  inference,  refers  to  the  owner  of  the 
railroad.  The  owner  of  a  railroad  cannot  shift  the  burden  of 
such  obligations  by  lease,  unless  expressly  exempted  from 
further  liability.  Mere  legislative  consent  to  a  lease  is  not 
sufficient. 

Upon  these  principles,  statutes  providing  that  railroad  com- 
panies shall  fence  their  tracks  and  maintain  cattle  guards,  are 
generally  held  to  impose  the  duty  upon  the  lessor  corporation 

Where  a  railroad  company  main-  tions  is  absolute,  and  not  dependent 

tained  its  tracks  in  the  streets  of  a  upon  their  consent,  it  is  immaterial 

city  and  was  required  by  statute  to  whether  such  consent  has  been  given 

keep   the   streets   in   repair   a   stated  or  not.     Nor  was  notice  of  the  ap- 

lieriod,  it  was  held  that  a  provision  pointment  or  the  proceedings  of  the 

in    the   lease    of    its   line   to    anotlier  commissioners  necessarj^  to  be  given 

corporation  that  the  lessor  renounced  to   parties   not   specified   in   the   act ; 

all   duty   to   the   public   vitiated   the  the   terms   of   the   act   not   requiring 

lease,    and   the   lessor   was   liable   for  such   notice.  .   .   .     All    these   parties 

the  negligence  of  the  lessee  in  allow-  have    derived    their    interests    from 

ing  an  obstruction  in  the  street.  the    original    corporations    to    whom 

Anderson    v.    Union    Terminal    R.  the    power   to    exercise    the    right    of 

Co.,  161    Mo.    411    (1900),  (61    S.  W.  eminent    domain    was    granted,    and 

Rep.   874).  they  hold  these  assigned  and  deriva- 

*  In   Mayor,    etc.    of  Worcester   v.  tive    interests     under     expressed     or 

Norwich,  etc.  R.  Co.,   109  Mass.   113  implied    authority    granted    to    those 

(1871),    the   Supreme   Judicial   Court  corporations  by  the  legislature." 
of  Massachusetts  said  :   "As  the  right  ^  See    post,    §    224:     "Taxation   of 

of  the  legislature  to  alter,  amend  or  Leased  Railroads." 
repeal  the  charters  of  these  corpora- 

386 


CHAP.    XIX] 


RIGHTS    AND    LIABILITIES    OF   LESSOR 


§  21G 


and  to  render  it  liable  for  all  damages  occasioned  by  a  failure 
to  comply  therewith.*  The  fact  that  the  lessee  corporation 
may  also  be  liable  does  not  affect  the  i-e.sponsibility  of  tho 
lessor.  In  Toledo,  etc.  R.  Co.  v.  Rumbold,-  the  Supreme  Court 
of  IlHnois  said:  "  It  was  the  duty  of  appellants  to  have  fenced 
the  road,  and  public  safety  demands  that  they  should  be  held 
liable  for  all  damages  resulting  from  the  neglect  to  fence  it. 
And  the  same  policy  would  require  that  the  lessee  should  be 
responsible  for  presuming  to  use  the  road  of  another  company, 
fenceless  and  unprotected.  Either  company  would  be  liable 
for  the  injury." 

Upon  similar  principles  it  is  held  that  a  lessor  corporation 
—  as  the  owner  of  the  railroad  —  is  liable  under  statutes  for 
injuries  sustained  by  adjoining  proprietors  from  fires  commu- 
nicated by  engines  operated  by  the  lessee.^ 


•  United  States :  Hayes  v.  Northern 
Pacific  R.  Co.,  74  Fed.  279  (LS96). 

California :  Fontaine  v.  Southern 
Pacific  R.  Co.,  54  Cal.  64.5  (1880), 
(1  Am.  &  Eng.  R.  Cas.  159). 

Illinois:  East  St.  Louis,  etc.  R. 
Co.  V.  Gerber,  82  111.  632  (1876); 
Toledo,  etc.  R.  Co.  v.  Rumbold,  40 
111.   143  (1866). 

Indiana:  In  this  State,  by  statute, 
when  the  les.see  operates  the  road  in 
the  name  of  the  lessor,  both  les.sor 
and  lessee  are  liable  for  live  stock 
killed  on  unfenced  tracks,  but  when 
the  lp.s.see  operates  in  its  own  name, 
it  is  alone  responsible.  Pittsburgh, 
etc.  R.  Co.  V.  Bolncr,  57  Ind.  572 
(1877);  Pittsburgh,  etc.  R.  Co.  v. 
Hanon,  60  Ind.  417  (1878);  Cin- 
cinnati, etc.  R.  Co.  V.  Bunnell,  61 
Ind.  183  (1878). 

Iowa:  Clary  v.  Iowa  Midland  R. 
Co.,  37  Iowa,  344  (1873);  Downing 
V.  Chicago,  etc.  R.  Co.,  43  Iowa,  96 
(1876). 

Kansas:  St.  Louis,  etc.  R.  Co.  v. 
Curl,  28  K.an.  622  (1882),  (11  .\m.  & 
Eng.  R.  Cas.  458);  Railroad  Co.  v. 
Wood,  24  Kan.  625  (1880):  ".\  dis- 
tinction may  be  tlrawn  between  those 
statutory    duties   which    require   con- 


stant action  on  the  part  of  those 
operating  the  road,  such  as  ringing 
the  bell  at  every  crossing,  and  those 
which,  like  the  one  in  question,  are 
of  the  nature  of  permanent  improve- 
ments." 

In  this  ca.se  a  railroad  company 
was  held  liable  for  an  injury  occa- 
sioned by  a  failure  to  fence  its  road, 
although  the  injury  occurred  while 
it  was  in  the  hands  of  a  receiver. 

Maine:  Whitney  v.  Atlantic, 
etc.  R.  Co.,  44  Me.  362  (1857),  (69 
Am.  Dec.  102). 

In  New  York,  however,  the  leiisce 
and  not  the  lessor  has  been  held 
liable  for  injuries  cause«l  by  failure 
to  fence  the  road  as  required  by 
statute.  Ditchett  v.  Spuytcn  Duyvil, 
etc.  R.  Co.,  67  N.  Y.  425  (1876), 
and  Thorne  i'.  Lehigh  Valley  R.  Co.,' 
88  Hun  (X.  Y.),  141  (1895),  (.34  N.  Y. 
Supp.  525,  68  N.  Y.  St.  Rep.  .308).' 
Since  1890,  however,  both  Icwor 
and  lessee  are  liable  by  statute. 
Railroad  Law  1890  and  1892,  §  32. 

2  Toledo,  etc.  R.  Co.  v.  Rnnibol.l. 
40  111.  145  (1866). 

'  Illinois:  A  railroad  company 
which  has  leased  its  road  to  another' 
company,  under  statutory  authority,' 

387 


§216 


INTERCORPORATE    RELATIONS 


[part    III 


The  lessor  corporation  is  responsible  even  for  the  torts  of  the 
lessee  in  the  operation  of  the  road  where  the  statute  author- 
izing the  lease  contains  a  provision  that  its  execution  shall 
not  exempt  the  lessor  from  any  liability  to  which  it  would  other- 
wise be  subject,  or  other  provision  evidencing  an  intention 
that  the  lessor  corporation  shall  remain  responsible  for  the 
proper  operation  of  the  leased  railroad.^ 


for  ninety-nine  j'ears,  will  be  liable 
for  the  destruction  of  property  by 
fire  caused  by  the  negligence  of  the 
lessee,  notwithstanding  the  legislature 
may  have  conferred  upon  the  lessee 
all  the  power  of  the  lessor  company. 
There  being  no  clause  of  exemption 
in  the  act  of  the  legislature,  the  lia- 
bility of  the  lessor  continues.  Bals- 
ley  V.  St.  Louis,  etc.  R.  Co.,  119  111. 
68  (188fi),  (8  N.  E.  Rep.  859,  59  Am. 
Rep.  784).  See  also  Railway  Co.  v. 
Campbell,  86  111.  443  (1877). 

Massachusetts :  Ingersoll  v.  Stock- 
bridge,  etc.  R.  Co.,  8  Allen,  438 
(1864) ;  Davns  v.  Pro\Tdence,  etc.  R. 
Co.,  121  Mass.  134  (1876). 

Maine:  Bean  v.  Atlantic,  etc.  R. 
Co.,  63  Me.  295  (1873). 

Missouri:  McCoy  v.  Kansas  Cit}', 
etc.  R.  Co.,  36  Mo.  App.  446  (1889). 

North  Carolina:  Aycock  r.  Raleigh, 
etc.  R.  Co.,  89  N.  C.  321  (1883). 

In  South  Carolina,  however,  under 
a  statute  making  a  railroad  company 
liable  for  danaages  caused  by  fire  com- 
municated by  "  its  locomotive  engine," 
it  was  held  that  a  company  was  not 
liable  for  a  fire  communicated  by  the 
engine  of  its  lessee. 

Hunter  v.  Columbia,  etc.  R.  Co.,  41 
S.  C.  86  (1893),  (19  S.  E.  Rep.  197); 
Lipfield  v.  Charlotte,  etc.  R.  Co.,  41 
S.  C.  285  (1893),  (19  S.  E.  Rep.  497). 

'  Quested  v.  Newburyport,  etc.  R. 
Co.,  127  Mass.  204  (1879);  Stearns  v. 
Atlantic,  etc.  R.  Co.,  46  Me.  95 
(1858);  Fort  Wayne,  etc.  R.  Co.  v. 
Heinebaugh,  43  Ind.  354  (1873). 

Under  a  statute  providing  that  a 
railroad  company  of  the  State  leasing 
its    road    to    a    company    organized 

388 


under  the  laws  of  another  State 
"shall  remain  liable  as  if  it  operated 
the  road  itself,"  it  has  been  held  tliat 
the  lessor  company  is  liable  not  only 
for  a  breach  by  the  lessee  of  its  duty 
as  a  common  carrier,  but  of  its  obli- 
gation as  a  master  to  its  employees; 
that,  consequently,  the  lessor  is 
liable  for  injuries  received  b3'  the 
lessor's  servants  due  to  its  negligence. 
Markey  v.  Louisiana,  etc.  R.  Co., 
185  Mo.  348  (1904),  (84  S.  W.  Rep. 
61).  In  this  case  the  Court  said: 
"The  language  of  that  reservation 
is  so  comprehensive  that  if  it  does  not 
cover  this  case  it  is  difficult  to  see  how 
it  could  be  amended  to  embrace  a 
case  exactly  like  the  case  at  bar,  un- 
less general  terms  should  be  discarded 
as  ineffectual,  and  resort  be  had  to  the 
enumeration  of  the  kind  of  cases  in 
which  the  lessor  should  be  held 
answerable."  See  also  Keller  v.  Kan- 
sas City,  etc.  R.  Co.,  135  Fed.  204 
(1903). 

But  in  Axline  v.  Toledo,  etc.  R. 
Co.,  138  Fed.  169  (1903),  a  directly 
contrary  construction  was  placed 
upon  a  statute  of  Ohio  similar  to  that 
of  Missouri  pro\ading  that  "notwith- 
standing such  lease  the  corporation 
of  this  State  lessor  therein,  shall 
remain  liable,  as  if  it  operated  the 
road  itself  and  both  lessor  and  lessee 
shall  be  jointly  liable  on  all  rights  of 
action  accruing  to  any  person  for  any 
negligence  or  default  growing  out  of 
the  operation  and  maintenance  of 
such  road  or  in  any  wise  connected 
therewith." 

The  language  of  both  the  statutes 
in  question  is  so  broad  that  the  Mis- 


CHAP.    XIX]  RIGHTS   AND    LIABILITIES    OF    LESSOR 


§217 


§  217.  Lessor  cannot  avoid  Primary  Obligations  unless  ex- 
empted.—  Analogous  to  the  rule  that  a  railroad  company 
after  the  lease  of  its  road  continues  liable  for  any  omission  in 
the  performance  of  duties  imposed  upon  it  by  statute,  is  the 
rule  that  a  lessor  corporation,  unless  exemptetl,  is  responsible 
for  any  injury  caused  by  a  failure  to  fulfil  its  primary  and  posi- 
tive obligations  to  the  public.  Thus,  the  duties  of  properly 
constructing  and  locating  its  railroad,  bridges,  and  station 
houses,  owed  by  the  lessor  corporation  in  the  first  instance, 


souri  decisions  would  seem  tlie 
sounder  in  principle. 

A  South  Carolina  statute  provides 
that  a  consolidated  railroad  company 
shall  be  subject  to  any  action  that 
may  arise  out  of  the  operation  of  its 
lines  of  road,  notwitiistaiiding  the 
lease  of  the  same.  Under  this  statute 
it  is  held  that  a  railroad  company 
which  has  leased  its  road  is  liable  to 
an  employee  of  the  lessee  for  its  negli- 
gence. Reed  v.  Southern  R.  Co.,  75 
S.  C.  162  (1906),  (55  S.  E.  Rep.  218). 

Under  a  statute  providing  that  a 
lessor  railroad  company  should  re- 
main liable  for  the  acts  of  the  lessee, 
it  was  held  that  the  lessor  was  liable 
for  permitting  salt  to  remain  on  the 
tracks  which  attracted  stock  thereon, 
the  stock  being  killed  by  a  passing 
train.  Brown  i'.  Hannibal,  etc.  R. 
Co.,  27  Mo.  App.  394  (1887). 

In  California  by  statute  the  lessor 
is  liable  for  personal  injuries  due  to 
improper  construction  of  road.  Lee 
r.  Southern  Pacific  R.  Co.,  116  Cal. 
97  (1897),  (47  Pac.  Rep.  932,  38  L. 
R.  A.  71,  58  Am.  St.  Rep.  140). 

In  Mahoney  v.  Atlantic,  etc.  R.  Co., 
03  Me.  68  (1873),  it  was  held  that  a 
jiro vision  that  the  lessor  should  not  be 
exonerated  by  the  lea.se  from  any  ex- 
isting liabilities  left  the  les.sor  respon- 
sible for  the  torts,  but  not  the  con- 
tracts, of  the  lessee,  and  that  a  pas- 
senger a-ssaulted  by  tiie  lessee's 
servants  upon  its  train  had  no  right 
of  action  against  the  lessor  because 
his  demand  was  founded  in  contract. 


This  decision  is  not  well  founded 
in  principle,  for  the  passenger's  right 
of  action  against  the  lessee  for  breach 
of  its  duty  as  a  common  carrier  was 
clearly  founded  in  tort. 

Under  the  Arkansas  statute  (S.  & 
H.  Digest  1894,  §  6349),  providing 
that  "all  railroads  which  are  now  or 
m.iy  be  hereafter  built  or  operated  in 
whole  or  in  part  in  this  State  shall  be 
responsible  for  all  damages  to  persons 
and  property  done  or  caused  by  the 
running  of  trains  in  this  State,"  one 
who  has  obtained  a  jiulgment  against 
the  lessee  of  a  railroad  can  enforce 
payment  by  seiz.ure  and  sale  of  the 
road  it.self.  Little  Rock,  etc.  R.  Co. 
V.  Daniels,  68  Ark.  171  (1900),  (56 
S.  W.  Rep.  874). 

It  will  be  observed  that  this  statute 
makes  the  railroad,  as  distinguished 
from  the  railroad  corporation,  respon- 
sible for  all  damages  resulting  from 
its  operation.  For  construction  of 
this  statute  with  respect  to  presump- 
tion of  negligence,  sec  St.  Louis,  etc. 
R.  Co.  V.  F.van.s,  80  Ark.  19  (1906), 
(96  S.  W.  Rep.  616).  Another 
Arkansas  statute  upon  this  subject 
appears  in  S.  &  II.  Digest  1894, 
§  6334. 

In  Ohio  (Bates'  Anno.  Stat.  (1787- 
1902),  §  3305),  and  Texas  (Saylcs' 
Civ.  Stat.  1897  (Supp.  to  19(X)),  vol.  ii. 
ch.  15a),  it  is  provided  that  the  les.sor 
corporation  shall  remain  liable  as  if  it 
oi)erated  the  road.  See  also  Missouri 
statute  in  preceding  note. 

389 


Y§217 


INTERCORPORATE    RELATIONS 


[part    III 


cannot  be  shifted  to  another  corporation  so  as  to  absolve  the 
lessor  from  liability  unless  immunity  is  expressly  granted  by 
statute.*  As  said  by  the  Supreme  Court  of  Maine  in  Nugent 
V.  Railroad  Co.:''  "  For  an  injury^  resulting  from  the  negli- 
gent omission  of  some  duty  owed  to  the  public,  such  as  the 
proper  construction  of  its  road,  station  houses,  etc.,  the  char- 
ter company  cannot,  in  the  absence  of  statutory  exemption, 
discharge  itself  of  legal  responsibility."  ^ 

This  rule  is  based  upon  considerations  of  public  policy  which 


.  •  United  States :  In  Hayes  v. 
Northern  Pacific  R.  Co.,  74  Fed.  282 
(1896),  Judge  Jenkins  said:  "When 
there  is  due  authority  of  law  for  the 
leasing  of  a  railway,  the  company 
cannot,  by  leasing  its  line,  discharge 
itself  of  those  responsibilities  which 
are  imposed  upon  it  by  the  law  of  its 
incorporation,  and  cannot  relieve 
itself  from  liability  in  the  discharge  of 
those  positive  duties  which  it  owes  to 
the  public,  and  have  been  specially 
imposed  by  its  charter."  See  also 
Arrowsmith  v.  Nashville,  etc.  R.  Co., 
57  Fed.  177  (1893). 

California :  Lee  v.  Southern  Pa- 
cific R.  Co.,  116  Cal.  97  (1897),  (47 
Pac.  932,  38  L.  R.  A.  71,  58  Am. 
St.  Rep.  140). 

Kansas:  In  St.  Louis,  etc.  R.  Co. 
V.  Curl,  28  Kan.  622  (1882),  (11  Am. 
&  Eng.  R.  Cas.  458),  Mr.  Justice 
Brewer,  then  .Judge  of  the  Supreme 
Court  of  Kansas,  said:  "When  the 
injury  results  from  the  omission  of 
some  duty,  which  the  lessor  itself 
owes  to  the  public  in  the  first  instance, 
—  something  connected  with  the 
building  of  the  road,  —  then  we  think 
the  company  assuming  the  franchise 
cannot  divest  itself  of  the  responsi- 
bility by  leasing  its  track  to  some 
other  company."  See  also  Railway 
Co.  V.  Wood,  24  Kan.  619  (1880). 

Maine:  Nugent  i\  Railroad  Co., 
80  Me.  62  (1888),  (12  Atl.  Rep.  797, 
6  Am.  St.  Rep.  151,  38  Am.  &  Eng. 
R.  Cas.  52). 

Michigan:  A  lessor  is  liable  for  an 

390 


additional  servitude  imposed  upon 
land  by  a  le.ssee.  Thus,  where  a  rail- 
road company  condemned  a  right  of 
way  for  the  passing  of  trains  over 
pi'ivate  property  and  leased  the  same 
to  a  lessee  who  used  it  not  only  for 
that  purpose  but  for  switching  pur- 
poses, thus  causing  additional  dam- 
age to  the  adjoining  property,  it  was 
held  that  the  owner  of  such  property 
was  entitled  to  recover  additional 
compensation  from  the  lessor.  Backus 
V.  Detroit,  etc.  R.  Co.,  71  Mich.  645 
(1888),  (40  N.  W.  Rep.  60). 

Pennsylvania:  Kearney  v.  Cent. 
R.  Co.,  167  Pa.  St.  362  (1895),  (31 
Atl.  Rep.  637). 

Texas:  Southern  Kansas  R.  Co.  v. 
Sage  (Tex.  Civ.  App.,  1904),  80  S.  W. 
Rep.  1038. 

2  Nugent  V.  Railroad  Co.,  80  Me. 
76  (1888),  (12  Atl.  Rep.  797,  38  Am. 
&  Eng.  R.  Cas.  52,  6  Am.  St.  Rep. 
151). 

^  But  wliile  a  lessor  railroad  com- 
pany is  liable  for  defects  in  the  origi- 
nal construction  of  the  leased  road,  it 
is  not  (in  a  jurisdiction  where  the  rule 
that  a  lessor  under  an  authorized 
lease  is  not  liable  for  the  negligence 
of  the  lessee  is  followed)  responsible 
for  the  subsequent  failure  of  the  lessee 
to  keep  the  roadbed  in  repair. 

Ackerman  v.  Cincinnati,  etc.  R. 
Co.,  143  Mich.  58  (1906),  (106  N.  W. 
Rep.  558,  114  Am.  St.  Rep.  640). 
Compare  Lee  v.  Southern  Pac.  R.  Co., 
116  Cal.  97  (1897),  (47  Pac.  Rep.  932, 
38  L.  R.  A.  71,  58  Am.  St.  Rep.  140). 


CHAP.    XIX] 


RIGHTS    ANI>    LIABILITIES    OF    LESSOR 


§   217 


disregard  the  lease  in  fixing  liability.  Like  the  rule  respect- 
ing statutoiy  duties,  it  relates  to  the  direct  obligations  of  the 
lessor  corporation.  The  lessor  is  held  responsible  under  both 
rules  for  its  own  omissions.^  It  is  chargeable  with  the  neglect 
of  the  lessee  only  as  such  neglect  constitutes  its  own  default. 
Whether  the  lease  is  authorized  or  unauthorized  is  immaterial. 
The  result  of  the  operation  of  either  rule  may,  moreover, 
under  certain  conditions  be  obtained  by  the  application  of 
another  and  distinct  principle.  When  the  failure  to  fulfil 
a  statutory  obligation  or  perform  a  public  duty  results  in  a 
nuisance,  the  lessor,  as  well  as  the  lessee,  ma)^  be  held  respon- 
sible. The  general  principle  of  the  law  of  landlord  and  tenant 
applies  that  both  may  be  liable  for  a  nuisance  —  the  one  for 
creating  and  the  other  for  continuing  it.^  Thus,  two  railroad 
companies  —  lessor  and  lessee  —  have  been  held  liable  for  an 
unla^\'ful  change  of  grade  in  the  streets  of  a  city,  made  before 
the  lease  and  continued  thereafter  by  the  lessee;  ^  and  the 
same  principle  may  be  applicable  where,  notwithstanding  stat- 
utes requiring  fences,  railroads  are  leased  in  an  unfenced  con- 
dition and  are  permitted  to  remain  so.^ 

1  St.  Louis,  etc.  R.  Co.  v.  Curl,  28  ^  Railroad   Co.    v.   Hambleton,    40 

Kan.  622  (1882),  (11  Am.  &  Eng.  R.       Ohio  St.  496  (1884). 


Cas.  458):  "The  injury  resulted  di- 
rectly from  its  own  wrong,  and  not 
from  any  mere  negligence  on  the  part 
of  the  [lessee]  companj-.  It  cannot 
relieve  itself  by  contracting  with  some 
other  party  to  discharge  its  statutory 
duties." 

-  Arrowsmith  v.  Nashville,  etc.  R. 
Co.,  57  Fed.  165  (1893);  Swords  v. 
Edgar,  59  N.  Y.  28  (1874),  (17  Am. 
Rep.  295).  Compare  Ditchett  t\ 
Spuyten  Duyvil  R.  Co.,  67  N.  Y.  425 
(1876),  Taylor's  Lantllord  and 
Tenant,  §  175. 

The  lessor  of  a  railroad  is  responsi- 
ble for  damages  from  an  obstruction 
caused  by  a  defect  in  a  cul\-ert  or 
embankment  built  by  it,  and  the 
lessee  is  not  liable  therefor  unless  it 
has  been  notified  to  reiuo\e  tlic  ob- 
struction. 

Shores  v.  Southern  R.  Co.,  72  S.  C. 
244  (1905),  (51  S.  E.  Rep.  699). 


The  lessor  corporation,  as  well  as 
the  lessee,  is  liable  for  an  injurj-  done 
by  the  lessor  in  building  its  track  .so  as 
to  cut  off  ingress  to  adjoining  i>roperty 
and  by  the  lessee  subsequently  using 
the  same.  Sticklej'  v.  Chesapeake, 
etc.  R.  Co.,  93  Ky.  323  (1892),  (20  S. 
W.  Rep.  261). 

A  lessor  of  a  railroail  is  not  liable 
for  damages  to  atljacent  land  caused 
by  the  erection  of  an  embankment  in 
filling  in  a  trestle,  it  not  appearing 
that  the  trestle  was  insufficient  at  the 
time  of  the  lease.  Miller  v.  New 
York,  etc.  R.  Co.,  125  N.  Y.  118 
(1890),  (26  N.  E.  Rep.  35). 

*  Arrowsmith  v.  Na,shville,  etc.  R. 
Co.,  57  Fed.  165  (1893).  In  St. 
Louis,  etc.  R.  Co.  v.  Curl,  28  Kan.  622 
(1882),  (11  Am.  &  Eng.  R.  Cas.  458), 
the  question  is  raised  but  not 
decided. 

391 


§218 


INTERCORPORATE    RELATIONS 


[part  lit 


§  218.  Liability  of  Lessor  for  Negligent  Operation  of  Rail- 
road —  (A)  Under  Unauthorized  Lease.  —  As  a  corollary  to  the 
conclusion  that  a  railroad  corporation  cannot  lease  its  railroad 
and  franchises  without  statutory  authority,  it  follows  that  a 
lease  executed  without  such  authority  is  void.  A  lessor  cor- 
poration under  an  unauthorized  lease  continues  liable  for  the 
negligence  of  the  lessee  affecting  the  public.  With  respect 
to  the  public,  the  lessee  stands  in  the  relation  of  an  agent  to 
the  lessor.^  The  lessor  is  bound  by  its  acts  and  is  responsible 
for  its   omissions.^ 


*  For  consideration  of  liability  of 
lessor  to  employees  of  lessee  when 
lease  is  unauthorized,  see  post,  §  220. 

^  I.  Cases  holding  lessor  corporation 

—  under    unauthorized    lease  —  liable 
for  injuries  to  passengers : 

United  States :  Railroad  Co.  v. 
Brown,  17  Wall.  445  (1873). 

Georgia:  Central  R.,  etc.  Co.  v. 
Phinazee,  93  Ga.  488  (1894),  (21  S.  E. 
Rep.  66). 

Iowa :  Bower  v.  Borlington,  etc. 
R.  Co.,  42  Iowa,  546  (1876). 

Kentucky:  Brooker  v.  Maysville, 
etc.  R.  Co.,  119  Ky.  137  (1904),  (83  S. 
W.  Rep.  117) ;  Chesapeake,  etc.  R.  Co. 
V.  Osborne,  97  Ky.  112  (1895),  (30 
S.  W.  Rep.  21,  53  Am.  St.  Rep.  407). 

New  York:  Abbott  v.  Johnstown, 
etc.  R.  Co.,  80  N.  Y.  27  (1880),  (36 
Am.  Rep.  572). 

South  Carolina:  Bouknight  v. 
Charlotte,  etc.  R.  Co.,  41  S.  C.  415 
(1894),  (19  S.  E.  Rep.  915). 

Texas:  International,  etc.  R.  Co. 
V.  Eckford,  71  Tex.  274  (1888),  (8  S. 
W.  Rep.  679). 

West  Virginia:  Ricketts  v.  Chesa- 
peake, etc.  R.  Co.,  33  W.  Va.  433 
(1890),  (10  S.  E.  Rep.  801,  25  Am.  St. 
Rep.  901,  7  L.  R.  A.  354) ;  Fisher  v. 
West  Virginia,  etc.  R.  Co.,  39  W.  Va. 
366  (1894),  (19  S.  E.  Rep.  578,  23  L. 
R.  A.  758). 

II.  Cases  holding  lessor  corporation 

—  under    unauthorized    lease  —  liable 
for  injuries  to  persons  upon  its  tracks : 

United  States :   Briscoe  v.  Southern 

392 


Kansas  R.  Co.,  40  Fed.  273  (1889) 
(live  stock). 

Kentucky:  Louisville,  etc.  R.  Co. 
V.  Breeden's  Admx.,  Ill  Ky.  729 
(1901),  (64  S.  W.  Rep.  667). 

Minnesota :  Freeman  v.  Minne- 
apolis, etc.  R.  Co.,  28  Minn.  443 
(1881),  (10  N.  W.  Rep.  594,  7  Am. 
&  Eng.  R.  Cas.  410). 

South  Carolina:  Smalley  v.  Atlan- 
tic, etc.  R.  Co.,  73  S.  C.  572  (1906), 
(53  S.  E.  Rep.  1000). 

Texas:  Galveston,  etc.  R.  Co.  v. 
Gartesier,  9  Tex.  Civ.  App.  456  (1895), 
(29  S.  W.  Rep.  939). 

III.  Miscellaneous  cases  stating 
general  ride  that  lessor  is  liable  for 
negligence  of  lessee  in  operation  of 
road  under  unaidhorized  lease: 

United  States:  Welden  Nat.  Bank 
V.  Smith,  86  Fed.  398  (1898) ;  Hayes 
V.  Northern  Pacific  R.  Co.,  74  Fed. 
282  (1896);  HukiU  v.  Mays\'ille,  etc. 
R.  Co.,  72  Fed.  745  (1896);  Arrow- 
smith  V.  Nashville,  etc.  R.  Co.,  57  Fed. 
165  (1893).;  Van  Dresser  v.  Oregon 
R.,  etc.  Co.,  48  Fed.  202  (1891). 

Alabama:  Rome,  etc.  R.  Co.  v. 
Chasteen,  88  Ala.  591  (1889),  (7  So. 
Rep.  94). 

District  of  Columbia:  Howard  v. 
Chesapeake,  etc.  R.  Co.,  11  App.  Cas. 
300  (1897). 

Idaho :  Palmer  v.  Utah,  etc.  R.  Co., 
2  Idaho,  350  (1888),  (16  Pac.  Rep. 
553,  36  Am.  &  Eng.  R.  Cas.  443). 

Illinois:  Railway  Co.  v.  Dunbar, 
20  111.  623  (1858),  (71  Am.  Dec.  291). 


CHAP.    XIX]  RIGHTS    AXD    LIABILITIES    OF    LESSOR  §   219 

"  Shippers,  who  have  a  common-hiw  right  to  demand  of  the 
common  carrier  that  he  shall  carry  their  goods  safely,  passen- 
gers, who  have  a  common-law  right  to  demand  of  the  common 
carrier  that  they  shall  be  carried  safely  to  their  destination, 
and  travellers  upon  the  highway,  who  have  a  statutory  and 
common-law  right  to  such  a  reasonable  and  careful  operation 
of  the  road  as  shall  not  unduly  injure  them  in  the  pursuit  of 
'their  la^vful  rights,"  sustaining  damages  by  the  failure  of  a 
lessee,  under  an  unauthorized  railroad  lease,  to  fulfil  all  the 
obligations  required  of  railroad  companies,  may  hold  the  les- 
sor—  as  well  as  the  lessee  —  resi)onsiblc  therefor.* 

§  219.  Liability  of  Lessor  for  Negligent  Operation  of  Rail- 
road —  (B)  Under  Authorized  Lease.  —  Extending  the  prin- 
ciple, already  considered,  that  the  approval  by  the  legislature 
of  a  railroad  lease  is  insufficient  without  a  clause  of  exemption 
to  release  a  lessor  from  the  performance  of  its  statutory  duties 
and  the  fulfilment  of  its  primary  obligations,  it  is  held  by  courts 
of  high  authority  that  an  express  exemption  is  also  necessary 
to  relieve  a  lessor  from  liability  for  injuries  to  third  persons 
caused  by  the  negligence  of  a  lessee  in  the  operation  and  man- 
agement of  a  leased  railroad;  that  although  the  lessor  has, 
with  statutory  authority,  parted  with  the  control  of  its  railroad, 
it  is  still  liable  for  the  torts  of  the  lessee.^ 

Louisiana  :  Muntz  r.  Algiers,  etc.  Where  a  railroafi  comjjany,  without 
R.  Co.,  Ill  La.  423  (1903),  (35  So.  authority,  lea-ses  its  railroad  to  an- 
Rep.  624,  64  L.  R.  A.  222,  100  Am.  other  corporation,  the  le.s.see  is  con- 
st. Rep.  495).  sitlcred  its  agent  in  the  operation  of 

Oregon:     Lakin    v.    Railroad    Co.,  the  road,  and  in  an  action  against  the 

13  Or.  4.36   (1886),  (11   Pac.  Rep.  68,  lessor   for   a   tort   committed   by   the 

57  Am.  Rep.  25).  lessee    service    of     proces.9    upon    the 

South  Carolina :  Harmon  f.  Colum-  agents   of   the   lessee    has    been    held 

bia,  etc.  R.  Co.,  28  S.  C.  401  (1887),  sufficient. 

(5  S.  E.  Rep.  835,  13   Am.   St.    Rep.  Van  Dresser  v.  Oregon  R.,  etc.  Co., 

686).  48  Fed.  202  (1891). 

Texas:    Railroad  Co.  v.  Culberson,  ^Connecticut:    In  Driscoll   r.   Nor- 

72  Tex.  375  (1888),   (10  S.  W.   Rep.  wich,  etc.  R.  Co.,  65  Conn.  230  (1894), 

706,  13  Am.  St.  Rep.  805,  3  L.  R.  A.  (32  Atl.  Rep.  354),  it  was  said  that  a 

567).  railroad  company  cannot,  by  a  lea.so 

Vermont:    Nelson  v.  Railroad  Co.,  of    its  property,   absolve   itself    from 

20    Vt.    717    (1854),    (62    Am.    Dec.  liability  for  an  injury  to  a  stranger, 

614).  caused  by  the  negligence  of  the  les.>5ee 

'  Ilukill  r.  Maysville,  etc.   R.  Co.,  in  the  operation  of  the  road,   unless 

72  Fed.  752  (1890).  such  exemption  is  provided  for  in  the 

393 


§  219 


INTEUCOUPORATE    RELATION'S 


[part    III 


It  is  urged,  in  support  of   this  position,  that  public  poUcy 
requires  that  the  obligations  of  a  railroad  corporation  —  to 


lease,  and  is  also  expressly  sanctioned 
by  legislative  authority. 

The  conclusion  of  the  Court  in  this 
case  can,  however,  be  justified  on 
other  grounds.  See  post,  §  221 : 
"Liability  of  Lessor  for  Negligent 
Operation  of  Railroad —  (D)  When  it 
shares  in  Control." 

Georgia:  Green  v.  Coast  Line  R. 
Co.,  97  Ga.  27  (1895),  (24  S.  E.  Rep. 
814,  54  Am.  St.  Rep.  379,  33  L.  R.  A. 
806):  "It  is  by  reason  of  this  firm 
adhesion  of  duty  imposed  to  franchise 
granted  that  an  incorporated  railroad 
company  cannot  lease  its  line  of  rail- 
way and  permit  it  to  be  operated  by 
the  lessee  without  being  liable  for 
negligent  torts  committed  by  the 
lessee,  to  the  same  extent  as  if  they 
were  committed  by  itself.  .  .  .  And 
this  rigid  rule  of  liability,  which  is 
directly  the  opposite  of  that  which 
prevails  touching  leases  where  no 
charter  franchises  of  a  gttasi-public 
nature  are  involved,  is  not  relaxed  in 
favor  of  a  company  having  express 
permission  from  the  legislature  to 
make  the  lease,  unless  there  be  also 
an  express  exemption  or  grant  of  abso- 
lution from  liability.  Thus,  in  the 
case  of  a  mere  permissive  lease  of  a 
railroad,  there  is  a  cumulative  rather 
than  diminished  security  to  the  in- 
jured citizen,  who  for  a  tort  committed 
.  .  .  by  the  lessee,  in  the  exercise  of 
franchises  derived  from  the  lessor, 
can  hold  either  or  both  answerable 
for  the  damages." 

In  Singleton  v.  South  Western  R. 
Co.,  70  Ga.  464  (1883),  (48  Am.  Rep. 
574),  a  lessor  was  held  liable  for  inju- 
ries to  a  passenger  upon  lessee's  train 
through  the  negligence  of  lessee's  serv- 
ants. This  decision  was  placed  upon 
the  broad  ground  that  a  lessor  is  liable 
for  the  torts  of  its  lessee  even  under 
an  authorized  lease,  but  might  well 
have  been  based  upon  the  privity  of 

394 


contract  between  the  lessor  and  the 
passenger,  for  the  passenger's  ticket 
was  issued  in  the  name  of  the  lessor. 
See  also  Georgia  R.,  etc.  Co.  v.  Haas, 
127  Ga.  187  (1906),  (56  S.  E.  Rep. 
313) ;  Central  R.,  etc.  Co.  v.  Phinazee, 
93  Ga.  488  (1893),  (21  S.  E.  Rep.  66) ; 
Central  R.  Co.  v.  Brin,son,  64  Ga.  475 
(1880). 

Illinois:  Chicago,  etc.  R.  Co.  v. 
Schmitz,  211  111.  446  (1904),  (71  N.  E. 
Rep.  1050);  Chicago,  etc.  R.  Co.  v. 
Doan,  195  111.  168  (1902),  (62  N.  E. 
Rep.  826) ;  Balsley  v.  St.  Louis,  etc. 
R.  Co.,  119  111.  68  (1886),  (8  N.  E. 
Rep.  859,  59  Am.  Dec.  784);  Penn- 
sylvania Co.  V.  Ellet,  132  111.  654 
(1890),  (24  N.  E.  Rep.  559,  42  Am.  & 
Eng.  R.  Cas.  64) ;  Peoria,  etc.  R.  Co. 
V.  Lane,  83  111.  448  (1876). 

Kentiwky :  McCabe's  Admx.  v. 
Maysville,  etc.  R.  Co.,  112  Ky.  876 
(1902),  (66  S.  W.  Rep.  1054):  "By 
its  acceptance  of  the  franchises  con- 
ferred by  the  State  the  corporation 
assumed  the  corresponding  burdens 
thereby  imposed.  These  franchises 
it  could  not  transfer  to  another  with- 
out distinct  legislative  authority. 
The  grant  of  power  to  lease  its  prop- 
erty is  one  thing ;  the  grant  of  abso- 
lution from  responsibility  is  another, 
and  is  not  to  be  inferred  from  a  mere 
power  to  lease  the  road,  where  the 
corporation  still  retains  its  existence 
and  the  enjoyment  of  its  franchises 
in  the  rents.  For  such  grants  are 
strictly  construed,  and,  as  against 
the  i^ublic,  are  never  extended  by 
construction.  In  the  case  before  us 
there  is  only  a  grant  to  the  lessor  of 
power  to  contract  for  the  operating  of 
the  road.  The  company  enjoys  all 
its  franchises  in  the  fruits  of  the  con- 
tract. There  is  nothing  in  the  pro- 
vision to  show  that  the  Legislature 
had  in  mind  authorizing  the  company 
to   divest   itself  of   its   franchises,    or 


CHAP.    XIX] 


RIGHTS   AND    LIABILITIES    OF    LESSOR 


219 


persons  using  its  road  as  passengers  and  shippers,  to  tra\el- 
Jers  upon  highways  crossed  by  its  tracks  —  should  not  be  cUs- 


perniitting  it,  while  enjoying  them  or 
their  fruits,  to  be  acquit  of  responsi- 
bility for  their  abuse,  without  regard 
to  the  financial  ability  of  the  lessee 
or  his  amenability  to  suit."  Com- 
■pare,  however,  Harper  v.  Newport 
News,  etc.  R.  Co.,  90  Ky.  359  (1890), 
(14  S.  W.  Rep.  346). 

Massachusetts:  Braslin  v.  Somer- 
ville  Horse  R.  Co.,  145  Mass.  68  (1887), 
(13  N.  E.  Rep.  65)  {per  Allen,  J.):  "It 
is  nowhere  stated  that  tlie  lessor  should 
be  exonerated  from  responsibility, 
nor  was  it  possible  for  the  parties  to 
make  a  contract  which  should  have 
that  effect.  The  sanction  of  the  legis- 
lature was  given  the  contract  as  made 
by  the  parties,  but  added  nothing  by 
way  of  exemption  from  the  primary 
responsi):)ility  of  the  lessor.  The  lease 
did  not  purport  to  transfer  the  lessor's 
franchise,  or  the  whole  of  its  ])ropcrty. 
The  lessor  was  not  going  out  of  busi- 
ness entirely,  but  only  leased  a  portion 
of  its  road,  with  provisions  for  restora- 
tion of  the  leased  property  at  the  end 
of  the  terra,  and  for  reentry.  It  was 
under  a  positive  duty  and  obligation 
to  the  public,  and  the  consent  of  the 
legislature  to  the  making  of  the  lea.se 
did  not  imply  a  discharge  from  the 
duty  and  obligation.  Indeed,  there 
is  a  certain  implication  tliat  the  par- 
ties did  not  contemplate  any  such 
discharge,  arising  from  the  stipulation 
for  indemnity  "during  said  term," 
that  is,  during  the  whole  term  of  the 
lease.  Where  a  corporation  seeks  to 
escape  from  the  burden.s  imjjoscd 
upon  it  by  the  legislature,  clear  evi- 
dence of  a  legislative  assent  to  such 
exoneration  should  be  found." 

In  the  earlier  Massachusetts  case  of 
Quested  v.  Newburyport  Hor.se  R.  Co., 
127  Mass.  204  (1879),  a  lessor  was  held 
liable  to  persons  injured  through  the 
negligence  of  the  lessee,  but  in  that 
ca.se    it    was    expressly    provided    by 


statute  that  the  lea.se  should  not 
"release  or  exempt  such  company 
from  any  duties,  liabilities  or  restric- 
tions to  which  it  would  otherwise  be 
subject." 

Mississippi:  Illinois  Central  R. 
Co.  V.  Lucas,  89  Miss.  411  (1907),  (42 
So.  Rep.  607). 

Nebraska :  In  Chollette  v.  Omaha, 
etc.  R.  Co.,  26  Neb.  159  (1889),  (41 
N.  W.  Rep.  1106,  4  L.  R.  A.  135), 
where  a  passenger  was  injured  through 
the  negligence  of  the  lessee's  em- 
ployees, it  was  held  that,  upon 
grounds  of  public  policy,  the  original 
obligation  of  a  railroad  company  to 
the  public  cannot  be  discharged  by  a 
transfer  of  its  franchises  to  another 
company,  except  by  legislative  enact- 
ment consenting  to  and  authorizing 
such  transfer,  with  an  exemption 
granted  to  such  company  relieving  it 
from  liability;  that  mere  legislative 
con,sent  to  the  transfer  is  not  suffi- 
cient, there  must  be  a  release  from 
the  obligations  of  the  company  to  the 
public. 

North  Carolina:  Raleigh  v.  North 
Carolina  R.  Co.,  129  N.  C.  265  (1901), 
(40  S.  E.  Rep.  2) ;  Perry  r.  Western 
North  Carolina  R.  Co.,  129  N.  C.  333 
(1901),  (40  S.  E.  Rep.  191);  Harden 
V.  North  Carolina  R.  Co.,  129  N.  C. 
354  (1901),  (40  S.  E.  Rep.  184,  85 
Am.  St.  Rep.  747,  55  L.  R.  A.  784) ; 
Pierce  v.  North  Carolina  R.  Co.,  124 
N.  C.  83  (1899),  (32  S.  E.  Rep.  309, 
44  L.  R.  A.  316);  Kinney  v.  North 
Carolina  R.  Co.,  122  N.  C.  961  (1898). 
(30  S.  E.  Rep.  313);  Logan  v.  North 
Carolina  R.  Co.,  116  N.  C.  940  (1895), 
(21  S.  E.  Rep.  959). 

South  Carolina:  In  Harmon  ?•. 
Columbia,  etc.  R.  Co.,  28  S.  C.  401 
(1888),  (5  S.  E.  Rep.  835,  13  Am. 
St.  Rep.  686),  a  lessor  wa.s  licld  liable 
for  stock  killed  tlirough  negligence 
of  lessee.     In  Parr  i-.  Spartansburgh, 

395 


§   219  INTERCORPORATE    RELATIONS  [pART    III 

charged  by  a  lease  of  its  property  and  franchises  to  another 
corporation  unless  it  is  exempted  from  liability  by  legislative 
authority;  that  when  a  corporation  seeks  to  escape  from  the 
burdens  imposed  upon  it,  clear  evidence  of  legislative  assent 
to  such  exoneration  must  be  shown,  which  is  not  furnished 
by  a  mere  approval  of  the  transfer  of  its  property  and  fran- 
chises. As  tersely  expressed  by  the  Supreme  Court  of  Georgia 
in  Singleton  v.  South  Western  R.  Co.:  ^  "  The  view  which  we 
take  of  the  law  and  the  cases  cited  is  that  the  original  obliga- 
tions can  only  be  discharged  by  legislative  enactment  consent- 
ing to  and  authorizing  the  lease,  with  an  exemption  to  the 
lessor  company." 

On  the  other  hand,  it  is  said  by  courts  of  equally  high  au- 
thority that  the  legislature,  by  sanctioning  a  lease,  gives  its  con- 
sent that  the  lessee  shall  stand  as  a  substitute  for  the  lessor 
with  respect  to  all  matters  arising  out  of  the  future  manage- 
ment and  control  of  the  leased  railroad.  It  is  held  by  these 
courts  that  a  lessor  having,  with  the  approval  of  the  legisla- 
ture, leased  and  entirely  parted  with  the  possession  and  control 
of  its  railroad,  is  not  liable  for  the  torts  of  the  lessee  ;  that 
legislative  exemption  is  not  necessary  in  addition  to  legislative 
sanction.^ 

etc.  R.  Co.,  43  S.  C.  197  (1895),  (20  >  Singleton    v.    South   Western    R. 

S.  E.  Rep.   1009),    (49  Am.   St.    Rep.  Co.,  70  Ga.  469  (1883),  (48  Am.  Rep. 

826),    the    Court    went    the    extreme  574). 

length  of  holding  a  lessor  liable  for  For  consideration  of  proper  plead- 

the  torts  of  a  receiver  of  the  lessee.  ing  when  it  is  sought  to  hold  a  lessor 

This  holding  that  a  lessor  is  respon-  corporation    liable    for    the    acts    or 

sible  for  the  management  of  property  negligence  of  a  lessee,  see  Georgia  R., 

in  custodia  legis   cannot   be   justified  etc.  Co.  v.  Haas,  127  Ga.  187  (1906), 

upon     principle     or     authority.     See  (56  S.  E.  Rep.  313). 

also   Hart  v.   Railroad  Co.,   33   S.   C.  '^  United  States :  Hayes  v.  Northern 

427  (1890),  (12  S.   E.   Rep.   9,  10  L.  Pacific   R.   Co.,    74   Fed.   282   (1896), 

R.    A.    794);     Chester   Nat.    Bank   v.  (Jenkins,    J.):      "It    is,    however,    a 

Atlanta,    etc.    R.    Co.,    25    S.    C.    216  different    question    when    the    lessor 

(1886).  company  is  sought  to  be  made  liable 

Tennessee:    In  Hanna  v.   Railway  for    the     negligent    management     of 

Co.,  88  Tenn.  310  (1889),  (12  S.  W.  the    road    which    it    was    authorized 

Rep.  718,  6  L.  R.   A.   727),  a  railroad  to  lease,   and  of  which  management 

company  was  held  not  liable  for  an  it  had  no  control.     In  such  case,  we 

injury  to  an  employee  of  a  contractor,  perceive  no  ground  of  public   policy 

but   the    Court    remarked    that    botli  which    should    impose    such    liability 

"sanction      and      exemption"      were  upon  the  lessor  company  with  respect 

necessary  to  relieve  a  lessor.  to    injuries    resulting    to    individuals 

396 


CHAP,    XIX] 


RIGHTS   AND    LIABILITIES   OF    LESSOR 


§219 


In  Arrowsmith  v.   Nashville,  etc.  R.  Co.,^  Judge  Lurton  dis- 
tinguished the  case  where  statutoiy  exemption  is  necessary 


from  the  negligent  operation  of  the 
railway.  The  .subject  has  been  much 
discussed,  and  some  of  the  cases  are 
characterized  by  lack  of  discrimina- 
tion between  liability  for  duties 
absolutely  imposed  by  law  upon  the 
lessor  company  and  duties  arising 
from  the  manner  of  the  operation  of 
trains." 

See  also  Curtis  v.  Cleveland,  etc. 
R.  Co.,140  Fed.  777  (1905);  Yeates 
V.  Illinois  Central  R.  Co.,  137  Fed. 
943  (1905) ;  Arrowsmith  v.  Nashville, 
etc.  R.  Co.,  57  Fed.  165  (1893),  (a 
leading  case). 

Arkansan:  Little  Rock,  etc.  R.  Co. 
V.  Daniels,  68  Ark.  171  (1900),  (56 
S.  W.  Rep.  874). 

Kansas:  St.  Louis,  etc.  R.  Co.  v. 
Curl,  28  Kan.  623  (1882):  "If  the 
injury  results  from  negligence  in  the 
handling  of  trains  or  in  the  omission 
of  any  statutory  duty  connected  with 
the  management  of  the  road,  matters 
in  respect  to  which  the  lessor  com- 
pany could,  in  the  nature  of  things, 
have  no  control  —  then  the  lessee 
company  will  alone  be  responsible." 

See  also  Caruthers  v.  Kansas  City, 
etc.  R.  Co.,  59  Kan.  629  (1898),  (54 
Pac.  Rep.  673,  44  L.  R.  A.  737). 

Maine:  Nugent  v.  Railroad  Co., 
80  Me.  76  (1888),  (12  Atl.  Rep.  797, 
6  Am.  St.  Rep.  151):  "An  authorized 
lease,  without  any  exemption  clause, 
absolves  the  les.sor  from  the  torts 
of  the  lessee  resulting  from  the  negli- 
gent operation  antl  handling  of  its 
trains  and  the  general  management 
of  the  leased  road,  over  which  the 
lessor  could  have  no  control." 

See  al.so  Mahoney  v.  Atlantic,  etc. 
R.  Co.,  63  Me.  68  (1873). 

Michigan :  Ackerman  v.  Cincin- 
nati, etc.  R.  Co.,  143  Mich.  61  (1906), 
(106   N.  W.  558)  :    "No  one  doubts 


that  without  statutory  authority  a 
railroad  company  would  be  precluded 
from  substituting  another  in  its  place 
to  perform  its  obligatiojis  to  the  State 
and  public.  This  question  was  con- 
sistently disposed  of  in  England,  by 
the  holding  that  a  railroad  company 
could  not  make  a  valid  lease  of  its 
rights  and  franchises ;  this  is  upon  the 
grountl  that  the  effect  of  a  lease  of 
property  is  to  relieve  the  lessor  frcm 
obligation  to  others  in  regard  to  its 
use,  and  that  hence  there  could  be  no 
presumption  of  an  intent  to  grant  the 
power  to  lease  —  a  logical  conclusion. 
But  the  doctrine  that  a  statutory  au- 
thority to  lease  a  railroad  leaves  the 
lessor  liable  to  the  full  extent  that  it 
would  be  if  it  operated  the  road  itself, 
unless  it  be  expressly  stated  to  the 
contrary  in  the  statute,  can  rest  on 
nothing  less  than  a  supposed  legisla- 
tive intent  to  use  the  word  'lease'  in 
a  limited  and  different  .sense  than  that 
usually  given  the  term." 

Minnesota :  Heron  v.  St.  Paul,  etc. 
R.  Co.,  68  Minn.  542  (1897),  (71  N.  W. 
Rep.  706). 

Missouri:  Moorshead  v.  United 
Rys.  Co.,  119  Mo.  App.  541  (1906), 
(96  S.  W.  Rep.  261),  affirmed  203  Mo. 
121  (1907),  (100  S.  W.  Rep.  611): 
"The  reasoning  of  these  cases  is,  in 
the  main,  that  when  the  legislature 
by  statute  confers  the  authority  on 
a  railroad  company  to  lca.sc  its  proi>- 
erties.  and  on  another  company  to 
take  and  operate  them,  and,  pursuant 
to  such  statute,  a  lea.sc  is  made  turn- 
ing over  all  jiroperty  in  an  unrestricteil 
way  to  the  lessee,  the  i)roi>cr  view 
is  that  the  legislature  intended  that 
all  the  ordinary  incidents  of  a  lease 
should  accompany  the  transaction 
and  the  lessor  not  remain  liable  for 
operating  torts." 


>  Arrowsmith  v.  Nashville,  etc.  R.  Co.,  57  Fed.  177  (1893), 

397 


§   219  INTERCORPORATE    RELATIONS  [PART   III 

from  that  where  statutoiy  sanction  is  sufficient:  "  Where 
obhgations  are  imposed  by  charter  or  statute  law  upon  a  rail- 
road company  for  the  protection  and  advantage  of  the  gen- 
eral public  not  having  contract  relations  with  it,  it  may 
very  well  be  said  that  a  general  authority  to  lease  out 
its  road,  which  contains  no  provision  exempting  it  from 
such  public  obhgations,  will  not  absolve  it  from  liability. 
So,  if  a  railway  be  in  such  condition  that  it  is  a  nuisance 
when  leased  out  by  reason  of  the  absence  of  sometliing 
necessary  to  its  safe  operation,  or  the  presence  of  something 
dangerous  to  its  safe  operation,  and  this  nuisance  be  con- 
tinued by  the  lessee,  both  the  lessor  and  lessee  would  be 
liable,  —  the  one  as  having  created,  and  the  other  as  having 
continued  the  nuisance.  But  to  say  that,  after  the  lessor 
has,  by  authority  of  law,  transferred  the  control  and  man- 
agement of  its  road  to  another,  he  shall,  unless  especially 
exempted,  remain  liable  for  all  the  torts  and  contracts  of 
the  lessee,  is  to  ignore  the  contract  of  lease  and  the  legis- 
lative sanction  under  which  it  was  made.  The  State,  on 
grounds  of  public  policy,  may  well  refuse  its  consent  to  the 
transfer;  but  if  it  consent,  then  there  is  no  public  policy  to 
authorize  the  courts  to  say  that  the  responsibility  for  the  future 
management  and  operation  of  the  road  has  not  been  exclusively 

This  was  a  case  of  a  street  railway  upon  a  highway,  for  damages  result- 
lease.  A  steam  railroad  company  ing  from  an  omission  of  the  lessee 
as  lessor  is  liable  for  the  negligence  of  to  repair  a  fence  which  was  in  good 
its  lessee  under  a  Missouri  statute.  order  at  the  time  of  the  lease  and 
See  notes  to  §  216,  ante:  " Lessor  Cor-  surrender  of  possession. 
poration  cannot  avoid  Statutory  Obli-  See  also  Miller  v.  Railroad  Co.^ 
gations  xirdess  exempted."  125  N.  Y.  118  (1890),  (26  N.  E.  Rep. 

New   Hampshire:    Murch   v.    Con-  35);     Fisher   v.    Metropolitan    El.    R. 

cord  R.  Co.,  29  N.  H.   1   (1854).  Co.,  34  Hun  (N.  Y.),  433  (1885). 

New  York :  Phillips  v.  Northern  R.  Pennsylvania :   Pinkerton  v.  Phila- 

Co.,  41  N.  Y.  St.  Rep.  780  (1891),  (16  delphia  Traction  Co.,  193  Pa.  St.  229 

N.    Y.    Supp.    909).     In    Ditchett    v.  (1899),  (44  Atl.  Rep.  284). 
Spuyten,   etc.   R.   Co.,   67  N.   Y.   425  Texas:    Houston,   etc.    R.    Co.    v. 

(1876),    it   was   held   that   a   railroad  McFadden,   91   Tex.    194    (1897),   (40 

corporation    which    had   parted    with  S.  W.  Rep.  216,  42  S.  W.  Rep.  593)  r 

the    possession    and    control    of    its  Missouri  Pacific  R.   Co.   v.  Watts,  63 

road  under  a  lease  thereof  to  another  Tex.  549  (1885). 

corporation,    containing    a    covenant  Virginia.     Virginia,  etc.  R.  Co.  v. 

that  the  lessees  should  keep  up  the  Washington,   86  ^'a.   629   (1890),   (Itt 

fences  was  not  liable  to  one  travelling  8.  E.  Rep.  927). 

398 


CHAP.    XIX]  lUGHTS    AND    LIABILITIES    OF    LESSOR  §   219 

imposed  upon  the  lessee  as  the  lawful  substitute  for  the  com- 
pany owning  the  road." 

Upon  principle  there  is  no  obvious  reason  why,  when  tlie 
legislature  has  authorized  a  railroad  company  to  lease  its  rail- 
road, and  it  has  exercised  the  power  conferred  and  has  entirely 
parted  with  the  control  of  the  leased  property,  it  should  still 
be  responsible  for  the  negligence  of  the  lessee  in  the  operation 
of  the  road.  The  doctrine  of  respondeat  superior  has  no  appli- 
cation, for  the  lessee  is  the  owner  pro  hac  vice.  The  legislature 
has  passed  upon  considerations  of  public  policy  in  authorizing 
the  lease.  Under  these  conditions,  it  would  seem  that  the 
privileges  and  corresponding  oljligations  should  both  pass  to 
the  lessee  in  the  manner  of  other  property,  and  that  the  general 
principle  that  a  landlord  is  not  responsible  for  the  negligence 
of  his  tenant  in  the  management  of  the  leased  property  should 
be  applicable  and  controlling. 

The  federal  courts  in  adopting  the  view  just  stated,  that 
the  lessor  corporation  under  an  authorized  lease  is  not  respon- 
sible for  the  negligence  of  the  lessee,  so  hold  as  a  matter  of 
general  law,  and  are  not  controlled  by  the  decisions  of  the 
courts  of  the  State  in  which  the  railroad  is  located.^ 

'  Yeates  v.  Illinois  Central   R.  Co.,  weight  of  federal  decisions  establishes 

137  Fed.  943  (1905).  the    contrary    rule.    .   .   .       The    rule 

In  Curtis  v.  Cleveland,  etc.  R.  Co.,  of  law  in  question  is  not  local,  or  the 

140  Fed.  578  (190.5)  the  Court  said:  effect  of  a  statute,  or  its  construction, 

"The  question  for  decision,  therefore,  but   exists   as    a   general    rule   of   the 

is   whether   the   mere   leasing   of   the  common  law,  which  the  federal  courts 

right    of    way,    track,    turnouts,    anil  determine    for    them.selves.     One    of 

stations    to    be    used    and    operated  the   benefits  secured   through   federal 

exclusively    by    another     ipso     facto  jurisdiction  is  the  uniform  and  equal 

reserves  or  creates  a  liability  against  administration    of    the    law    affecting 

the  Ies.sor  for  the   negligence   of   the  the    rights    of    citizens    of    different 

les.see    in    its    own    exclusive    use    of  States,    and,    if  we   were   required   to 

operating  appliances  owned  and  con-  follow  the  decision  of  the  local  court.s 

trolled  by  it  upon  tiie  track  and  right  upon  questions  not  arising  upon  the 

of  way  possessed  and  used  imder  the  statutes    of    the     State,     with    great 

terms    of    the    lease.     The    Sujjreme  respect    to    the    State    courts,    be    it 

Court  of  Illinois  lias  decided  (Chicago,  said,    there    would    be    more    or    less 

etc.    R.    Co.    V.    Hart,    209    111.    414  discord      and      uncertainty      in      the 

(1904),  (70  N.  E.  6.54.  (if)  L.  R.  A.  75))  decisions.      It  would  be  an  anomaly, 

that  both  lessor  and  lessee  companies  were  this  court   rccjuired  to  hold  the 

are    liable    for    such    negligence,    and  law  different  from  its  own  juilgment 

that  a  joint  action  may  be  maintained  of  what  it  is,  except  in  obedience  to 

against      them      for     damages.     The  superior  authority,  in  order  that  the 

309 


§  220 


INTERCORPORATE    RELATIONS 


[part  hi 


§  220.  Liability  of  Lessor  for  Negligent  Operation  of  Rail- 
road —  (C)  To  Employees  of  Lessee.  — The  rule  that  a  lessor 
corporation,  under  an  unauthorized  lease,  is  responsible  to 
the  public  for  the  negligence  of  the  lessee  is,  upon  principles' 
already  illustrated,  well  settled.'  A  similar  rule,  in  favor  of 
the  employees  of  the  lessee,  has  been  adopted  by  several  courts 
upon  the  theory  that  the  original  obligation  of  the  lessor  to 
compensate  its  own  servants  for  injuries  received  enures  to 
the  benefit  of  the  servants  of  the  lessee.^  And,  extending  this 
theory  upon  what  are  denominated  grounds  of  public  policy, 
two  courts,  at  least,  hold  that  a  lessor  corporation  even  under 
an  authorized  lease  is  responsible  for  injuries  to  the  lessee's 
employees  due  to  its  negligence.^ 


jurisdiction  of  the  State  court  may 
be  sustained  and  its  own  jurisdiction 
defeated." 

'  Ante,  §  218:  "Liability  of  Lessor 
for  Negligent  Operation  of  Railroad  — 
{A)   Under  Unauthorized  Lease." 

2  In  Logan  v.  North  Carolina  R. 
Co.,  116  N.  C.  949  (1895),  (21  S.  E. 
Rep.  959),  the  Court  said:  "If  we 
apply  the  test  which  we  hold  to  be 
the  true  one,  that  the  liability  of 
the  lessor  grows  out  of  the  duty  im- 
posed with  the  privilege  in  the  first 
instance,  the  same  reason  is  found 
to  exist  for  holding  it  liable  to  serv- 
ants of  the  lessee  for  injuries  sus- 
tained by  them,  as  for  injuries  in- 
flicted on  passengers.  A  part  of  the 
original  duty  impo.sed  by  the  charter 
was  to  compensate  servants  in  dam- 
ages for  any  injuries  they  might  sus- 
tain, except  such  as  should  be  due 
to  the  negligence  of  their  fellow-serv- 
ants. The  employee  is  deemed  in 
law  to  contract  ordinarily  to  incur 
such  risks  as  arise  from  the  careless- 
ness of  the  other  ser\'ants  of  the 
company,  but  where  the  lessor  com- 
pany would  be  liable,  if  it  remained 
in  charge  of  the  road,  to  a  person 
acting  as  its  own  servant,  we  see  no 
reason  why  it  should  not  be  answer- 
able to  him  when  employed  by  the 
lessee.     Its     implied     obligation     in 

400 


the  first  instance  —  to  come  back 
to  the  touchstone  —  was  to  com- 
pensate its  own  servants  for  injuries 
due  to  any  cause  other  than  the  care- 
lessness of  their  fellows,  and  the  same 
rule  must  apply  in  its  relation  with 
the  servants  of  the  lessee." 

In  Macon,  etc.  R.  Co.  v.  Mayes,  49 
Ga.  355  (1873),  (15  Am.  Rep.  678), 
the  Court  held,  generally,  that  a 
lessor,  under  an  unauthorized  lease, 
is  liable  to  an  employee  of  the  lessee 
for  injuries  caused  by  the  negligent 
operation  of  the  road,  but  in  that 
case  the  negligence  was  actually 
that  of  the  lessor  itself.  Compare 
Galveston,  etc.  R.  Co.  v.  Daniels,  9 
Tex.  Civ.  App.  253  (1894),  (28  S.  W. 
Rep.  548). 

3  In  Chicago,  etc.  R.  Co.  v.  Hart, 
209  111.  414,  421  (1904),  (70  N.  E. 
Rep.  654,  66  L.  R.  A.  75),  the 
Supreme  Court  of  Illinois  said:  "In 
the  absence  of  statutory-  exemption 
from  liability  for  the  negligence  of 
the  lessee  company,  the  obligation  to 
respond  for  such  negligence  is  also  to 
be  maintained  upon  grounds  of 
public  policy.  The  fact  that  the  con- 
tract relation  is  between  the  employee 
and  the  lessee  company,  and  was 
voluntarily  entered  into  by  the  em- 
ployee with  the  lessee  company  alone 
cannot    be    allowed  to  control.   .   .  . 


CHAP.    XIX] 


RIGHTS    AND    LIABILITIES    OF    LESSOR 


§    220 


These  doctrines  are  believed  to  be  fundamentally  unsound. 
The  obligations  of  the  lessor  to  its  own  servants  grow  out  of 
the  contract  of  employment.  Their  duties  are  reciprocal. 
But  after  the  lease  of  a  railroad  there  is  no  privity  of  contract 
between  the  lessor  and  the  servants  of  the  lessee.  An  employee 
of  the  lessee  owes  the  lessor  no  duty,  and  the  lessor  owes  him 
no  corresponding  ol^ligation.  Upon  principle  and  the  weight 
of  authority,  the  lessor  corporation  is  not  liable  to  an  employee 
of  the  lessee  for  injuries  sustained  through  the  negligence  of 
the  lessee  in  the  operation  of  the  road,  even  though  the  lease 
l)e  without  legislative  sanction.  "  To  his  own  master  he 
standeth  or  falleth."  *     A  fortiori  is  this  true  where  the  legis- 


The  obligation  to  provide  cars  and 
engines  that  are  reasonably  safe 
and  servants  that  are  reasonably 
competent  and  skilful,  which  was 
cast  upon  the  lessor  company  by 
the  grant  to  it  of  its  corporate  powers, 
is  not  shifted  to  one  with  whom  it 
has  contracted  to  operate  its  road  as 
lessee,  but  remains  to  be  discharged 
by  the  lessor  company  to  all  the 
public,  and  to  relieve  it  of  that  duty 
as  to  its  employees  would  be  to 
invite  negligence  from  which  injury 
to  the  public  would  likely  occur. 
Tlie  lessee's  employees  are  a  part 
of  the  general  public  and  the  lessor 
company  is  liable  to  them  for  the 
actionable  negligence  of  the  lessee 
company  to  the  same  extent  as  if 
such  workmen  were  in  the  employ 
of  the  lessor  company." 

See  also  Harden  v.  North  Carolina 
R.  Ck).,  129  N.  C.  354  (1901),  (40  S.  E. 
Rep.  184,  55  L.  R.  A.  784,  85  Am.  St. 
Rep.  747). 

Reed  V.  Southern  R.  Co.,  75  S.  C. 
1G2  (190G),  (55  S.  E.  Rep.  218)  states 
similar  general  views,  but  the  decision 
is  ba.sed  primarily  upon  the  South 
Carolina  statute  referred  to  in  note 
to  §  216,  ante:  "Lessor  Corporation 
cannot  avoid  Statutorj/  Obligations 
unless  exempted." 

'  In  Ea.st  Line,  etc.  R.  Co.  v.  Cul- 
berson, 72  Tex.  379  (1888),  (10  S.  W. 


Rep.  706,  13  Am.  St.  Rep.  805,  3  L. 
R.  A.  567,  38  Am.  &  Eng.  R.  Caa. 
225),  where  a  conductor  upon  a  train 
of  a  lessee  corporation,  under  an 
unauthorized  lease,  was  injured  by 
the  negligence  of  the  lessee  in  supplj'- 
ing  a  defective  engine  and  employ- 
ing a  careless  engineer,  the  Court 
said:  "The  duties  which  are  owed 
bj'  a  railroad  company  to  its  servants 
are  not  duties  owed  to  him  in  common 
with  the  public,  but  grow  out  of  the 
contract  of  service.  He  assumes 
the  relation  of  servant  to  his  em- 
ployer voluntarily,  and  out  of  it 
arises  the  reciprocal  obligations  from 
one  to  the  other.  It  seems  to  us 
that  the  relation  of  the  servant  of 
the  company  operating  the  road  to 
the  owner  is  very  different  from  his 
relation  to  his  employer,  and  that 
the  relation  of  the  owner  of  the  road 
to  him  is  different  from  its  relation 
to  the  general  public.  His  contract 
is  not  with  the  company  owning  the 
road,  and,  it  may  be  asked,  does  the 
latter  owe  him  the  duty  of  a  master 
to  a  servant,  or  guarantee  that  the 
master  with  whom  he  has  voluntarily 
contracted  will  perform  its  obliga- 
tion to  him?  It  may  be  that  if  the 
injury  had  occurred  by  reason  of  a 
defect  in  the  roadbed  or  track  and 
not  by  reason  of  a  defect  in  the  engine, 
the  company  charged  with  the  duty 

401 


§  220 


INTERCORPORATE   RELATIONS 


[part  hi 


lature  has  authorized  the  lease.  In  such  a  case  there  is  not 
only  no  privity  between  the  parties  but  the  legislature  in  sanc- 
tioning the  lease  has  itself  determined  the  questions  of  pubUc 
policy  involved.* 

The  rules  already  considered,  however,  that  a  lessor  corpo- 
ration is  liable  for  any  failure  in  the  performance  of  its  own 
statutory  and  primary  duties,  unless  expressly  exempted,^ 
are  applicable  in  favor  of  employees  of  the  lessee,  as  well  as 
other  persons.  Thus,  a  lessor  may  be  Uable  to  such  employees 
for  injuries  caused  by  the  improper  construction  of  a  station- 
house  ^  and  by  defects  in  the  roadbed  where  the  owner  is 
charged  with  the  duty  of  keeping  it  up.^ 


of  keeping  up  the  road  would  be 
liable.  But  if  it  were  true  that  the 
injury  was  caused  entirely  by  another 
company  operating  the  owner's  road, 
and  was  inflicted  upon  one  of  its  own 
employees  by  reason  of  a  defect  in 
machinery  entirely  under  its  control, 
it  is  difficult  to  see  upon  what  principle 
of  policy  or  justice  the  lessor  should 
be  held  liable  merely  because  it 
owned  the  road." 
See  also: 

United  States:  Hukill  v.  Maysville, 
etc.  R.  Co.,  72  Fed.  745  (1896) ;  Hayes 
V.  Northern  Pacific  R.  Co.,  74  Fed. 
279  (1896);  Williard  v.  Spartansburg, 
etc.  R.  Co.,  124  Fed.  796  (1903). 

Indiana:  Baltimore,  etc.  R.  Co. 
V.  Paul,  143  Ind.  23  (1895),  (40  N.  E. 
Rep.  519,  28  L.  R.  A.  216). 

Mississippi:  Buckner  v.  Rich- 
mond, etc.  R.  Co.,  72  Miss.  873  (18 
So.  Rep.  449). 

Tennessee :  Hanna  v.  Railway  Co., 
88  Tenn.  310  (1889),  (12  S.  W.  Rep. 
718,  6  L.  R.  A.  727). 

Texas:  Baxter  v.  New  York,  etc. 
Co.,  22  S.  W.  Rep.  1002  (1893). 

Virginia:      Virginia     Midland     R. 


*  East  Line,  etc.  R.  Co.  v.  Culber- 
.son,  72  Tex.  375  (1888),  (10  S.  W. 
Rep.  706,  13  Am.  St.  Rep.  805, 
3  L.  R.  A.  567,  38  Am.  &  Eng.  R. 
Cas.    225);     Galveston,    etc.    R.    Co. 

402 


Co.  V.  Washington,  86  Va.  629  (1890), 
(10  S.  E.  Rep.  927). 

*  See  cases  cited  in  preceding  note 
and  also:  Lee  v.  Southern  Pacific 
R.  Co.,  116  Cal.  97  (1897),  (47  Pac. 
932,  38  L.  R.  A.  71,  58  Am.  St.  Rep. 
140) ;  Swicp  V.  Maysville,  etc.  R.  Co. 
116  Ky.  253  (1903),  (75  S.  W.  Rep. 
278) ;  Missouri  Pacific  R.  Co.  v.  Watts, 
63  Tex.  549  (1885). 

In  Banks  v.  Georgia  R.  etc.  Co., 
112  Ga.  655  (1900),  (37  S.  E.  Rep. 
992)  a  lessor  company  which  had 
leased  its  railroad  with  legislative 
authority  wa^s  held  not  liable  for  an 
injury  to  a  lessee's  employee  caused 
by  the  negligence  of  a  co-employee. 
In  this  case  the  Court  distinguished 
Macon,  etc.  R.  Co.  v.  Mayes,  49  Ga. 
355  (1873),  cited  in  a  preceding  note, 
upon  the  ground  that  there  was  in 
that  case  no  legislative  authority 
for  the  lease. 

2  See  ante,  §  216:  "Lessor  cannot 
avoid  Statutory  Obligations  unless  ex- 
empted " ;  ante,  §  217:  "Lessor  cannot 
avoid  Primary  Obligations  unless  ex- 
empted." 

3  Nugent  V.  Boston,  etc.  R.  Co.,  80 


V.  Daniels,  9  Tex.  Civ.  App.  253 
(1894),  (28  S.  W.  Rep.  548).  See, 
however,  March  v.  Concord  R.  Corp., 
29  N.  H.  9  (1854),  (61  Am.  Dec. 
631). 


CHAP.    XIX  1  RIGHTS    AND    LIABILITIES    OF    LESSOR  §    221 

§  221.    Liability  of  Lessor  for  Negligent  Operation  of  Railroad 

—  (D)  When  it  shares  in  Control.  —  A  cogent  reason  why 
a  railroad  corporation  whicli  has,  with  legislative  sanction, 
leased  and  turned  over  the  possession  of  its  road  to  another 
company  should  not  be  held  responsible  for  the  torts  of  the 
lessee  is  that  they  are  committed  by  persons  over  whom  it  has 
no  control,  upon  property  in  the  exclusive  possession  of  an- 
other. This  reason  fails  when  the  lessor,  having  leased  its 
railroad,  retains  any  part  in  its  control.  Thus,  for  example, 
where  a  lease  provided  that  the  managing  agent  of  the  leased 
road  should  be  satisfactory  to  the  lessor,  and  that  its  treasurer 
should  receive  and  disburse  the  earnings,*  it  was  held  that 
the  lessor,  as  well  as  the  lessee,  was  responsible  for  all  injuries 
to  the  public  through  the  negligent  operation  of  the  road. 
Where  the  control  retained  amounts  to  joint  management,  the 
lessor  is  undoubtedly  liable  for  injuries  to  employees  equally 
with  the  lessee. 

Upon  other  principles  —  contractual  liability   and  estoppel 

—  the  lessor  corporation  will  be  held  responsible  where  it 
allows  the  lessee  to  use  its  name  in  the  operation  of  the  leased 
road  and  in  the  issue  of  tickets  for  travel  thereon.^ 

Me.  62  (189S),  (12  Atl.  Rep.  797,  serves  to  itself  an  absolute  control 
6  Am.  St.  Rep.  151).  The  lessor  has,  over  all  business  done  by  the  lessee 
however,  been  held  not  liable  for  upon  the  leased  property,  by  requiring 
injuries  received  by  an  employee  of  that  the  managing  agent  to  be  ap- 
thc  lessee  when  the  proximate  cause  pointed  by  the  lessee  shall  be  a  person 
of  the  injury  was  the  running  of  the  satisfactory  to  itself;  that  its  own 
train  by  a  co-employee,  although  treasurer  .shall  collect  all  the  money 
a  defective  railroad  platform  con-  received  from  and  the  earnings  of 
f  ributed  to  the  injury.  Evans  v.  the  leased  property,  and  have  po.s- 
.Sabine,  etc.  R.  Co.  (Tex.  1892),  session  of  the  same;  from  which  he 
(18  S.  W.  Rep.  493).  See  also  Jones  shall  pay  all  the  expenditures  and 
V.  Georgia  Southern  R.  Co.,  06  Ga.  dues  incurred  in  respect  to  the 
558  (1881).  property  demised,  all  taxes,  a.sses.s- 
»  In  DrifscoU  v.  Norwicli,  etc.  R.  Co.,  ments,  and  other  liabilities,  and 
65  Conn.  2.30  (1894),  (32  Atl.  Rep.  shall,  at  the  end  of  each  six  months, 
354),  the  Court  heUl  a  lessor  corpo-  pay  to  himself  for  and  on  account 
ration  responsible  for  the  negligence  of  the  defendant,  the  semi-annual 
of  its  lessee  upon  .several  grounds,  rent  due  by  the  terms  of  the  contract, 
and,  while  some  of  them  seem  op-  and  the  balance,  if  any,  deliver  over 
posed  to  the  current  of  authority,  to  the  Fessee,  the  said  New  York 
the  following  groimd,  as  stated  bj^  and  New  England  Railroad  Corn- 
Chief  Justice  Andrews  (p.  254),  is  pany." 
unexceptionable:  "The  defendant  pre-  ^  Bower  v.  Burlington,  etc.  R.  Co., 

403 


§   222  INTERCORPORATE    RELATIONS  [PART    III 

In  Railroad  Co.  v.  Brown  *  the  Supreme  Court  of  the  United 
States  said:  "  The  holder  of  such  a  ticket  contracts  for  car- 
riage with  the  company,  not  with  the  lessees  and  receiver. 
Indeed,  there  is  nothing  to  show  that  Catherine  Brown  knew 
of  the  difficulties  into  which  the  original  company  had  fallen, 
nor  of  the  part  performed  by  the  lessees  and  receiver  in  operat- 
ing the  road.  She  was  not  required  to  look  beyond  the  ticket, 
which  conveyed  the  information  that  this  road  was  run,  as 
railroads  generally  are,  by  the  chartered  company.  Besides, 
the  company,  having  permitted  the  lessees  and  receiver  to 
conduct  the  business  of  the  road  in  this  particular  as  if  there 
were  no  change  of  possession,  is  not  in  a  position  to  raise  any 
question  as  to  its  liability  for  their  acts." 

§  222.  Liability  of  Lessor  upon  Contracts  of  Lessee.  —  Where 
a  railroad  company  leases  its  railroad  to  another  corporation, 
with  or  without  legislative  authority,  it  is  not  liable  upon  con- 
tracts made  by  the  lessee  with  third  persons,  not  relating  to 
the  performance  of  its  duties  to  the  public.^  There  is  no  privity 
between  the  lessor  and  the  parties  to  such  contracts,  nor  are 
there  reasons  of  public  policy  which  require  that  the  lessee 
should  be  considered  the  agent  of  the  lessor  in  their  execution. 

Contracts  of  the  lessee  relating  to  the  discharge  of  the  lessor's 
public  duties  stand  upon  a  different  basis.  In  case  of  an  un- 
authorized lease,  the  lessee,  in  the  operation  of  the  road,  is 
treated  as  the  agent  ^  of  the  lessor,  and  the  lessor  may  be  held 

42    Iowa,    546    (1876);     Singleton    v.  ^  In  Nelson  v.  Vermont,  etc.  R.  Co., 

Southwestern    R.    Co.,    70    Ga.    464  26    Vt.    721    (1854),    (62    Am.    Dec. 

(1883),  (48  Am.  Rep.  574);    Harmon  614),   Judge  Redfield  used  this  com- 

V.  Columbia,  etc.  R.  Co.,  28  S.  C.  401  prehensive    language:      "The    les.sors 

(1887),  (5  S.  E.  Rep.  835,  13  Am.  St.  must,   at  all  events,  be  held  respon- 

Rep.  686).  sible    for    just    what    they    expected 

i^Railroad  Co.  v.  Brown,   17  Wall.  the  lessees  to  do,    and   probabh",  for 

(U.  S.)  451  (1873).  all  which  they  do  do,  as  their  general 

^  Pittsburgh,    etc.    R.    Co.    v.    Har-  agents.     For    the    public     can    only 

baugh,   4   Brewst.    (Pa.)    115    (1870).  look    to    that    corporation    to    whom 

Compare  International,  etc.  R.  Co.  v.  they  have   delegated  this   portion  of 

Thornton,  3  Tex.  Civ.  App.  197  (1893),  the  public  service." 
(22  S.  W.  Rep.  67) .  It  is  incorrect  to  say,  however,  that 

A  lessor  is  not  liable  for  construe-  the  lessee  is  the  general  agent  of  the 

tion  work  done  by  contractors  having  lessor,  except  so  far  as  relates  to  the 

contracts  solely  with  the  lessee.     St.  performance  of  its  public  duties. 
Louis,  etc.  R.  Co.  v.  Ritz,  30  Kan.  30 
(1883),  (1  Pac.  Rep.  27). 

404 


CHAP.    XIX]  RIGHTS   AND    LIABILITIES    OF   LESSOR  §   223 

responsible,  in  actions  ex  contractu  upon  contracts  of  carriaga 
and  in  actions  ex  delicto  for  any  failure  to  perform  the  obliga- 
tions imposed  by  law  upon  common  carriers.^  The  foundation 
of  liabiUty  in  each  case  is  the  same.  The  lessee  is  agent  of  the 
lessor  because  the  public  have  the  right  to  look  to  the  corpora- 
tion to  which  they  have  delegated  the  performance  of  public 
duties.  The  lessor  is  responsible  for  the  negligence  of  the 
lessee  because  it  cannot,  by  its  own  action,  absolve  itself  from 
its  obligations  to  the  public.^ 

The  foundation  of  the  lessor's  liability  in  actions  ex  contractu 
being  the  same  as  that  in  actions  ex  delicto,  the  liability  of  a 
lessor,  under  an  authorized  lease,  upon  the  contracts  of  the 
lessee  is  determinable  according  to  the  principles  already  con- 
sidered which  fix  its  liability  for  negligence.  In  the  juris- 
dictions which  require  an  express  legislative  exemption  to 
relieve  a  lessor  in  the  case  of  negligence,  it  is  undoubtedly 
necessary  in  the  case  of  a  contract.  If  legislative  sanction  is 
sufficient  in  the  one  case,  it  is  sufficient  in  the  other.' 

§  223.  Liability  of  Lessor  for  Reconstruction  and  Repairs.  — 
At  common  law,  in  the  absence  of  an  express  covenant  in  the 
lease,  the  lessor  was  not  bound  to  repair  or  rebuild,  or  to  allow 
the  lessee  compensation  for  repairs  made  without  his  authority. 
The  lessee  took  the  leased  property  as  he  found  it,  and  there 
was  no  implied  covenant  or  warranty  on  the  part  of  the  lessor 
in  regard  to  the  condition  of  the  property,  its  continuance  in 
its  existing  condition  through  the  term,  or  its  availability  for 
the  purposes  for  which  it  was  leased. 

These   principles,   except   as   they   have   been    modified   Ijy 

'  Chester    National    Bank    v.    At-  ing  its  charter,   lias  a.<sumed  obliga- 

lanta,    etc.    R.    Co.,     25     S.     C.     21 G  tions   from   which   it   cannot   absolve 

(1880).  itself  by  lea-sing  its  ro.ail  to  another 

Lessor  is  liable  for  lessee's  failure  companj';    antl   as   sucli   company  is 

to  carry  goods.     Central,  etc.  R.  Co.  not   only   under  obligations  to   carry 

V.  Morris,  68  Tex.  49  (1887),  (.3  S.  W.  pas.sengers  safely  but  also  to  deliver 

Rep.  457).     Lessor  is  liable  for  goods  goods  intrusted  to  it  for  transporta- 

received   by   it   to   be   carried   by   its  tion,    the    same    principles    apply    in 

lessee,  a  foreign  corporation.     Langley  each    case.     Chester    National    Bank 

I'.  Boston,  etc.  R.  Co.,  10  Gray  (Mass).,  v.  .\tlantic,  etc.  R.  Co.,  25  S.  C.  21t> 

103  (1857).  (18SG). 

2  The  foundation  of  liability  in  ac-  *  See    ante,    §    219:     "Liability   of 

tions   ex  delicto   and    actions   ex   coti-  Lessor  for  Xecfligcnt  Operation  of  Rail- 

tractu  is  that  the  comj)any,  by  accept-  road  —  (6)   Under  Authorized  Lease.". 

405 


§   224  INTERCORPORATE    RELATIONS  [PART    III 

statute,  are  still  of  general  application  and  apply  where  the 
property  leased  is  a  railroad.  A  railroad  company,  leasing 
its  railroad,  remains  under  no  obligation,  unless  it  is  so  pro- 
vided in  the  lease,  to  rebuild  bridges  or  other  similar  property, 
whether  regarded  as  repairs,  reconstruction  or  substitution, 
or  to  reimburse  the  lessee  corporation  or  its  receiver  for  any 
such  improvements  made  upon  the  leased  road  without  its 
authority.' 

§  224.  Taxation  of  Leased  Railroads.  —  The  exercise  of  the 
taxing  power  is  evidenced  entirely  by  statutes  which,  in  the 
different  States,  vary  widely  in  their  provisions. 

Especially  is  this  true  in  the  matter  of  the  taxation  of  rail- 
road companies.  The  method  of  assessment,  whether  upon 
earnings,  capital  stock  or  property,  and  the  manner  of  collec- 
tion, are  governed  by  statutes  of  essentially  different  charac- 
ter in  different  States.  The  respective  ol)ligations  of  lessor  and 
lessee  corporations  to  pay  taxes,  the  question  whether  lease- 
hold interests  are  taxable  separately  from  the  fee,  and  the 
obligations  of  foreign  lessor  corporations  regarding  taxes,  may 
also  properly  be  determined  by  statutory  provisions.^ 

'  Felton,  Receiver,  v.  City  of  Cin-  should    be    furnished    by    the    lessor, 

cinnati,  95  Fed.  336  (1899).     In  this  The    purchasing   agent   of   the   lessee 

case  a  receiver  was  appointed,  at  the  ordered  equipment  and  directed  that 

suit    of    creditors    and    stockholders,  it   should   be   charged   to    the   lessor, 

for  the  property  of  a  railroad  com-  but  there  was  no  agreement  to  that 

pany  whose  only  interest  in  the  road  effect  and  no  demand  made  upon  the 

it  operated  was  a  leasehold  for  a  term  lessor    to    furnish    such    equipment, 

of  years.     The  lessor  was  not  a  party  It  was  held  that  the  lessee,  and  not 

to  the  suit.     It  was  held  that  the  prin-  the  lessor,  was  liable, 
ciples    upon    which    courts    authorize  Southern    R.    Co.    v.    Ensign    Mfg. 

expenditures  by  receivers  of  railroads  Co.,  117  Fed.  417  (1902). 
in  foreclosure  suits  for  necessary  im-  ^  Arkansas.     San.  &  H.  Dig.  1894, 

provements,  and  charge  the  cost  as  a  §  6333 :    If  a  railroad  company  of  an- 

first    lien    on    the    property,    do    not  other  State  leases  a  railroad  in  this 

authorize  a  court  to  charge  the  cost  State  such  part  of  the  railroad  as  is 

of  bridges  rebuilt  by  a  receiver  under  within  this  State  is  subject  to  taxa- 

order  of  the  court  upon  the  lessor's  tion. 

interest  in  the  property,  where  the  Kansas.  G.  S.  1897,  ch.  70,  §  90: 
lease  gives  the  lessee  no  right  to  make  Nothing  in  the  provisions  authorizing 
.such  improvements  at  the  lessor's  leases  of  railroads  to  foreign  corpora- 
expense,  tions  shall  be  construed  as  curtailing 

A  lease  of  a  railroad  provided  that  any  rights  of  the  State,  or  counties, 

when    the    parties    agreed    that    new  etc.  of  this  State,  through  which  road 

equipment     was     needed     the     same  is  located,    to  levy  and  collect  taxes 

406 


CHAP.    XIX] 


RIGHTS    AND    LIABILITIES    OF    LKSSOR 


§  224 


As  a  general  rule  in  America,  real  estate  is  taxable  as  a 
whole,  without  regard  to  separate  estates  of  different  persons 
therein,'  and  is  assessed  in  the  name  of  the  lessor  —  as  owner 
—  rather  than  in  the  name  of  the  lessee.^     These  principles 


on  the  same,  in  conformity  with  the 
provisions  of  the  laws  of  this  State. 

Missouri.  R.  S.  1899,  §  1060: 
Similar  to  Arkansas  provision,  supra. 

Montana.  Code  1895,  §  923: 
Similar   to    Kansas   provision,    supra. 

Nebraska.  Comp.  Stat.  1901,  § 
1768:  Lessees  of  railroads  "shall 
cause  the  same  to  be  listed  for  taxa- 
tion." lb.  §  4026 :  Similar  to  Kansas 
pro\'ision,  supra. 

North  Carolina.  Pub.  Laws  1895, 
ch.  116,  §  40,  p.  127:  Where  a  rail- 
road is  operated  in  this  State  by  virtue 
of  a  lease,  taxes  sliall  be  paid  by  the 
les.see  and  may  be  charged  against, 
and  deducted  from,  any  payments 
due  or  to  become  due  the  leasor  on 
account  of  the  lessee  or  otherwise. 

lb.  §  48,  p.  151 :  If  the  property  of 
any  railroad  company  be  leased  or 
operated  by  any  other  corporation, 
foreign  or  domestic,  the  property 
of  the  lessor  shall  be  subject  to  taxa- 
tion. 

SoiUh  Dakota.  Anno.  St.  1901,  § 
3906:  Nothing  in  the  provisions  of 
the  statute  authorizing  lea-ses  shall 
curtail  the  right  of  the  State  and 
counties  through  which  the  road  is 
located,  to  levy  and  collect  ta.xes; 
and  all  roads  leased  or  purcha.sed 
sliall  be  subject  to  taxation. 

Wyoming.  R.  S.  1899,  §  3206: 
Similar  to  South  Dakota  provision, 
supra. 

'  Cooley  on  Taxation,  p.  288. 

2  In  Rutland  R.  Co.  v.  Central 
Vermont  R.  Co.,  63  Vt.  25  (1890),  (21 
Atl.  Rep.  262,  10  L.  R.  A.  562),  the 
Supreme  Court  of  Vermont  said 
regarding  a  tax  on  earnings:  "L'uder 
the  original  as  well  as  tlic  modified 
lease  no  provision  for  the  payment 
of  ta.xes  was  made.     The  lease  being 


silent,  the  duty  to  pay,  under  the  com- 
mon law,  rested  ufjon  the  lessor." 

In  this  ca.se  [Rutland  R.  Co.  v. 
Central  Vermont  R.  Co.],  it  was  also 
held  that  a  statute  levying  a  tax  on 
the  gross  receipts  of  railroad  com- 
panies and  providing  that  in  the 
case  of  a  leased  road  the  tax  shovild 
be  paid  by  the  lessee  corporation 
and  deducted  from  the  rent  was  not 
unconstitutional  as  impairing  the 
obligation  of  the  contract  of  lease. 
The  Court  said:  "It  is  further  con- 
tended that  our  law  violates  another 
clause  of  the  fecleral  constitution  in 
that  it  impairs  the  obligation  of  the 
contract  subsisting  between  the  parties 
respecting  tlie  payment  of  rent,  by 
requiring  the  lessee  to  pay  the 
tax  and  deduct  the  same  from  the 
stipulated  rent.  .  .  .  We  think  the 
method  prescribed  for  the  collection 
of  the  tax  is  no  imjjairment  of  the 
contract  to  pay  the  rent  due  under 
the  Iciise.  .  .  .  When,  therefore,  the 
parties  made  the  lease  .  .  .  both 
parties  made  their  contract  with 
notice  of,  and  in  subordination  to  the 
right  of  the  State  to  exact  from  the 
fruits  of  their  contract  by  way  of 
taxation  such  sum  as  it  might 
properly  collect  for  public  purposes. 
Having  then  the  right  to  le\-v  the 
tax  tlie  metliod  to  be  adojjted  for  its 
collection  is  purely  a  question  of 
legislative  discretion  with  which  the 
court  has  no  power  to  interfere  so 
long  as  no  legal  or  constitutional 
rights  are  disturbed.  .  .  .  We  hold, 
therefore,  that  the  section  .  .  .  is  not 
unconstitutional  in  respect  to  the 
method  prescribed  for  the  collection 
of  taxes  assessed  upon  tlie  earnings  of 
railroads  operated  by  lessees." 

See  also  Ir%'in  v.  New  Orleans,  etc. 

407 


§224 


INTERCORPORATE    RELATIONS 


[part    III 


are  applicable  to  railroads,  in  the  absence  of  controlling  statute, 
and  must  be  followed  irrespective  of  covenants  in  the  lease, 
which  merely  determine  the  obligations  of  the  parties  between 
themselves/ 

An  exception  to  the  general  rule  that,  in  the  absence  of  a 
governing  statute,  taxes  are  assessed  in  the  name  of  the  lessor, 
has  sometimes  been  made  in  the  case  of  leases  in  perpetuity, 
and  might  properly  be  made  in  the  case  of  other  long  term 
railroad  leases.  These  exceptions,  however,  in  no  way  modify 
the  principle,  for  a  lessee  under  such  a  lease  is  treated  for 
purposes  of  taxation  as  the  owner,  and  the  lease  as  equivalent 
to  a  conveyance  in  fee  in  consideration  of  an  annuity.^ 


R.  Co.,  94  111.  105  (1879),  (34  Am. 
Rep.  208);  Wood's  Landlord  and 
Tenant,  p.  685;  Taylor's  Landlord 
and  Tenant,  pp.  341,  395. 

In  Maryland  the  general  principle 
that  the  lessor  is  bound  to  pay  all 
State  and  municipal  taxes  is  modified 
by  statutes  requiring  the  lessee  to  pay 
them  but  giving  him,  in  the  absence 
of  other  agreement,  the  right  to  re- 
cover the  amount  paid  from  the  lessor 
or  to  deduct  it  from  the  rent.  Phila- 
delphia, etc.  R.  Co.  V.  Appeal  Tax 
Court,  50  Md.  397  (1879). 

Upon  the  principle  that  only  the 
owners  of  railroads  are  liable  for 
assessments,  it  has  been  held  that 
the  lessee  of  a  railroad  cannot  be  held 
liable  for  a  ditch  assessment.  Balti- 
more, etc.  R.  Co.  V.  Pausch,  7  Ohio 
N.  P.  624  (1896). 

Under  a  New  Mexico  statute  pro- 
viding that  leased  property  shall  be 
taxed  to  the  lessor  unless  listed  by  the 
lessee,  railroad  property,  held  under 
lease,  cannot  be  assessed  against  the 
lessee  unless  so  listed.  Valencia 
County  V.  Atchison,  etc.  R.  Co.,  3 
N.  M.  677  (1886),  (10  Pac.  Rep.  294). 

^  Ante,  §  205:  "Covenant  to  pay 
Taxes." 

'  Where  the  charter  of  a  railroad 


company  authorized  it  to  acquire,  by 
lea.se  or  purchase,  any  neccssarj'  ex- 
tension of  its  road,  and  provided  that 
all  property  so  acquired  should  be- 
come part  of  its  property,  and  in 
pursuance  thereof  it  leased  other  rail- 
roads forever,  and  provided  in  the 
leases  that  the  roads  so  leased  should 
become  and  be  operated  as  a  part  of 
its  main  line,  it  was  held  that  the 
leased  railroads  would,  if  not  for  all 
purposes,  at  least  for  the  purposes 
of  taxation,  be  regarded  as  the 
property  of  the  lessee.  Huck  v. 
Chicago,  etc.  R.  Co.,  86  111.  352  (1877). 
See  also  Appeal  Tax  Court  v.  Western 
Maryland  R.  Co.,  50  Md.  274  (1879); 
Commonwealth  v.  Nashville,  etc.  R. 
Co.,  93  Ky.  430  (1892),  (20  S.  W.  Rep. 
383).  Compare  State  v.  Housatonic 
R.  Co.,  48  Conn.  44  (1880). 

In  People  v.  Feitner,  171  N.  Y. 
641  (1902),  (63  N.  E.  Rep.  786), 
however,  it  was  held  where  one  rail- 
road company  leased  the  railroad  of 
another  company  for  the  entire  life 
of  the  latter's  charter  and  the  re- 
newals thereof,  that  the  lessee  ac- 
quired only  a  lessee's  interest,  with  a 
right  to  use  the  leased  property  upon 
pajTnent  of  the  rental,  and  was  not 
taxable  as  owner. 


408 


CHAP.    XX]  RIGHTS   AN'D    LIABILITIES    OF    LESSEE  §   225 


CHAPTER    XX 


RIGHTS    AND    LIABILITIES    OF    LESSEE    CORPORATION 

I.    Rights  and  Remedies  of  Lessee  Corporation 

§  225.  Rights  of  Lessee  in  General.     Incidental  Franchises. 

§  226.  Rights  of  Lessee  in  Matter  of  Tolls. 

§  227.  Mortgages  of  Leases. 

§  228.  Remedies  of  Lessee  Corporation. 

II.    Liabilities  of  Lessee  Corporation 

§  229.     Obligation  of  Lessee  to  perform  Lessor's  Public  Duties. 

§  230.     Statutory  Liability  of  Lessee. 

§  231.     Liability  of  Lessee  for  Torts  in  Operation  of  Road  under  Authorized  or 

Unauthorized  Lease. 
§  232.     Joint  Liability  of  Lessor  and  Lessee. 
§  233.     Liability  of  Lessee  for  Debts  of  Lessor. 

I.    Rights  and  Remedies  of  Lessee  Corporation 

§  225.  Rights  of  Lessee  in  General.  Incidental  Franchises.  — 
Under  a  lease  of  a  railroad  and  franchises,  by  legislative  au- 
thority, the  lessee  as  a  general  rule  succeeds  to  all  the  rights 
and  privileges  of  the  lessor  and  is  entitled  to  the  full  enjoy- 
ment of  the  property  leased.'  But  the  lessee  acquires  by  the 
lease  no  rights  superior  to  those  enjoyed  by  the  lessor.  The 
power  to  lease  does  not  imply  power  to  transfer  greater  pri\  i- 
leges  than  the  lessor  possesses.^     A  lessee  takes  the  benefit  of 

'  P'isher  v.  New  York,  etc.  R.  Co.,  Chicago,  etc.  R.  Co.  v.  Weber,  219 

46N.  ¥.644(1871);  Chicago  V.  Evans,  111.  373  (1905),   (76   N.  E.  Rep.  489, 

24  111.  52  (1860).  4  L.  R.  A.  (n.  8.)  272). 

A    statute    authorizing    a    foreign  The    contrary    is,    however,    held 

railroad  company  to  lease  a  domestic  under   an   unauthorized   lease   in   Van 

railroad   invests  the  foreign  corpora-  Dresser  v.  Oregon   R.,  etc.  R.  Co.,  48 

tion   with   all    the   powers   and   fraii-  I'ed.  202  (1891). 

chises  of  the  lessor  corporation  with  In  Pennsijlvrinia  (Bright.  Pur.  Dig. 

respect  to  the  leased  road.  1894,   §   123,   p.    1804)   the  lessee  cor- 

Canton    v.    Canton,    etc.    Co.,    84  poration    may    indorse,    guarantee   or 

Miss.   268  (1904),    (36   So.    Rep.   266,  otherwise  become  liable  for,  or  assunu- 

65  L.   R.  A.  561,    105  Am.   St.   Rep.  the   principal   and    interest   of,   bonds 

528).  of  the  lessor  corporation. 

The  servants  of   a  lessee  corpora-  ^  Nibbs  ?•.  Chicago,  etc.  R.  Co.,  39 

tion    are   not    servants   of    the    lessor  Iowa,  344  (1874) :    "It  (the  lessee)  can 

for  the  service  of  process.  exercise  no  right  which  its  lessor  could 

409 


§  226 


INTERCORPORATE    RELATIONS 


[part   III 


contracts  for  the  use  of  railroad  property,  entered  into  by  the 
lessor  with  other  corporations/  and  may  purchase  the  lease- 
hold interests  of  the  lessor  in  connecting  lines. ^  And  where 
a  portion  of  the  leased  property  is  taken  by  process  of  con- 
demnation for  the  use  of  another  corporation,  the  lessee  is 
entitled  to  the  use  of  the  money  awarded  as  compensation 
during  the  remainder  of  the  term  of  the  lease.^ 

A  lessee  taking  under  a  lease  a  railroad,  without  other  words 
of  description  in  the  lease  or  governing  statute,  takes,  as  inci- 
dental thereto,  such  rights  and  franchises  as  are  necessary 
for  the  continued  operation  of  the  road.*  Only  such  rights 
and  franchises,  however,  as  are  essential  to  such  purpose  are 
so  acquired  and,  as  already  shown,  the  lessee,  under  statutory 
authority  to  take  a  lease  of  a  railroad,  does  not  succeed  to  the 
prerogative  franchises  of  the  lessor.-^ 

§  226.  Rights  of  Lessee  in  Matter  of  Tolls.  —  Upon  the  prin- 
ciple that  a  lessee  corporation  in  operating  a  leased  road  exer- 
cises only  derivative  franchises,**  it  has  been  held  that  a  lessee, 


not.  If  that  corporation  had  no 
right  to  use  the  land  and  may  be  re- 
strained from  operating  its  road,  the 
lessee  acquired  no  higher  or  superior 
right  under  its  lease,  which  could  not 
transfer  privileges  the  lessor  did  not 
possess."  See  also  McMillan  v.  Michi- 
gan, etc.  R.  Co.,  16  Mich.  79  (1867), 
(93  Am.  Dec.  208). 

'  London,  etc.  R.  Co.  v.  South 
Eastern  R.  Co.,  8  Ex.  (W.  H.  &  G.) 
584  (1853). 

2  Philadelphia,  etc.  R.  Co.  v.  Cata- 
wissa  R.  Co.,  53  Pa.  St.  20  (1866). 

^  Where  a  railroad  lease  included 
all  lands  reasonably  useful  and  con- 
venient in  operating  a  railroad,  and 
another  railroad  company  condemned 
a  piece  of  land  which  might  be  useful 
although  not  then  in  use,  it  was  held 
that  the  land  was  included  in  the  lease 
and  that  the  lessee  was  entitled  to  the 
use  of  the  money  awarded  as  damages 
for  such  taking,  during  the  continu- 
ance of  the  lease.  Matter  of  New 
York,  etc.  R.  Co.,  49  N.  Y.  414 
(1872). 

410 


■•  See  ante,  §  157:  "Essential  Fran- 
chises pass  upon  Sale  of  Railroad." 

Pennsylvania  Co.  v.  Lake  Erie,  etc. 
R.  Co.,  146  Fed.  447  (1905):  "As 
the  complainant  is  lessee  of  the  road 
its  interest  in  the  property  is  such  a.s 
to  give  it  the  right  to  prevent  by 
judicial  process  any  illegal  interfer- 
ence with  its  enjoyment  of  the  leased 
property,  and  this  right  it  may  enforce 
by  injunction." 

A  lessor  corporation  operating  a 
railroad  under  a  perjietual  lease  may 
file  a  petition  to  railroad  commis- 
sioners with  respect  to  the  alteration 
of  the  road  and  the  elimination  of 
grade  crossings. 

Town  of  Westbrook's  Appeal  from 
Commissioners,  57  Conn.  95  (1889), 
(17  Atl.  Rep.  368). 

*  See  ante,  §  210:  "Lessor  Corpora- 
tion retains  Prerogative  Powers.  Right 
of  Eminent  Domain." 

^  Where  one  railroad  company 
leases  the  rights  and  property  of  an- 
other railroad  company,  all  corporate 
rights  exercised  bv  the  lessor  in  the 


CHAP.    XX]  RIGHTS    AND    LIABILITIES    OF    LESSEE  §    227 

in  taking  over  the  railroad  of  the  lessor,  is  entitled  to  charge 
the  rates  of  fare  fixed  by  the  charter  of  the  lessor  without 
regard  to  the  rates  prescribed  in  its  own.' 

But  while  the  rates  fixed  in  the  owner's  charter  ma}^  limit 
—  as  a  condition  —  the  tolls  collectible  upon  the  leased  road, 
the  privilege  of  charging  a  greater  rate  of  fare  than  authorized 
in  the  lessee's  charter  or  in  general  laws  applicable  to  it,  can 
only  be  transferred  by  lease  where  the  statute  permits  the 
transfer  and  the  lease  distinctly  includes  the  privilege.^ 

§  227.  Mortgages  of  Leases.  —  A  railroad  corporation,  having 
power  to  mortgage  its  property  to  secure  its  bonds,  may  mort- 
gage its  leasehold  interest  in  a  railroad,  as  well  as  other  prop- 
erty, and  such  an  interest  will  pass  whenever  comprehended, 
expressly  or  by  implication,  in  the  terms  of  the  mortgage.^ 
So,  also,  a  leasehold  interest  in  a  railroad  acquired  after 
the  execution  of  a  mortgage  may  be  included  within  its  "  after 
acquired  property  "  clause  whenever  it  clearly  appears  from 
the  language  that  leasehold  estates  were  intended  to  be  era- 
braced.  Thus,  a  railroad  mortgage  covering  "  all  the  corpo- 
rate rights,  privileges,  franchises,  and  immunities  and  all 
things  in  action,  contracts,  claims,  and  demands  of  the  said 
party  of  the  first  part,  whether  now  owned  or  hereafter  ac- 
quired in  connection  or  relating  to  said  railroad,"  has  been 
held  to  include  a  subsequently  acquired  lease  of  a  connecting 
road.^ 

operation  of  the  leased  road  are  refer-  and  lessee's  roads  combined  gives  the 

able   to   the   chartered    rights   of   the  lessor  no  claim  on  earnings  from  new 

lessor.     McCandless  v.  Richmond,  etc.  road.s  subsequently  built  or  acquired 

R.  Ck).,  38  S.  C.  103  (1892),  (16  S.  E.  by  the  lessee.     Murch  v.  Eastern    R. 

Rep.  429,  18  L.  R.  A.  440).  Co.,  43  N.  H.  515  (1862). 

'Where     one     railroad     company  ^  See   ante,    §    161:     "Right   to   fix 

leased  the  road  of  another  with  all  its  Rates  of  Fare.     Chartered  Rates." 
rights,  powers,  privileges,  etc.,  it  was  The  lessee  can  collect  only  the  tolls 

held    that    the    lessee,    in    using    the  stated  in  the  lessor's  charter  though 

lessor's  road,  was  not  subject  to  the  less  than  its  own.     McGregor  v.  Erie 

charges  fixed  by  its  own  charter  as  R.  Co.,  .35  N.  J.  L.  89  (1871). 
to  toll,  but  to  the  regulations  in  the  ^  Bcekman  v.   Hudson   River,   etc. 

charter  of  the  lessor.     Pennsylvania  R.  Co.,  35  Fed.  3  (1888). 
R.  Co.  V.  Sly,  65  Pa.  St.  205  (1870).  The     Iowa    statute     (Code     1897, 

See  also  Fisher  i>.  New  York,  etc.  R.  §  2067)  authorizes  the  mortgaging  of 

Co.,  46  N.  Y.  652  (1871).  Iea,ses  to  .secure  construction  bonds. 

A  lease  on  the  basis  of  a  division  *  Columbia,   etc.   Co.   v.    Kentucky 

of    the    net    profits    from  the   les.sor's  Union  R.  Co.,  60  Fed.  794  (1894). 

411 


§   229  INTERCORPORATE    RELATIONS  [PART   III 

Where  a  mortgage  made  by  a  railroad  company  provided 
that  it  should  include  all  property  subsequently  acquired  by 
the  mortgagor,  it  was  held  that  it  included  a  railroad  with  its 
appurtenances  subsequently  leased,  and  that  the  title  thereto 
was  valid  as  against  the  assignee  of  the  mortgagor.^ 

On  the  other  hand,  however,  a  lease  executed  by  a  mort- 
gagor after  the  execution  of  a  mortgage  creates  no  privity  of 
estate  or  contract  between  the  mortgagee  and  the  lessee,  and 
a  covenant  of  the  lessee  to  make  advancements  cannot  be 
treated  as  "  after  acquired  property,"  within  the  meaning  of 
that  phrase  as  used  in  mortgages.^ 

§  228.  Remedies  of  Lessee  Corporation.  —  The  fact  that  a 
railroad  company  takes  a  lease  of  a  railroad  manifestly  affects, 
in  no  way,  its  remedies  against  third  persons. 

The  demands  of  a  lessee  against  a  lessor  corporation  depend 
upon  the  terms  of  the  lease.  In  enforcing  these  demands  and 
establishing  its  rights  as  lessee,  a  railroad  company  must, 
ordinarily,  depend  upon  an  action  at  law,  but  when  this  remedy 
is  inadequate  resort  may  be  had  to  equity.  Thus,  where  an 
attack  was  threatened  upon  the  validity  of  a  lease,  under 
which  a  railroad  cortipany  held  a  road  forming  a  necessary  part 
of  its  system,  it  was  held  that  the  company  might  maintain 
a  bill  in  equity  against  the  lessor  corporation  and  its  officers 
to  estabUsh  the  validity  of  the  lease.^ 

II.    Liabilities  of  Lessee  Corporation 

§  229.    Obligation  of  Lessee  to  perform  Lessor's  Public  Duties. 

—  A  lessee  railroad  company  taking  by  lease  the  railroad, 
franchises  and  privileges  of  a  lessor  corporation,  assumes  its 
correlative  duties  and  obligations.     The  burdens  are  insepa- 

1  Barnard  v.  Norwich,  etc.  R.  Co.,  defendant,  in  an  action  by  the  at- 
14  N.  B.  R.  469  (1876).  torney-general  to  forfeit  the  charter 

2  Moran  v.  Pittsburgh,  etc.  R.  Co.,  of  the  lessor  corporation,  especially 
32  Fed.  878  (1887).  where,  the  interests  of  the  lessor  being 

3  Southern  R.  Co.  v.  North  Carolina  protected  by  stipulations,  there  is 
R.  Co.,  81  Fed.  595  (1897).  State  v.  reason  to  believe  it  is  not  unfriendly 
Mobile,   etc.    R.    Co.,    86    Mis.s.     172  to  the  proceeding. 

(1905),  (38  So.  Rep.  732).  People  v.  Albany,  etc.  R.  Co.,  77 

A  lessee  may  intervene,  as  a  party       N.  Y.  232  (1879). 

412 


CHAP.    XX] 


RIGHTS    AND    LIABILITIES    OF    LESSEE 


229 


rable  from  the  privileges.*  The  lessee  assumes  the  obligations 
connected  with  the  operation  of  the  railroad  contained  in  the 
lessor's  charter  and  must  conform  to  its  requirements.^  It 
must  fulfil  the  conditions  upon  which  the  franchise  was  origi- 
nally granted.^ 

A  lessee  corporation  must,  primarily,  keep  the  road  in  opera- 
tion.* Where  the  lessor,  in  consideration  of  a  grant  of  State 
or  municipal  aid,  has  entered  into  an  agreement  to  maintain 
the  road  in  a  certain  location,  the  lessee  must  fulfil  the  obliga- 
tion.^    So,  where  the  charter  of  the  lessor  provides  for  the 

>  Mayor,  etc.  v.  Twenty-Third  St. 
R.  Co.,  113  N.  Y.  311  (1889),  (21 
N.  E.  Rep.  60) ;  Chicago  v.  Evans,  24 
111.  52  (1860). 

^  People  1'.  St.  Loiiis,  etc.  R.  Co., 
176  111.  512  (1898),  (52  N.  E.  Rep. 
292,  35  L.  R.  A.  6.5G). 

^  Mullen  V.  Philadelphia  Traction 
Co.,  4  Pa.  Co.  Ct.  Rep.  164  (18S7). 

*  The  law  is  clearly  established  that 
a  railroad  comiiany  may  be  com- 
pelled, by  mandamus,  to  operate  its 
railroad,  and  the  underlying  principles 
would  seem  to  require  the  application 
of  the  same  remedy  %vhere  a  le.s.see, 
after  acquiring,  under  an  authorized 
lease,  a  railroad  and  its  franchises, 
fails  to  operate  it.  It  has,  however, 
been  held  that  the  lessee  of  a  railroad 
under  an  unauthorized  lease  cannot  be 
compelled  by  mandamus  to  operate 
it.  See  People  v.  Colorado,  etc.  R. 
Co.,  42  Fed.  638  (1800). 

8  Chicago,  etc.  R.  Co.  v.  Crane,  113 
U.  S.  424  (1885),  (5  Sup.  Ct.  Rep. 
578). 

See  also  State  v.  Central  Iowa  R. 
Co.,  71  Iowa,  410  (1887),  (32  N.  W. 
Rep.  409,  60  Am.  Rep.  799). 

.\  lessee  corporation  which  has 
agreed  to  perform  all  the  i)ublic 
obligations  of  the  lessor,  and  which 
is  of  financial  ability  to  do  .so,  will  be 
compelled  to  discharge  such  obliga- 
tions notwithstanding  the  lessor  may 
be  financially  unable  to  do  so  and  it 
may  entail  loss  upon  the  lessee.  A 
lessor   and   lessee    corporation    which 


have  sought  and  obtained  a  charter 
imposing  obligations  cannot  repudiate 
the  latter  merely  because  they  are 
onerous  or  unprofitable.  Thus  where 
the  charter  of  a  railroad  company 
required  it  to  build  its  road  to  a  cer- 
tain town  and,  having  lea.sed  its  road, 
an  amendment  to  the  charter  was 
obtained  relieving  it  from  this  duty 
on  condition  that  the  right  should 
be  obtained  from  a  third  corporation 
owning  a  connecting  road  to  run 
trains  to  said  town  over  such  road,  it 
was  held  that  the  fact  that  the  obtain- 
ing of  such  right  would  entail  loss 
\ipon  the  lessee  was  no  excuse  for  its 
failure  to  discharge  the  lessor's  ehar- 
tor  obligations. 

Winchester,  etc.  R.  Co.  v.  Com- 
monwealth, 106  Va.  264  (1906),  (55 
S.  E.  Rep.  692). 

Where  it  is  the  duty  of  a  railroad 
company  to  maintain  a  depot  at  a 
county  seat  and  it  leases  its  railroad 
the  lessee  is  bound  to  fulfil  the  same 
obligation  and  cannot  avoid  it  by 
changing  the  line  of  the  road. 

State  r.  Mobile,  etc.  R.  Co.,  86 
Miss.  172  (1905),  (38  So.  Rep.  732). 

Where  the  charter  of  a  railroad 
company  provided  that  in  case  it 
should  be  necessary  to  change  the 
location  of  any  public  road  the  com- 
pany should,  at  its  own  expense, 
reconstruct  the  road  in  the  most 
favorable  location  possible  and  in  as 
perfect  a  manner  as  the  original  road, 
and    it    occupied    a   highway   with    a 

413 


230 


INTERCORPORATE    RELATIONS 


[part   III 


payment  of  a  certain  percentage  of  the  receipts  to  the  State 
or  to  a  city,  the  lessee  is  bound  to  make  the  payment.^  Where 
a  lessor  corporation  under  its  charter  is  not  permitted  to 
abridge  its  liability  as  a  common  carrier,  the  Lessee  operates 
the  road  subject  to  the  same  condition.^ 

A  lessee  corporation  is  not  only  bound  to  fulfil  the  public 
obligations  of  the  lessor  existing  at  the  time  of  the  lease,  but 
is  subject  to  laws  subsequently  enacted  imposing  duties  with 
respect  to  the  railroad  leased.^ 

§  230.  Statutory  Liability  of  Lessee.  — Statutes  have  been 
enacted  expressly  providing  that  all  duties  imposed  by  law 
upon  railroad  companies  shall  be  discharged  by  lessee  corpo- 
rations, and  that  all  liabilities  may  be  enforced  against  them.* 


wall  and  embankment,  but  took  no 
steps  towards  reconstruction  and 
leased  its  road  to  another  corpora- 
tion, it  was  held  that  the  lessee  was 
bound  to  reconstruct  the  road.  The 
Court  said  that  the  rights  and  fran- 
chises of  the  lessor  corporation  were 
not  changed  in  character  in  passing 
to  the  lessee  and  that  the  latter  in 
the  exercise  thereof  assumed  all  the 
obligations  of  a  public  character  im- 
posed by  the  lessor's  charter. 

Commonwealth  v.  Pennsylv.ania  R. 
Co.,  117  Pa.  St.  637  (1S88),  (12  Atl. 
Rep.  38). 

A  statute  requiring  every  railroad 
company  operating  a  passenger  rail- 
road in  the  State  to  provide  and 
maintain  closets  at  each  of  its  stations 
makes  no  distinction  between  lessor 
and  lessee,  and  a  lessee  of  a  station 
from  another  company  cannot  avoid 
responsibility  for  failure  to  provide 
such  closets  upon  the  ground  that  the 
lessor  company  had  agreed  to  perform 
the  duty.  State  v.  So.  Kansas  R. 
Co.,  (Tex.  Civ.  App.  1907),  99  S.  W. 
167. 

'  Where  the  charter  of  a  street  rail- 
way compan}'  obliged  it  to  pay  one 
per  cent  of  the  fares  received  to  the 
city  in  which  it  was  located,  and  the 
company  leased  its  railroad  and  fran- 
chises to  another  comp.any,   without 

414 


any  provision  in  the  lease  imposing 
upon  the  lessee  the  obligation  to  pay 
the  percentage,  it  was  held  that  the 
lessee,  upon  taking  the  place  of  its 
lessor  as  to  its  cliarter  rights  and 
powers,  took  its  place  also  as  to  its 
charter  obligations  and  duties,  and 
was  not  entitled  to  exercise  the 
former  without  discharging  the  latter. 
Mayor,  etc.  v.  Twenty-Third  St.  R. 
Co.,  113  N.  Y.  311  (1889),  (21  N.  E. 
Rep.  60). 

2  McMillan  v.  Michigan,  etc.  R.  Co., 
16  Mich.  102  (1867):  "The  power  to 
lease  does  not  imply  the  power  to 
transfer  greater  rights  than  the  lessor 
himself  posses.scs;  and  where  the 
obligations  assumed  by  the  lessor, 
pertaining  to  the  management  of  his 
business,  and  the  liabilities  which 
would  spring  therefrom,  were  the 
consideration  upon  which  the  fran- 
chise was  granted,  it  would  be  a  vio- 
lent inference  that  the  legislature 
designed  to  waive  them  when  they  are 
no  less  important  to  the  public  pro- 
tection after  the  lea.se  than  before." 

^  Dryden  v.  Grand  Trunk  R.  Co., 
60  Me.  512  (1S72). 

«  Iowa :  Code  1897,  §  2039.  An- 
other provision  of  the  Iowa  Code 
(§  2066)  is  as  follows:  "Any  .  .  . 
corporation  operating  the  railway  of 
another  shall   be  liable  in  the  same 


CHAP.    XX] 


RIGHTS   AND    LIABILITIES    OF    LESSEE 


§  230 


Other  statutes  have  been  construed  to  apply  to  them  as  well 
as  to  lessor  corporations. 

As  a  general  rule,  statutes  imposing  duties  upon  railroad 
companies  apply  to  the  corporation  actually  operating  the 
road.  They  are  often  applicable  to  the  lessor  corporation  also 
—  but  the  liability  of  the  lessee  is  not  thereby  affected. 

Statutes  recjuiring  railroad  companies  to  fence  their  roads 
and  to  maintain  cattle  guards  at  crossings  apply  to  lessee  cor- 
porations, and  they  are  held  responsible  for  any  failure  to  ob- 
serve their  provisions.^ 


manner  and  extent  as  though  such 
railway  belonged  to  it."  For  con- 
struction of  this  statute  see  Stewart 
V.  Chicago,  etc.  R.  Co.,  27  Iowa,  282 
(1869);  Stephens  v.  Davenport,  etc. 
R.  Co.,  36  Iowa,  327  (1873);  Bovver 
V.  Burlington,  etc.  R.  Co.,  42  Iowa, 
546  (1876). 

In  Indiana,  by  statute,  the  lessee  is 
solely  liable  when  it  operates  the  rail- 
road in  its  own  name.  Pittsburgh, 
etc.  R.  Co.  V.  Bolner,  57  Ind.  572 
(1877) ;  Pittsburgh,  etc.  R.  Co.  v. 
Hannon,  60  Ind.  417  (1878),  Cin- 
cinnati, etc.  R.  Co.  V.  Bunnell,  61 
Ind.  183  (1878). 

For  additional  statutory  pro\'isions 
prescribing  the  liability  of  lessees  of 
railroad  see : 

Arizona:  R.  S.  1901,  par.  864. 

Arkansas:  S.  &  H.  Dig.  1894, 
§§  6188,  6334. 

Georgia:   Code  1895,  §  1863. 

Massachusetts:  Pub.  St.  ch.  112, 
§5. 

Nebraska:  Comp.  Stat.  1901,  § 
4020. 

Ohio:  Anno.  Stat.  (1787-1902), 
§  3305. 

Tennessee:    Code  1896,  §  1539. 

Texas:  Saylcs'  Qv.  Stat.  1897 
(Supp.  to  1900),  vol.  ii.  ch.  15a 
(Acts  1899,  p.  73). 

In  Georgia  (Code  1895,  §  2335),  a 
lessee  of  any  railroad  may  be  sued  in 
the  same  jurisdiction  in  which  the 
le.ssor  might  have  been  sued. 

'  I.    Failure  to  maintain  fences : 


Ditchett  V.  Spuyten  Duyvil,  etc.  R. 
Co.,  67  N.  Y.  425  (1876);  Tracy  v. 
Troy,  etc.  R.  Co.,  38  N.  Y.  433  (1868), 
(98  Am.  Dec.  54);  Birchfield  v. 
Northern  Central  R.  Co.,  57  Barb. 
(N.  Y.)  589  (1870);  Clement  v.  Can- 
field,  28  Vt.  302  (1856);  Cook  v. 
Milwaukee,  etc.  R.  Co.,  36  Wis.  45 
(1874) ;  McCall  v.  Chamberlain,  13  Wis. 
637  (1861);  Clary  v.  Iowa  Midland 
R.  Co.,  37  Iowa,  344  (1873) ;  Down- 
ing V.  Chicago,  etc.  R.  Co.,  43  Iowa, 
96  (1876).  The  liabiHty  of  a  lessee 
is  sometimes  placed  upon  grounds  of 
public  poUcy.  Thus,  in  Illinois  Cent. 
R.  Co.  V.  Kanouse,  39  111.  272  (1866), 
(89  Am.  Dec.  307)  the  Court  said,  in 
substance,  that  the  defendant  wa.^; 
liable  for  using  a  defective  road  ;  that 
public  policy  retjuired  that  it  should 
be  held  responsible  for  injuries  result- 
ing from  such  u.se ;  that  the  fencing 
law  was  enacted  for  the  public  good 
and  would  be  defeated  if  an  irre- 
sponsible owner  could  lea.se  an  un- 
fcnccd  road  to  a  responsible  company 
which  would  not  be  liable  for  injuries; 
that  the  company  using  the  road  was 
jrro  hac  vice  the  owner.  See  also 
Toledo,  etc.  R.  Co.  v.  Rumbold,  40 
111.   (1866). 

In  New  York,  since  1890  (General 
Railroad  Law,  1891  and  1892,  §  32), 
both  lessor  and  lessee  arc  liable  for 
want  of  fences.  Prior  to  that  statute 
the  lessee  was  alone  held  liable. 
Thome  v.  Lehigh  Valley  R.  Co.,  S 
Hun  (N.  Y.),  141    (1895),  (34  N.  Y. 

415 


§  230 


INTERCORPORATE    RELATIONS 


[part   III 


Statutes  fixing  the  liability  of  railroad  corporations  for 
damages  by  fire  communicated  by  their  locomotives  also  apply 
to  lessee  corporations.'  In  construing  such  a  Massachusetts 
statute,  Judge  Ames,  in  Davis  v.  Providence,  etc.  R.  Co.^ 
after  reviewing  cases  holding  the  lessor  responsible,  said: 
"  But  there  is  nothing  in  these  decisions,  or  in  the  reasons 
upon  which  they  appear  to  rest,  that  confines  the  liability  in 
such  a  case  exclusively  to  the  lessor,  or  that  excludes  the  idea 
that  the  party  injured  may  seek  his  remed}'  either  of  the  les- 
sor or  the  lessee.  The  case  of  the  defendant  comes  literally 
within  the  terms  of  the  statute.  The  fire  was  communicated 
from  its  engine.  The  damage  was  occasioned  by  its  use  of 
the  road.  .  .  .  All  the  reasons,  assigned  in  the  above  cited 
cases,  for  holding  the  corporation  owning  the  road  liable,  apply 
with  at  least  equal  force  to  the  corporation  using  the  road 
and  actually  doing  the  mischief.  Under  such  circumstances, 
the  route  for  the  time  being  may  be  considered  as  the  route 
of  the  defendant;  and  there  is  no  reason  why  it  should  not 
be  held  responsible  for  the  damage  caused  by  its  use  of  the 
road,  although  the  law  has  given  to  the  injured  party  the  right, 
if  he  sees  fit,  to  seek  his  remedy  against  the  corporation  owning 
the  road." 


Supp.  525).  See  also  ante,  §  216 : 
"Lessor  Corporation  cannot  avoid 
Statutory  Obligations  unless  ex- 
empted. " 

The  Iowa  statute  (Code  1897, 
§  2058)  is  as  follows :  "  If  the  .  .  . 
lessee  owning  or  engaged  in  the  opera- 
tion of  any  railroad  in  the  State  re- 
fuses or  neglects  to  comply  with  any 
provision  of  this  chapter  relating  to 
fencing  of  the  tracks,  it  shall  be  guiltj^ 
of  a  misdemeanor. "  Compare  Liddle 
V.  Keokuk,  etc.  R.  Co.,  23  Iowa  378 
(1867). 

II.  Failure  to  maintain  Cattle 
Guards : 

In  Missouri  Pacific  R.  Co.  v.  Mor- 
row, 32  Kan.  217  (1884),  (4  Pac.  Rep. 
87,  19  Am.  &  Eng.  R.  Cas.  630),  it 
was  held,  under  a  Kansas  statute, 
that  it  is  always  the  duty  of  a  railway 
company  operating  a  railroad  to  see 

416 


that  proper  cattle  guards  exist 
wherever  its  railroad  enters  or  leaves 
improved  or  fenced  lands,  whether 
such  railway  company  owns  the  rail- 
road or  is  simply  operating  it  under  a 
lease. 

An  Iowa  statute  (Code  1897, 
§  2054)  relates  to  cattle  guards  and 
holds  all  railroad  companies  (includ- 
ing lessees)  liable  for  all  damages 
occasioned  by  a  failure  to  maintain 
them. 

'  Pierce  v.  Concord  R.  Corp.,  51 
N.  H.  590  (1872);  Da\is  v.  Pro\-i- 
dence,  etc.  R.  Co.,  121  Mass.  134 
(1876);  Cantlon  v.  Eastern  R.  Co., 
45  Minn.  481  (1891),  (48  N.  W.  Rep. 
22).  See  also  Slossen  v.  Burlington, 
etc.  R.  Co.,  60  Iowa,  215  (1882),  (14 
N.  W.  Rep.  244). 

^  Da\'is  V.  Pro\'idence,  etc.  R.  Co., 
121  Mass.  134  (1876). 


CHAP.    XX]  RIGHTS   AND    LIABILITIES    OF    LESSEE  §   231 

A  lessee  corporation  holding  under  a  long  term  lease  has  been 
held  to  the  "  proprietor  "  of  the  railroad,  within  the  mean- 
ing of  a  New  Hampshire  statute  relating  to  fires,  and  to  be 
liable  for  damages  sustained;  ^  and  has  been  held  to  be  the  cor- 
poration "  owning  the  tracks,"  within  the  provisions  of  a 
statute  imposing  upon  railroads  whose  tracks  crossed  at  grade, 
the  joint  duty  of  making  repairs  and  of  maintaining  a  lookout 
at  the  crossing.^ 

A  lessee  corporation  is  also  liable  for  injuries  to  travellers 
at  highway  crossings  caused  by  a  failure  to  equip  its  engines 
with  statutory"  signals  to  warn  them,  and  must  observ^e  other 
statutory  provisions  for  the  protection  of  the  lives  and  prop- 
erty of  the  public.^ 

§  231.  Liability  of  Lessee  for  Torts  in  Operation  of  Road  under 
Authorized  or  Unauthorized  Lease.  —  A  railroad  company  opera- 
ting, under  lease,  the  railroad  of  another  corporation,  is  liable  for 
injuries  caused  by  its  negligent  or  improper  operation,  to  the 
same  extent  that  the  lessor  would  have  been  had  it  continued 
to  operate  the  road;  *  and  its  liability  is  not  affected  by  the 
fact  that  the  lease  may  have  been  unauthorized  and  the  lessor 
also  responsible  for  the  same  acts  or  omissions.^ 

'  Pierce  v.   Concord   R.    Corp.,    51  and  constructed  by  itself,  see  Nichols 

N.  H.  590  (1872).  v.  Boston,  etc.  R.  Co.,  174  Mass.  379 

2  Baltimore,  etc.  R.  Co.  v.  Worker,  (1899),  (54  N.  E.  Rep.  881). 

45  Ohio  St.  577  (1888),  (14  West.  Rep.  *  In  Spragne  v.  Smith,  29  Vt.  425 

172,  16  N.  E.  Rep.  475).  (1857),  (70  Am.  Dec.  426),  Chief  .lus- 

^  A    Massachusetts    statute  which  tice  Redfield  said:    "It  is  well  settled 

required  every  railroad  corporation  to  in  practice,  and  by  repeated  decisions, 

carry  a  bell  on  every  engine  passing  that  the  lessees  of  railroads  are  liable 

upon  "their  road,"  etc.,  applied  to  a  to  the  same  extent  as  the  lessors  would 

railroad  corporation  which  had  taken  have  been,  while  they  continue  to  o\>- 

a  lease  of  a  railroad  owned  by  another  erate  the  road.   .   .   .     The  party  hav- 

corporation  and  was  running  its  own  ing  independent  control  is,  in  general, 

engines    upon    it    under    such    lease.  liable  for  the  acts  of  those  imdcr  such 

Linfield  v.   Old  Colony   R.   Corp.,    10  control,  whether  in  contract  or  tort." 

Cush.    (Mass.)    562    (1852),    (57    Am.  »  Feital  v.   Middlesex   R.   Co.,    109 

Dec.   124).  Mass.  405  (1872),  (12  Am.  Rep.  720) 

For   construction   of   a   Massachu-  (per  Colt,  J.) :    "The  defendants  were 

setts  statute  (Pub.  St.  cli.   112,  §  5),  in   actual   possession  and   use  of  the 

providing  that  a  corporation  lawfully  track    without    objection    from    the 

maintaining  and  operating  a  railroad  owners  or  the  Commonwealth;    thoy 

laid  out  and  constructed  by  another  assumed    this    responsibility    to    the 

corporation  should  be  subject  to  the  plaintiff  for  a  valuable  consideration; 

same  duties  and  liabilities  as  if  laid  out  and  it  is  wholly  immaterial,  so  far  as 

417 


§231 


INTERCORPORATE   RELATIONS 


[part   III 


The  lessee  is  liable  for  its  own  wrongs  regardless  of  the  lia- 
bility of  others,  and  its  responsibility  is  usually  placed  upon 
this  ground.*  It  may  also  be  placed  upon  the  ground  that,  in 
assuming  the  rights  and  franchises  of  the  lessor  to  operate  the 
road,  the  lessee  assumes  the  correlative  duty  of  operating  it 
properly  and  the  consequent  liability  for  negligent  operation.^ 

The  obligation  of  a  common  carrier  may  be  contractual,  and 
a  lessee  corporation  will  be  responsible  for  any  damage  arising 
from  its  breach  of  contract  of  carriage.^  So,  of  course,  the 
relations  of  the  lessee  corporation  with  its  employees  are  con- 
tractual, and  it  is  liable  to  them  for  any  failure  in  the  fulfil- 
ment of  its  obligations  as   master.^     The  lessee  corporation 


this  action  is  concerned,  that  the  lease 
was  not  legally  made." 

In  McCluer  v.  Maneliester,  etc.  R. 
Co.,  13  Gray  (Mass.),  124  (1859),  (74 
Am.  Dec.  624),  it  was  held  that  a  rail- 
road company  could  not  avoid  liability 
for  goods  injured  upon  a  railroad 
leased  by  it  on  the  ground  that  the 
lease  was  void.  The  Court  said 
(p.  129):  "An  innkeeper  might  as 
well  resist  the  claim  of  a  guest  for 
compensation  for  the  loss  of  his  bag- 
gage, by  suggesting  doubts  as  to  the 
validity  of  his  landlord's  title  to  the 
inn  which  he  hired." 

Where  one  railroad  corporation  has 
acquired,  through  judicial  proceedings, 
the  right  to  cross  at  grade  the  tracks 
of  another  company,  a  suit  to  enforce 
the  decree  in  such  proceedings  is,  in 
effect,  to  enjoin  a  continuing  trespass 
upon  the  right  acquired  therein.  In 
such  a  suit  the  lessee  of  the  railroad 
whose  tracks  are  crossed,  and  not 
the  lessor,  is  an  indispensable  part}'. 

Baltimore,  etc.  R.  Co.  v.  Wabash 
R.  Co.,  119  Fed.  678  (1002). 

A  lessee  cannot  be  held  liable  for 
the  torts  of  the  lessor  committed  be- 
fore the  execution  of  the  lease.  Pitts- 
burgh, etc.  R.  Co.  V.  Kain,  35  Ind.  291 
(1871). 

'  Wabash,  etc.  R.  Co.  v.  Peyton, 
106  111.  534  (1883),  (46  Am.  Rep.  705) ; 
Hall  V.  Brown,  54  N.  H.  495  (1874), 

418 


Toledo,  etc.  R.  Co.  v.  Rumbokl,  40 
111.  143  (1866);  Philadelphia,  etc.  R. 
Co.  V.  Anderson,  94  Pa.  St.  351  (1880), 
(39  Am.  Rep.  787,  6  Am.  &  Eng.  R.  Cas. 
407) ;  St.  Louis,  etc.  R.  Co.  v.  Curl, 
28  Kan.  622  (1882),  (11  Am.  &  Eng. 
R.  Cas.  458). 

2  Sprague  v.  Smith,  29  Vt.  421 
(1857),  (70  Am.  Dec.  424);  McMillan 
V.  Michigan,  etc.  R.  Co.,  16  Mich.  79 
(1867),  (93  Am.  Dec.  208);  Haff  v.  ■ 
Minneapolis,  etc.  R.  Co.,  14  Fed.  558 
(1882). 

^  Wabash,  etc.  R.  Co.  v.  Peyton, 
106  111.  534  (1883),  (18  Am.  &  Eng.  R. 
Cas.  1),  (46  Am.  Rep.  705);  Arrow- 
smith  V.  Na.shville,  etc.  R.  Co.,  57  Fed. 
165(1893);  Philadelphia,  etc.  R.  Co. 
V.  Anderson,  94  Pa.  St.  351  (1880), 
(6  Am.  &  Eng.  R.  Cas.  407,  39  Am. 
Rep.  787). 

In  Mahoney  i\  Atlantic,  etc.  R.  Co., 
63  Me.  68  (1873),  and  Murch  v.  Con- 
cord R.  Corp.,  29  N.  H.  1  (1854),  it 
was  held  that  the  remedy  of  a  pas- 
senger injured  is  against  the  company 
with  which  he  contracts. 

*  The  lessee  of  a  continuous  line  of 
railroad  is  liable  to  suit  b\-  an  em- 
ploj'ee  for  an  injury  received  any- 
where on  the  line,  which  may  be 
brought  at  the  general  residence  of 
the  lessee  corporation  whether  within 
or  without  the  limits  of  the  State 
where  the  injury  occurred.     Watson 


CHAP.    XX] 


RIGHTS   AND    LIABILITIES    OF   LESSEE 


§232 


is  also  liable  for  creating  a  nuisance,  as  well  as  for  maintaining 
and  continuing  a  nuisance  created  by  the  lessor.* 

§  232.  Joint  Liability  of  Lessor  and  Lessee.  —  As  a  general 
rule,  in  cases  where,  upon  principles  already  considered,  the 
lessor  corporation  is  responsible  for  the  negligence  of  the  les- 
see, both  corporations  may  be  jointly  sued  and  a  joint  judg- 
ment obtained."  A  joint  liability  is  also  sometimes  created 
by  statute.^ 

The  lessor  and  lessee  corporations  may  be  jointly  liable 
for  a  nuisance  —  the  former  for  creating,  thes  latter  for  con- 


V.  Richmond,  etc.  R.  Co.,  91  Ga.  222 
(1892),    (18   S.    E.    Rep.    306). 

'  Ante,  §  217:  "Lessor  cannot  avoid 
Primary  Obligations  unless  exempted." 

In  Wasmer  v.  Delaware,  etc.  R.  Co., 
80  N.  Y.  216  (1880),  (1  Am.  &  Eng. 
R.  Cas.  125,  36  Am.  Rep.  608), 
where  a  railroad  was  improper}}'  laid 
upon  and  along  a  street,  the  Court 
said:  "The  defendant  cannot  escape 
liability  for  tliis  condition  of  the  rail- 
road, because  it  was  simply  the  lessee 
of  the  road.  It  had  the  possession, 
the  use  and  control  of  the  road,  and 
could  not  keep  and  maintain  the  rails 
in  such  a  way  in  the  street  as  to  be 
dangerous  to  travellers  thereon,  and 
yet  escape  responsibility.  He  who 
knownglj'  maintains  a  nuisance  is 
just  as  responsible  as  he  who  created 
it." 

See  also  Dickson  v.  Chicago,  etc.  R. 
Co.,  71  Mo.  575  (1880);  Western,  etc. 
R.  Co.  V.  Cox,  93  Ga.  561  (1894),  (20 
S.  E.  Rep.  68). 

Compare,  however,  Kearney  v.  New 
•Jersey  Central  R.  Co.,  167  Pa.  St.  362 
(1895),  (31  Atl.  Rep.  637),  where  a 
lessee  was  held  not  Uable  for  an  over- 
flow caused  by  an  improperly  con- 
structed bridge.    • 

Compare  also  another  Pennsylvania 
case  where  it  was  held  that  a  lessee, 
taking  possession  of  and  operating  a 
leased  road,  is  responsible  for  dam- 
ages caused  by  a  defective  sewer  under 
the  road. 


Coyle  V.  Pittsburgh,  etc.  R.  Co.,  18 
Pa.  Super.  Ct.  235  (1901). 

Where  the  lessee  of  a  railroad 
makes  a  change  in  a  culvert  built  by 
the  lessor  wliich  results  in  damage, 
the  lessee  is  liable  therefor. 

Shores  v.  Southern  R.  Co.,  72  S.  C. 
244  (1905),  (51  S.  E.  Rep.  699). 

See  also  ante,  §  217:  "Lessor 
cannot  avoid  Primary  Obligations 
unless  exempted." 

2  Pcnn.sylvania  Co.  v.  Ellet,  132  111. 
654  (1890),  (24  N.  E.  Rep.  559).  In 
this  case  the  plaintiff  recovered  a  joint 
judgment  against  both  defendants  — 
lessor  and  lessee.  Compare,  however, 
Spangler  v.  Atchison,  etc.  R.  Co.,  42 
Fed.  307  (1890),  where  the  Court  .said  : 
"  It  may  also  be  conceded  that  both  are 
liable.  But  the  action  is  joint  as  well 
as  several.  The  plaintiff  had  the  right 
to  proceed  against  either  one  of  them, 
and  would  be  entitled  in  the  joint 
action  to  take  judgment  against  one, 
and  dismiss  as  to  the  other."  See  also 
Logan  I'.  North  Carolina  R.  Co.,  116 
N.  C.  940  (1895),  (21  S.  E.  Rep.  959). 

3  In  Ohio  (Anno.  Stat.  1787-1902, 
§  3305),  it  is  provided  that  lessor  and 
lessee  may  be  jointly  sued  for  negli- 
gence. This  statute  is  construed  in 
Staltz  V.  Baltimore,  etc.  R.  Co.,  7  Ohio 
N.  P.  129  (1897).  For  con.struction 
of  an  loua  statute,  see  Stephen  r. 
Davenport,  etc.  R.  Co.,  36  Iowa,  327 
(1873) ;  Clary  v.  Iowa  Midland  R.  Co., 
37  Iowa,  344  (1873). 

419 


§    232  INTERCORPORATE    RELATIONS  [I'ART    III 

tinuing  it.'  A  separate  liability,  as  has  been  shown,  also 
exists.^  So,  where  both  lessor  and  lessee  participate  in  the 
management  of  a  railroad,  they  are  jointly  and  severally  liable 
for  injuries  caused  by  the  negligence  of  employees,  for  the 
employees  are  as  much  the  servants  of  the  one  as  of  the  other.^ 
And  where  a  railroad  is  operated  under  an  unauthorized  lease, 
the  lessee  becomes  the  agent  of  the  lessor  in  such  operation, 
and  the  general  principle  is  applicable  that  the  liability  for 
negligence  of  principal  and  agent  may  be  enforced  in  a  suit 
against  either  or  both.^  The  lessor  and  lessee  may  also,  in 
such  a  case,  be  held  jointly  hable,  upon  the  ground  that  they 
are  undertaking  an  unlawful  enterprise  and  are  wrongfully 
usurping  powers. 

This  general  rule  also,  undoubtedly,  applies  in  the  case  of 
an  authorized  lease,  without  an  exemption  clause  in  those 
States  where  an  express  grant  of  immunity  is  necessary  to 
relieve  a  lessor  from  liability  for  the  negligence  of  its  lessee. 
It  should  be  observed,  however,  that  this  application  of  the 
rule  renders  a  railroad  company  which  makes  a  lease,  with 
the  approval  of  the  State,  a  joint  tort  feasor  in  the  operation 
of  a  road  over  which  it  has  no  control.' 

'  Stickley   v.    Chesapeake,    etc.    R.  agement  of  the  train,  whether  owner 

Co.,  9.3  Ky.  323  (1S92),  (20  S.  W.  Rep.  or  not  of  the  cars,  it  is  responsible  for 

261).  damages  for  wrongs ;  and  if  this  be  so. 

In    Railroad    Co.     v.     Hambleton,  it  follows,  necessarily,  that  if,  in  fact, 

40  Ohio  St.   503   (1884),   (14  Am.   &  that  control  be  joint,   and  the  train 

Eng.  R.  Cas.  126),  the  Supreme  Court  jointly  under  the  control  of  agents  of 

of  Ohio  said:   "Numerous  cases  are  re-  the  two  comijanies,  then  both  must  be 

ferred  to  by  counsel  for  the  plaintiff  held   responsible.     Two   persons  may 

in  error  involving  the  liability  of  lessor  be  joint  masters,  and  thereby  subject 

and   lessee.     But    most    of    them    are  to  a  joint  liability  for  the  acts  of  serv- 

cases  involving  the  separate  liability  ants    or   employees;    and    such  joint 

of   les.sor   and    lessee.     This    case    in-  liability  may  be  converted  into  a  sev- 

volves  the  joint  liabilitj''  of  lessor  and  eral   liability   by  the   election   of  the 

lessee,    and   this   class   of   liability   is  plaintiff  to  sue  only  one,  which  maj' 

clearly    applicable    to    a    person    who  be  done  in  such  a  case." 

creates  a  nuisance  jointly  with   him  See  also  Railroad  Co.  v.  Brown,  17 

who  continues  it."  Wall.  (U.  S.)  445  (1873).     Also  ante. 

^  Ante,  §  217:    " Lessor  cannot  avoid  §  221:    "Liability  of  Lessor  for  Negli- 

Primarxf  Obligations  unless  exempted."  gent     Operation     of     Railroad  —  (D) 

'  In  Nashville,  etc.  R.  Co.  v.  Carroll,  When  it  shares  in  Control." 

6  Heisk.  (Tenn.)  357  (1871),  the  Court  *  Cooley  on  Torts,  p.  165. 

said:     "The   principle  is,   that  where  *  Even  if  the  lessor  and  lessee  under 

one  has  the  exclusive  control  and  man-  an    authorized    lease    are    joint    tort 

420 


CHAP.    XX ] 


RIGHTS    AND    LIABILITIES    OF    LESSEE 


§  233 


§  233.  Liability  of  Lessee  for  Debts  of  Lessor.  —  A  railroad 
company  taking  under  lea.se,  in  good  faith,  the  railroad  and 
franchises  of  another  corporation,  assumes,  as  a  general  rule, 
no  responsibility  for  the  unsecured  debts  of  the  latter.  Where, 
however,  the  lease  embraces  the  entire  property  of  a  le.ssor 
corporation  in  debt,  of  the  existence  of  which  indebtedness 
the  lessee  has  notice,  it  may,  upon  the  principle  that  the  prop- 
erty of  a  corporation  constitutes  a  trust  fund  for  the  payment 
of  its  debts,  be  chargeable  as  a  trustee  and  compelled  to  apply 
the  property  so  received  in  payment  of  the  debts  of  the  les- 
sor.^ And  even  without  bad  faith  on  the  part  of  the  lessor 
or  lessee,  where  the  entire  property  of  a  corporation  having 
debts  is  transferred,  under  a  lease  permitting  the  lessee  to 
dispose  of  a  portion  of  the  leased  property  and  apply  the  pro- 
ceeds, not  only  for  the  improvement  of  the  remaining  property 
but  for  its  own  benefit  —  thus  preventing  any  application  for 
the  satisfaction  of  debts  —  and  the  lessee  makes  such  sale 
and  application,  a  court  of  equity  will  decree  the  payment 
of  a  judgment  debt  of  the  lessor  by  the  lessee."     In  such  a  case 


fea.^orf:  it  is  certain  that  the  rule  which 
forbids  contribution  among  wrong- 
doers is  inapplicable  in  favor  of  a 
lessee. 

'  Mellon  V.  Molino  Iron  Works,  131 
U.  S.  352  (ISSa),  (9  Sup.  Ct.  Rep.  781) ; 
Central  R.  Co.  v.  Pettus.  113  U.  S. 
116  (188.5),  (5  Sup.  Ct.  Rep.  387). 

2  In  Chicago,  etc.  R.  Co.  v.  Third 
National  Bank,  134  U.  S.  276  (1800), 
(10  Sup.  Ct.  Rep.  550),  affirming  26 
Fed.  820  (1886),  where  a  railroad  com- 
pany, heavily  in  debt,  leased  all  its 
property  to  another  company  for  nine 
hundred  and  ninety-nine  years;  and 
also  executed  a  deed  of  trust  securing 
bonds  to  a  large  amoimt  which  were 
to  be  sold  for  the  payment  of  existing 
liens  and  for  the  benefit  of  the  lessee, 
and  the  bonds  were  so  sold  and  applied, 
among  other  things,  for  tlie  building  of 
a  bridge  for  the  lessee's  benefit,  the 
Sujireme  Court  of  the  United  States 
said  (p.  286):  "The  contracting  [jar- 
ties  arranged  not  merely  for  the  dis- 
charge of  the  foreclosure  lion,  but  for 


the  completion  of  the  road  for  wliich 
the  lessor's  franchise  was  granted. 
The  lessee  not  only  performed  these 
stipulations,  but,  with  moneys  arising 
from  the  .sale  of  these  bonds,  built,  for 
its  own  benefit,  a  britlge  across  the 
Mississipi)i  River,  connecting  this 
road  with  its  line  in  Iowa,  and  thus 
making  a  continuous  line  of  road  to 
Omaha.  Neglecting  to  pay  the  debts 
of  the  lessor,  it  .approjiriated  a  large 
amount  of  the  proceeds  of  the  trust 
deed  upon  the  lessor's  property  to  its 
own  benefit,  and  the  improvement 
of  its  own  property.  Here  clearly 
was  a  diversion  of  funds,  wliich  the 
creditors  of  the  lessor  might  follow 
in  equity.  This  is  only  the  applica- 
tion of  familiar  doctrine.  The  projjor- 
ties  of  a  corporation  constitute  a  trust 
fund  for  the  payment  of  its  debts; 
and,  when  there  is  a  misappropriation 
of  the  funds  of  a  corjioration,  e(iuity, 
on  behalf  of  the  creditors  of  such  cor- 
poration, will  follow  the  funds  so 
diverted." 

421 


§   234  INTERCORPORATE   RELATIONS  [PART  III 

the  lessee  corporation  is  liable,  not  as  lessee,  but  as  a  trustee 
which  has  diverted  funds  due  creditors  to  its  own  use. 

A  lessee  corporation  may,  as  a  part  of  the  consideration  of 
the  lease,  assume  and  agree  to  pay  the  debts  of  the  lessor. 
In  such  a  case,  the  weight  of  authority  supports  the  view  that 
the  lessee  may  be  held  directly  liable  to  creditors  of  the  lessor 
upon  the  assumption  clause.^ 


CHAPTER   XXI 


RAILROAD    LEASES    UNDER    RECEIVERSHIP 

§  234.  Receiver  not  Assignee  of  the  Term.  May  not  abrogate  Leases  as  be- 
tween Parties. 

§  235.  Receiver  may  elect  ■nnthin  Reasonable  Time  to  assume  or  renounce 
Lease. 

§  236.     Obligations  of  Receiver  pending  Election. 

§  237.     Obligations  of  Receiver  after  Election. 

§  238.     Lease  of  Railroad  by  Receiver. 

§  234.  Receiver  not  Assignee  of  the  Term.  May  not  abro- 
gate Leases  as  between  Parties.  —  The  appointment  of  a  re- 
ceiver of  the  property  of  a  railroad  company,  by  a  court  of 
equity,^  does  not  change  the  title  to  the  property  or  even  the 
right  of  possession.  The  receiver  takes  the  property,  including 
leasehold  interests,  merely  as  a  custodian  for  the  court  from 

*  See    ante,    §    123:     "Liability   of  of  an  insolvent  with,  substantially,  the 

Purchasing   Corporation   for   Debts   of  powers    of    trustees    in    bankruptcy. 

Vendor  Company."  Such  statutes  are,  however,  generally 

For   cases   illustrating   assumption  inapplicable    to    railroad    companies, 

of  debts  of  lessor  by  lessee  corpora-  and  the  receivers  referred  to  in  this 

tion,    see   Mississippi,    etc.    R.    Co.    v.  chapter  are  those  appointed  according 

Southern   R.  Ass'n,   7  Baxt.   (Tenn.)  to  the  course  of  equity.     See  Quincy, 

595  (1874),  (11  Am.  &  Eng.  R.  Cas.  etc.  R.  Co.  v.  Humphreys,  145  U.  S. 

576);    Pennsylvania  Co.   v.  Erie,  etc.  82  (1892),  (12  Sup.  Ct.  Rep.  787),  and 

R.   Co.,  108   Pa.   St.   621    (1885),    (29  Gaither  v.   Stockbridge,   67   Md.   222 

Am.   &  Eng.    R.   Cas.   549).  (1887),     (9     Atl.     Rep.     632).     Also 

2  In  some  of  the  States,  as  in  New  Booth  v.  Clark,  17  How.  (U.  S.)  322 

York,  a  certain  class  of  receivers  are,  (1854). 
by  statute,  invested  with  the  estate 

422 


CHAP.    XXl] 


LEASES    UNDER    RECEIVERSHIP 


§  234 


which  he  derives  his  authority ;  he  does  not  become  an  assig- 
nee of  the  unexpired  term  of  the  leasehold  estate.'  As  said 
by  the  Supreme  Court  of  Maryland,^  in  language  approved  b}-- 
the  Supreme  Court  of  the  United  States:^  "  If  the  order  of 
the  court,  under  which  the  receiver  acts,  embraces  the  lease- 
hold estate,  it  becomes  his  duty,  of  course,  to  take  possession 
of  it.  But  he  does  not,  by  taking  such  possession,  become 
the  assignee  of  the  term,  in  any  proper  sense  of  the  word.  He 
holds  that  as  he  would  hold  any  other  personal  property  in- 
volved, —  for  and  as  the  hand  of  the  court,  and  not  as  assignee 
of  the  term." 

The  intervention  of  a  court  of  equity  for  the  preservation 
of  property  involved  in  litigation  by  putting  it  into  the  hands 
of  a  receiver  —  a  ministerial  officer  —  not  only  makes  no 
change  in  the  title  but  alters  no  lien  or  contract.     A  contract 


'  Quincy,  etc.  R.  Co.  v.  Humphreys, 
145  U.  S.  82  (1802),  (12  Sup.  Ct.  Rep. 
7S7),  affirming  sub  nom.  Central  Trust 
Co.  V.  Waba.sh,  etc.  R.  Co.,  34  Fed.  259 
(1888);  Union  Bank  of  Chicago  v. 
Kansas  City  Bank,  136  U.  S.  223 
(1890),  (10  Sup.  Ct.  Rep.  101.3); 
Central  Trust  Co.  v.  Continental  Trust 
Co.,  86  Fed.  517  (1898);  Empire  Di.s- 
tilling  Co.  V.  McNulta,  77  Ted.  700 
(1897),  affirmed  fiub  nom.  Dennehy  v. 
McNulta,  86  Fed.  825  (1898),  (41  L. 
R.  A.  609) ;  Carswell  v.  Farmers  Loan, 
etc.  Co.,  74  Fed.  88  (1896);  Ames  v. 
Union  Pacific  R.  Co.,  60  Fed.  966 
(1894);  New  York,  etc.  R.  Co.  v.  New- 
York,  etc.  R.  Co.,  58  Fed.  268,  280 
(1893);  Park  v.  New  York,  etc.  R. 
Co..  57  Fed.  799  (1893);  Bell  v. 
American  Protective  League,  163 
Mass.  558  (1895),  (40  N.  E. 
Rep.  857,  47  Am.  St.  Rep.  481); 
Gaither  v.  Stockbridge,  67  Md.  222 
(1887),  (9  Atl.  Rep.  632).  Com- 
pare, however.  United  States  Trust 
Co.  V.  Waba.sh  Western  R.  Co.,  150 
U.  S.  287  (1893),  (14  Sup.  Ct.  Rej).  86), 
where  Mr.  Justice  Brown  apparently 
overlooks  the  language  of  Mr.  Chief 
Justice  I'uller  in  Quincy,  etc.  R.  Co.  v. 
Humphreys,    supra,    and   considers   a 


receiver  as  standing  in  the  same  posi- 
tion as  an  assignee.  In  Brown  v. 
Toledo,  etc.  R.  Co.,  35  Fed.  444  (1888), 
Judge  Gresham,  in  view  of  the  nature 
of  the  proceedings,  treated  the  receiver 
as  an  a.ssignee  of  the  term,  but  that 
decision  has  been  criticised  in  later 
ea.ses.  New  York,  etc.  R.  Co.  v.  New 
York,  etc.  R.  Co.,  58  Fed.  268  (1893). 
Comparr  also  Commonwealtli  v.  Frank- 
fort Ins.  Co.,  115  Mass.  278  (1874); 
Frank  v.  New  York,  etc.  R.  Co.,  122 
N.  Y.  197  (1890),  (25  N.  E.  Rep. 
232). 

A  claim  for  unpaid  rentals  due  a 
le.ssor  corporation  before  the  appoint- 
ment of  a  receiver  for  the  lessee  cor- 
poration cannot  be  established  as  an 
e(|uitable  lien  upon  a  fund  in  the 
hands  of  the  receiver  arising  from  the 
operation  of  the  road  during  the  re- 
ceivership —  no  part  of  the  rental 
withheld  by  the  le.s.see  having  been 
received  by  the  receiver. 

Cox.  V.  Tcrre  Haute,  etc.  R.  Co., 
133  Fed.  371  (1904). 

2  Gaither  v.  Stockbridge,  67  Md. 
224  (1887),  (9  .\tl.  Rep.  632). 

^  (Quincy,  etc.  R.  Co.  ?•.  Humphre3's, 
145  U.  8.  98  (1892),  (12  Sup.  Ct.  Rep. 
787). 

423 


§   235  INTERCORPORATE    RELATIONS  [PART   III 

of  lease  is  not  affected  by  the  appointment  of  a  receiver,  nor 
is  the  right  of  the  lessor  corporation  to  insist  upon  perform- 
ance or  forfeiture  in  any  way  impaired.  The  lease  remains 
in  full  force  until  terminated  by  the  parties,  and  the  receiver 
has  no  power  to  abrogate  it  as  between  them.  "  It  is  not  in 
the  power  of  such  receivers  to  annul  or  abrogate  such  a  lease 
as  between  the  lessor  and  lessee  company."  * 

§  235.  Receiver  may  elect  within  Reasonable  Time  to  assume 
or  renounce  Lease.  —  When  a  receiver  of  a  railroad  company, 
having  leased  lines,  is  appointed,  it  is  necessary,  in  order  to 
keep  the  entire  system  a  going  concern,  that  he  should  take 
possession  of  and  operate  the  leased  roads,  as  well  as  the  other 
roads  of  the  system.  The  public  duties  of  the  corporations  — ■ 
lessor  and  lessee — must  be  performed;  their  obligations,  to 
the  government  in  carrying  the  mails,  to  the  public  as  common 
carriers,  must  be  fulfilled  without  interruption,  and  this  result 
can  only  be  obtained  by  putting  the  receiver  into  temporary 
possession  of  the  leasehold  interests.  The  mere  act  of  taking 
possession,  however,  does  not  constitute  an  adoption  of  the 
lease  by  the  receiver  nor  render  him  liable  upon  its  covenants, 
and  he  is  entitled  to  a  reasonable  time  —  a  breathing  spell  — • 
to  determine  whether  he  will  assume  or  renounce  the  lease. ^ 

'  New   York,    etc.    R.    Co.    v.   New  lease,    pending    receiver.ship,    without 

York,  etc.  R.  Co.,  58  Fed.  280  (1893),  the  consent  of  the  court.     In  deter- 

per  Lurton,  J.     In  Park  v.  New  York,  mining  the  matter,  the  court  will  take 

etc.  R.  Co.,  57  Fed.  802  (1893),  Judge  into  consideration  the  situation  of  the 

Lacombe  said:    "The  right  to  insist  parties  at  the  time  the  receiver  is  ap- 

upon  the  execution  of  this  contract  ac  -  pointed.     Day  v.  Postal  Tel.  Co.,  66 

cording  to  its  terms  —  the  right  to  re-  Md.  354  (1886),  (7  Atl.  Rep.  608) 
fu.sc  further  use  and  possession  of  that  ^  A  receiver,  appointed  by  order  of 

property  to  any  one  who  will  not  or  a  court  of  equity,  is  obliged  to  take 

cannot  make  such  payments  —  is  in  possession  of  a  leasehold  estate,  if  it  be 

no  way  impaired  by  the  fact  that  the  included  within  the  order  of  the  court ; 

court  has  taken  possession  of  all  the  but  he  does  not,  thereby,  become  the 

property  owned  and  held  by  the  Erie  assignee  of  the  term  or  liable  for  the 

Company,  to  administer  the  same  for  rent,   but  holds  the  property  as  the 

the  interests  of  all  concerned,  and  has  hand  of  the  court  and  is  entitled  to  a 

placed   its   officers,    the   receivers,    as  reasonable  time  to  ascertain  its  value, 

custodians   and   caretakers,   not  only  before  he  can  be  held  to  have  accepted 

to  preserve  the  same,  but  also  to  main-  it  as  lessee.     Quincy,   etc.   R.   Co.   v. 

tain  it  as  a  going  concern  pending  the  Humphreys,  14.5  U.  S.  82  (1892),  (12 

final  adjustment."  Sup.    Ct.    Rep.    787).     In   so   holding 

A  receiver  cannot,   by  agreement  Mr.  Chief  Justice  Fuller  said  (p.  101): 

with  the  lessor  company,  abrogate  a  "The  court  did  not  bind  itself  or  its 

424 


CHAP.    XXl] 


LEASES    UNDER    RECEIVERSHIP 


§235 


As  said  by  Judge  Lurton  in  Carswell  v.  Farmers  Loan,  etc. 
Co.:  ^  "  A  receiver  may  take  and  retain  possession  of  leasehold 
interests  for  such  reasonable  time  as  will  enable  him  to  intelli- 
gently elect  whether  the  interest  of  his  trust  will  be  best  sub- 
served by  adopting  the  lease,  and  making  it  his  own,  or  by 
returning  the  property  to  the  lessor." 

What  constitutes  a  reasonable  time,  within  which  a  receiver 
must  elect,  depends  to  such  an  extent  upon  the  facts  and  cir- 
cumstances appearing  in  any  particular  case,  that  no  general 
rule  can  be  laid  down  for  determining  it.^ 


receivers  eo  instaijti  by  the  more  act 
of  taking  possession.  Reasonable 
time  had  necessarily  to  be  taken  to 
ascertain  the  situation  of  affairs.  The 
Quincy  Corapany,  as  a  ^uosi-public 
corporation  operating  a  public  high- 
way, was  under  a  public  duty  to  keep 
up  and  maintain  its  railroad  as  a  going 
concern,  as  was  the  Wabash  Company 
under  the  contract  between  them, 
but  the  latter  had  become  imable  to 
perform  the  public  .service  for  which 
it  had  been  endowed  with  its  faculties 
and  franchises,  and  which  it  had  as- 
sumed to  discharge  as  between  it  and 
the  other  company.  Its  operation 
could  only  be  continued  under  the  re- 
ceivers, whose  action  in  that  respect 
cannot  be  adjudged  to  have  been  dic- 
tated by  the  idea  of  keeping  the  prop- 
erty in  order  to  sell  it,  or  using  it  to 
the  advantage  of  the  creditors,  or 
doing  otherwise  than  'abstain  from 
trying  to  get  rid  of  the  property.'" 

See  also  United  States  Trust  Co.  v. 
Wabash  Western  R.  Co.,  150  U.  S.  287 
(1893),  (14  Sup.  Ct.  Rep.  8G) ;  Seney 
V.  Wabash  Western  R.  Co.,  150  U.  S. 
310  (1S93),  (14  Sup.  Ct.  Rep.  94) ;  St. 
Joseph,  etc.  R.  Co.  v.  Humphreys,  14.5 
U.  S.  105  (1892),  (12  Sup.  Ct.  Rep. 
795) ;  Sunflower  Oil  Co.  v.  Wilson,  142 
U.  S.  313  (1892),  (12  Sup.  Ct.  Rop. 
235) ;  Central  Trust  Co.  v.  Continental 
Trust  Co.,  86  Fed.  517  (1898);  Mer- 
cantile Trust  Co.  V.  Farmers  Loan, 
etc.  Co.,  81  Fed.  254  (1897);  Emjure 
Distilling    Co.    v.    McNulta,    77    Fed. 


700  (1897) ;  Carswell  v.  Farmers  Loan, 
etc.  Co.,  74  Fed.  88  (189G);  Ames 
V.  Union  Pacific  R.  Co.,  60  Fed.  966 
(1894);  Farmers  Loan,  etc.  Co.  v. 
Northern  Pacific  R.  Co.,  58  Fed.  257 
(1893);  New  York,  etc.  R.  Co.  v.  New 
York,  etc.  R.  Co.,  58  Fed.  268  (1893); 
Park  V.  New  York,  etc.  R.  Co.,  57  Fed. 
799  (1893);  Bell  v.  American  Protec- 
tive League,  163  Mass.  558  (1895),  (40 
N.  E.  Rep.  857,  47  Am.  St.  Rep.  481). 

An  agreement  that  the  receipt  of 
less  than  full  rental  for  leased  property 
shall  be  without  prejudice  to  a  claim 
for  the  balance,  or  the  lessor's  right 
to  forfeit  the  lease,  niakes  the  receiver 
hold  under  the  agreement,  and  not 
under  the  lease,  so  that  his  continued 
possession  does  not  amount  to  an 
adoption  of  the  lease.  Thomas  v. 
Cincinnati,  etc.  R.  Go.,  77  Fed.  667 
(1896). 

'  Carswell  v.  Farmers  Loan,  etc. 
Co.,  74  Fed.  91  (1896). 

^  Receivers  of  a  lessee  railroad  com- 
pany are  not  bound,  merely  by  their 
appointment,  to  assume  all  its  leases ; 
but  they  have  a  reasonable  time  in 
which  to  determine  whether  thej'  will 
assume  or  renounce  them.  And 
where  numerous  contracts  are  to  be 
examined,  a  delay  of  65  days  before 
renouncing  a  lease  is  not  unreasonalile. 
Ames  ?'.  Union  Pacific  R.  Co.,  60  Fed. 
966  (1894). 

In  Quincy,  etc.  R.  Co.  v.  Hum- 
phreys, 145  U.  S.  82  (1892),  (12  Sup. 
Ct.  Rep.  787),  one  month  was  said  to  be 

425 


§   236  INTERCORPORATE    RELATIONS  [PART    III 

It  is  not  necessary  in  order  to  charge  the  receiver  that  he 
should  have  formally  elected  to  assume  the  lease.  His  pos- 
session of  the  leased  property  might  be  continued  for  such  a 
period  and  under  such  circumstances  as  would,  in  law,  be 
equivalent  to  an  election.*  Thus,  receiA-ers  of  a  leased  rail- 
road, who  for  a  long  time  continued  to  operate  the  leased 
line,  and  issued  receivers'  certificates  to  raise  money  for  pay- 
ing taxes  thereon  according  to  the  provisions  of  the  lease,  were 
held  to  have  adopted  the  lease,  and  to  be  liable  to  repay  to 
the  lessor  taxes  on  the  leased  line  which  it  had  been  compelled 
to  pay  by  the  judgment  of  a  competent  court.^  Where  the 
question  of  the  renunciation  or  adoption  of  a  lease  has  been 
by  a  receiver  submitted  to  and  determined,  after  due  considera- 
tion, by  the  court  appointing  him,  its  decision,  being  upon  a 
question  of  business  policy  and  not  of  law,  and  administrative 
rather  than  judicial  in  its  nature,  will  not  be  disturbed  by  an 
appellate  court,  unless  it  appears  that  the  discretion  of  the 
lower  court  has  been  abused.^ 

If  the  receiver  elect  to  adopt  a  lease,  he  becomes  vested 
with  the  title  to  the  leasehold  interest,  and  a  privit}^  of  estate 
is  thereby  created  between  the  lessor  and  the  receiver  by  which 
the  latter  becomes  liable  upon  the  covenant  to  pay  rent.* 

§  2.36.  Obligations  of  Receiver  pending  Election.  —  As  al- 
ready shown,  the  appointment  of    a    receiver  of   a  lessee  cor- 

a  reasonable  time  in  which  to  make  an  cantile     Trust     Co.,    88      Fed.      140 

election  to  accept  or  surrender  a  lea.se.  (1898). 

In  St.   Joseph,   etc.    R.   Co.   v.   Hum-  ^  Mercantile  Trust  Co.  v.  Farmers 

phreys,  145  U.  S.  105  (1892),  (12  Sup.  Loan,  etc.  Co.,  81  Fed.  254  (1897). 
Ct.    Rep.   787),   imder  somewhat   ex-  Disputed   questions   of  fact   as   to 

traordinary   circumstances,    a    period  whether  a  receiver  has  renounced  or 

of  nine  months  was  held  not  to  be  an  assumed  a  lease  must  be  determined 

unreasonable  time.     In  Park  v.  New  by  action  and  not  by  mere  petition 

York,  etc.  R.  Co.,  57  Fed.  799  (1893),  in  the  receivership  cause. 
two   weeks   was  said   not   to   be   un-  People  v.  Erie  R.  Co.,  54  How.  Pr. 

reasonable.     A  period  of  ten  months,  59     (1877).     See    also    Woodruff    v. 

during  all  of  which  time  negotiations  Erie  R.  Co.,  93  N.  Y.  609  (1883). 
were  being  carried  on  for  a  reduction  A  receiver  will  not  be  ordered  to 

of  the  rental,  was  held  in  Carswell  v.  assume   a   lease   merely   because    the 

Farmers  Loan,   etc.   Co.,   74  Fed.   88  company    he    represents    is    solvent. 

(1896),  to  be  a  reasonable  time.  Empire    Distilling    Co.    v.    McXulta, 

1  Empire  Distilling  Co.  v.  McNulta,  77  Fed.  700  (1897). 

77  Fed.  700  (1897),  and  cases  cited.  *  Mercantile  Trust  Co.  v.  Farmers 

2  United  States  Trust  Co.  v.  Mer-        Loan,  etc.  Co.,  81  Fed.  254  (1897). 

426      • 


CHAP.    XXl] 


LEASES    UNDER    RECEIVERSHIP 


236 


poration  does  not  work  an  assignment  of  the  lease  or  render 
him  Uable  upon  the  covenants  therein.  While  the  receiver 
may  operate  the  leased  railroad  for  a  reasonable  time  in  order 
to  determine  whether  he  will  adopt  the  lease,  he  does  not,  as  a 
general  rule,  thereby  become  liable  for  the  stipulated  rent  for 
such  period,  in  case  he  finds  the  road  unprofitable,  and,  with 
the  approval  of  the  court,  surrenders  it  to  its  owner.^     He 

*  In  Quincy,  etc.  R.  Co.  v.  Hum- 
phreys, 145  U.  S.  98  (1892),  (12  Sup. 
Ct.  Rep.  787),  Mr.  Chief  Justice  Fuller 
said  :  "  But  appellants  insist  that, 
without  regard  to  privity  of  estate 
or  privity  of  contract,  receivers  in 
chancery  are  liaole,  not  for  a  reason- 
able rental  value  during  the  occu- 
pancy of  leased  property  committed 
to  their  charge  by  order  of  court, 
but  for  rental  according  to  the  cov- 
enants of  the  lea.ses  whenever  there 
are  unequivocal  acts  of  use  and  con- 
trol of  such  property ;  and  that  they 
thus  adopt  the  leases  and  become 
bound  by  their  terms  so  long  as  such 
use  and  control  continue.  .  .  . 
Clearly,  this  was  no  case  of  the  em- 
ployment of  the  property  of  another 
for  one's  own  benefit.  Within  a 
month,  the  receivers  appUed  to  the 
court  for  instructions,  distinctly  set- 
ting forth  that  there  was  no  income 
wherewith  to  pay  the  rental  in  ques- 
tion, and  the  order  of  court,  entered 
at  once,  proceeded  under  the  theory 
that  they  were  not  to  be  bound  by 
the  rental  prescribed.  .  .  .  We  do 
not  discover  any  equitable  ground 
upon  which  appellants  are  entitled 
to  a  preference  in  the  distribution 
of  the  proceeds  of  the  .sale  of  the 
mortgaged  property.  The  cost  of 
the  maintenance  of  the  Quincy  road 
by  the  receivers  exceeded  its  total 
earnings ;  and  the  net  earnings  of 
the  whole  Wabash  .system,  before  the 
Quincy  Company  retook  its  road,  did 
not  amount  to  one  quarter  of  the 
amount  of  preferred  debt  existing 
when  the  receivers  were  appointed. 
The   property  was  surrendered  to  it 


freed  from  any  charge  for  that  debt, 
to  the  paj'ment  of  which  it  con- 
tributed nothing." 

An  order  directing  receivers  to 
keep  divisional  accounts,  and  to  pay 
rental  on  leased  lines  only  to  the 
extent  of  any  surplus  earned  by  them, 
is  notice  to  such  lines  that  they  must 
not  expect  payment  of  rentals  unless 
there  is  a  surplus ;  and  if  they  do 
not  then  intervene  to  regain  possession 
of  the  property,  they  have  no  claim 
on  the  receivers  in  the  event  that 
there  is  no  surplus.  United  States 
Trust  Co.  V.  Wabash  Western  R.  Co., 
150  U.  S.  287  (1893),  (14  Sup.  Ct. 
Rep.  86) ;  Seney  v.  Wabash  Western 
R.  Co.,  150  U.  S.  310  (1893),  (14  Sup. 
Ct.  Rep.  94). 

Receivers  have,  as  a  general  rule, 
a  reasonable  time  in  which  to  deter- 
mine whether  they  will  adopt  the 
lease,  or  will  merely  pay  to  the  lessor 
the  net  earnings  of  its  road,  subject, 
always,  to  the  le.ssor's  right  to  re- 
enter for  condition  broken.  Farmers 
Loan,  etc.  Co.  v.  Northern  Pacific 
R.  Co.,  58  Fed.  257  (1893). 

The  expenses  and  deficits  incurred 
by  receivers  in  operating  a  railroad 
under  a  lease  which  it  was  their 
duty  to  renounce  are  chargeable  to 
the  leased  road,  and  not  to  the  re- 
ceivers, where  they  have  not  assumed 
the  lease.  Mercantile  Trust  Co.  ?'. 
Farmers  Loan,  etc.  Co.,  81  Fed.  254 
(1897). 

A  lessor  corporation  has  no  pre- 
ferred claim  for  rentals  accruing 
during  receivership  where  it  did  not 
demand  either  po.ssession,  or  con- 
firmation of  lease  by  receiver.     New 

427 


§  236 


INTERCORPORATE    RELATIONS 


[part    III 


must,  however,  deal  fairly  with  the  lessor  and  is  bound  to  turn 
over  the  net  earnings  of  the  road,  if  less  than  the  stipulated 
rent,  to  the  lessor,  and  to  pay  a  reasonable  rental  for  leased 
property,  in  itself  non-producing.*     This  is  equitable.      The 


York,  etc.  R.  Co.  v.  New  York,  etc. 
R.  Co.,  58  Fed.  268  (1893). 

See  also  as  sustaining  general 
principle  stated  in  text :  St.  Joseph, 
etc.  R.  Co.  V.  Humphreys,  145  U.  S. 
105  (1892),  (12  Sup.  Ct.  Rep.  987); 
Milwaukee,  etc.  R.  Co.  v.  Brooks,  etc. 
Works,  121  U.  S.  430  (1887),  (7  Sup. 
Ct.  Rep.  1094) ;  Park  v.  New  York, 
etc.  R.  Co.,  57  Fed.  799  (1893); 
Ames  V.  Union  Pacific  R.  Co.,  60 
Fed.  966  (1894) ;  Bell  v.  American 
Protective  League,  163  Ma-ss.  558 
(1895),  (40  N.  E.  Rep.  857,  47  Am. 
St.  Rep.  481). 

Contra,  however.  Woodruff  v.  Erie 
R.  Co.,  93  N.  Y.  609  (1883),  where  the 
New  York  Court  of  Appeals  held  that 
a  receiver  could  not  take  possession 
of  a  leased  railroad  and  enjoy  its 
use  and  occupation,  without  incurring 
liability  for  the  rent  reserved. 

And  in  Frank  v.  New  York,  etc. 
R.  Co.,  122  N.  Y.  197  (1890),  (25 
N.  E.  Rep.  232)  it  was  again  held 
that  the  principles  governing  the 
liability  of  an  assignee  of  a  lease 
apply  in  the  case  of  a  receiver  of 
the  property  of  the  lessee,  and  that 
he  is  chargeable  with  the  payment 
of  the  rent  reserved  for  such  time 
as  he  occupies  the  leased    property. 

See  also  Mercantile,  etc.  Co.  v. 
Southern,  etc.  R.  Co.,  113  Ala.  543 
(1897),  (21  So.  Rep.  373) ;  Brown  v. 
Toledo,  etc.  R.  Co.,  35  Fed.  444 
(1888). 

1  See  cases  cit«d  in  preceding  note. 
Also  Carswell  v.  Farmers  Loan,  etc. 
Co.,  74  Fed.  88  (1896),  where  a 
receiver  of  a  railroad  retained  pos- 
session of  leased  depot  property  for 
ten  months,  with  the  assent  of  the 
depot  company,  negotiations  being  all 
the  time  in  progress  to  fix  a  reason- 
able rent.     At  the  end  of  tlais  time, 

428 


a  receiver  of  the  depot  company  was 
appointed.  It  was  held  that  the  rail- 
way receiver  had  not  elected  to  adopt 
the  lease,  and  was  hable  only  for  a 
reasonable  rent  of  the  depot,  not 
for  the  stipulated  rental. 

And  see  Savannah,  etc.  R.  Co.  v. 
Jackson\dlle,  etc.  R.  Co.,  79  Fed  35 
(1897).      • 

Where  a  mortgage  trustee  notified 
the  lessor  upon  taking  possession 
that  he  repudiated  the  lease  but 
would  paj^  fair  compensation  the 
court  upheld  the  notice.  Milwaukee, 
etc.  R.  Co.  V.  Brooks,  etc.  Works, 
121  U.  S.  430  (1887),  (7  Sup.  Ct. 
Rep.  1094). 

A  lessee  railroad  company  became 
insolvent  and  a  receiver  was  ap- 
pointed who  took  possession  of  the 
leased  road.  Thereafter,  and  during 
almost  the  entire  period  of  the  re- 
ceivership, the  lease  was  practically 
abrogated  and  while  the  leased  road 
was  operated  by  the  receiver  in  con- 
nection with  the  insolvent  road  it 
was  for  its  own  benefit.  Upon  the 
sale  of  the  insolvent  road  a  settle- 
ment was  made  wth  the  lessor  and 
a  fund  was  set  apart  as  a  result  of 
the  operation  of  the  leased  road. 
Stockholders  of  the  lessor  corpora- 
tion who  were  entitled  under  the 
lease  to  the  rental  by  way  of  divi- 
dends brought  suit  for  "back  rent- 
als" and  it  was  held  that  thej'  were 
only  entitled  to  dividends  out  of  such 
fund  for  the  time  during  wliich  the 
road  was  operated  before  the  abro- 
gation of  the  lease,  and  not  to  the 
balance  which,  under  the  settlement, 
went  directly  to  the  lessor  corpora- 
tion and  not  as  a  di\'idend  to  its 
stockholders. 

Farrar  v.  South  Western  R.  Co., 
116  Ga.  337  (1902),  (42  S.  E.  Rep.  527). 


CHAP.    XXl]  LEASES    UNDER    RECEIVERSHIP  §   237 

receiver  operates  the  leased  road  subject  to  the  right  of  the 
lessor  to  re-enter  for  condition  broken  and  to  insist  upon  an 
immediate  adoption  of  the  lease  or  surrender  of  the  road. 
If  the  lessor  fail  to  assert  his  right,  it  "may  fairly  be  presumed 
that  the  trial  of  the  road  by  the  receiver  is  of  as  much  impor- 
tance to  him  as  to  the  receiver,  and  there  is  no  reason  why  the 
receiver  should  hazard  the  corpus  of  his  estate  by  the  experi- 
ment. 

Where,  however,  the  lessor,  immediately  upon  the  appoint- 
ment of  the  receiver,  demands  of  the  receiver  and  of  the  court, 
either  an  assumption  of  the  lease  or  a  surrender  of  the  road, 
and  the  decision  is  long  delayed  that  the  receiver  may  deter- 
mine which  policy  is  expedient,  he  must  pay  the  stipulated 
rent  for  the  time  he  has  had  possession,  in  case  he  elects  to 
surrender  the  road.^  So,  where  a  receiver  operates  a  leased 
road  and  keeps  no  separate  accounts  showing  the  net  earnings 
of  the  road,  he  must  pay  the  rent  stipulated  for  the  time  of 
his  possession  although  he  renounces  the  lease.^  In  such 
cases,  equity  cstaljlishes  exceptions  to  the  general  rule. 

§  237.  Obligations  of  Receiver  after  Election.  —  When,  after 
due  investigation,  a  receiver  elects,  and  the  court,  after  con- 
sideration, determines  to  surrender  a  leasehold  interest  to  its 
owner  and  such  surrender  is  made  and  compensation  for  the 
use  pending  election  is  paid  according  to  the  principles  just 
indicated  the  connection  of  the  receiver  with  the  leased  })rop- 

'  In    Farmers    Loan,    etc.    Co.    v.  them:    'While  we  take  and  withhold 

Northern  Pacific  R.  Co.,  58  Fed.  265  that  possession  until  it  shall  be  satis- 

(1893),     Judge    .Jenkins    said:      "So  factorily    determined    whether    it    is 

that  here  the  lessors  have  been  con-  profitable  or  not  to  operate  the  road, 

tinuously    knocking    at    the    door    of  you,  the  lessee,  shall  not  have  your 

the   court,    demanding    possession    of  rental    pending    that    determination 

the  demised  premi.scs,  and  possession  according  to  the  stipulations  of  the 

has  been  withheld  from  them  against  lease    under    which    pos.session    was 

their  consent,  and  against  their  pro-  taken.'" 

test.     It  appears  to  the  court   that,  -  Central,  etc.  Co.  v.  Farmers  Loan, 

under   such    circumstances,   it   would  etc.  Co.,  79  Fed.  158  (1897). 

be  inequitable  to  say  that  the  court  Where   a   receiver  operates   leased 

or  its   receivers   should   hold   posses-  lines  for  a  year,  antl  uses  the  earnings 

sion  of  the  demised  premises,  refusing  to  pay  interest,  the  court  will  order 

to   pay  rent  accruing  before   the   rn-  him,  to  that  extent,  to  pav  taxes  on 

ceivcrship,     taking    from     the    lessor  the  road  as  required  by  the  terms  of 

their    estate    without    their    consent,  the   lease.      Clyde   v.    Richmond,    etc. 

express    or    implied,    and    saying    to  R.  Co.,  63  Fed.  21  (1894). 

429 


§  237 


INTERCORPORATE    RELATIONS 


[part  III 


erty  terminates;  but  when  the  receiver,  with  the  approval  of 
the  court,  decides  not  to  surrender  the  lease  and  so  notifies 
the  lessor  and  continues  in  possession  of  the  leased  property, 
such  acts  constitute  an  adoption  of  the  lease  and  carry  with  it 
an  obligation  to  fulfil  the  covenants  of  the  lease  and  to  pay 
the  rental  stipulated.^  Thus,  where  a  receiver  adopts  a  lease 
containing  provisions  for  the  purchase  of  the  property  leased, 
he  is  bound  by  the  instrument.^ 

When  a  receiver  is  operating  a  railroad  system  consisting 
of  many  leased  lines,  the  leases  of  which  have  been  adopted, 
the  accounts  of  each  line  should  be  kept  separately,  and  the 
outlay  of  each  reduced,  if  possible,  until  it  pays  operating 
expenses;  but  if  the  receiver  is  unable  to  do  so,  receiver's  cer- 
tificates on  the  whole  system  may  be  issued  to  make  up  the 
deficiency.^  So,  where  a  receiver  has  been  unable  to  obtain 
money  for  the  payment  of  rentals,  the  court  on  final  decree 
may  properly  declare  the  unpaid  rentals  a  first  lien  on  the 
property  and  direct  that  the  same,  with  interest,  be  paid  out 
of  the  proceeds  of  the  sale  as  a  preferential  lien.* 


'  Central  Trust  Co.  v.  Continental 
Trust. Co.,  86  Fed.  517  (1898). 

See  also  Easton  v.  Houston,  etc.  R. 
Co.,  38  Fed.  784  (1889)  ;  Mercantile, 
etc.  Co.  V.  Southern,  etc.  Co.,  113  Ala. 
543  (1897),  (21  So.  Rep.  373).  Spen- 
cer V.  World's  Columbian  Exposition, 
163  111.  117  (1896),  (45  N.  E.  Rep. 
250). 

Where  a  lessee  corporation  agreed 
to  pay,  as  a  part  of  the  rental,  the 
interest  on  certain  bonds,  the  holders 
of  such  bonds,  on  the  appointment 
of  a  receiver  by  a  federal  court  for 
such  corporation,  were  permitted  to 
come  in  and  directly  assert  their 
claims  for  interest  against  the  fund 
in  the  hands  of  tlie  court  for  the 
payment  of  rentals,  notwithstanding 
the  appointment  of  a  receiver  for 
the  lessor  corporation,  with  power 
to  collect  the  rentals.  Mercantile 
Trust  Co.  V.  Baltimore,  etc.  R.  Co., 
94  Fed.  722  (1899). 

See  also  Grand  Trunk  R.  Co.  v. 
Central  Vermont  R.  Co.,  78  Fed.  690 

430 


(1897),  affirmed  sub  nom.  Bank  v. 
Smith,  86  Fed.  398  (1898). 

As  to  submission  of  amount  of  in- 
creased rental  due  to  improvements 
to  arbitration  see  Farmers  Loan,  etc. 
Co.  V.  Chicago,  etc.  R.  Co.,  18  Fed. 
484  (1883),  affirmed  sub  nom.  Peoria, 
etc.  R.  Co.  V.  Chicago,  etc.  R.  Co., 
127  U.  S.  200  (1888),  (8  Sup.  Ct. 
Rep.  1125). 

^  Mercantile  Trust  Co.  v.  Atlantic, 
etc.  R.  Co.,  80  Fed.  18  (1897). 

^  Central  Trust  Co.  v.  Wabash,  etc. 
R.  Co.,  23  Fed.  863  (1885).  See  also 
Miltenberger  v.  Logansport  R.  Co., 
166  U.  S.  286  (1882),  (10  Sup.  Ct. 
Rep.  140). 

*  Central  Trust  Co.  v.  Continental 
Trust  Co.,  86  Fed.  517  (1898). 

Where  a  railroad  lease  is  declared 
void  the  lessor  has  no  right  to  a  quarts 
turn  meruit  against  funds  in  hands  of 
receiver,  the  operation  of  the  leased 
road  having  been  a  source  of  loss. 
St.  Louis,  etc.  R.  Co.  v.  Cleveland,  etc. 
R.  Co.,  125  U.  S.  658  (1888),  (8  Sup. 


CHAP.    XXl]  LEASES   UNDER   RECEI\'ERSHIP  §   238 

Where,  however,  the  court  in  authorizing  a  receiver  to  oper- 
ate a  leased  Une  provides  that  the  rent  shall  be  paid  only  after 
certain  prior  payments  have  been  made,  the  lessor  cannot 
claim  payment  from  the  receiver  absolutely.^  The  lessor 
may  re-take  its  road  if  dissatisfied  with  the  provisions  of  the 
order,  but  its  only  demand  against  the  receiver  is  in  accord- 
ance with  the  order. 

Where  a  receiver  makes  a  valid  contract  for  repairs  on  leased 
rolling  stock,  he  is  liable  thereon  as  receiver,  although  it  is 
subsequently  turned  over  to  another  receiver." 

§  238.  Lease  of  Railroad  by  Receiver.  —  As  a  railroad  cor- 
poration cannot,  itself,  lease  its  railroad  and  franchises,  with- 
out legislative  authority,  a  receiver  who  temporarily  assumes 
its  functions  does  not,  without  like  authority,  possess  the 
power.^  The  necessaiy  authority  is  legislative,  not  judicial, 
and  in  order  to  justify  a  lease  by  receivers  some  statutory  pro- 
vision must  confer  the  right  to  execute  it. 

Courts  have,  however,  sometimes  authorized  receivers  ap- 
pointed by  them  to  take  leases  of  railroads,  — generally  short 
connecting  lines,  —  where  the  interest  of  the  creditors  and 
the  corporation  required  it.'*  Upon  the  principle  that  legisla- 
tive authority  is  as  necessary  to  take  as  to  make  a  lease,  it  is 
assumed  that  such  orders  have  been  passed  only  where  some 
general  or  special  law  authorized  the  connection,  by  lease,  of 
the  road  leased  with  that  controlled  by  the  receiver.  It  can- 
not be  that  a  receiver,  without  an  enabling  statute  in  his  be- 
half and  without  authority  in  the  corjDoration  he  represents, 
can,  by  mere  order  of  court,  assume  the  discharge  of  public 
duties  imposed  on  another  corporation. 

Ct.  Rep.  1011).     Whether  a  debt  for  '  Central  Trust  Co.  v.  Wabash,  etc. 

rental  of  a  leased  line,  part  of  a  rail-  R.  Co.,  38  Fed.  63  (1889). 

road  system,  shall    be    treated   as   an  -  Central  Trust  Co.  v.  Wabash,  etc. 

obligation    of    the    receivership,    see  R.  Co.,  50  Fed.  857  (1892). 

Central  R.,  etc.  Co.  v.  Farmers  Loan,  ^  State     v.     McMinn\nlle,    etc.     R. 

etc.  Co.,  79  Fed.  158  (1897).  Co.,     6     Lea     (Tenn.),     369     (1880); 

Les.sor  has  no  preferred  claim  for  McMinnville,  etc.  R.  Co.   v.  Huggins, 

rentals   during   receivership   where  it  3  Raxt.  (Tenn.)   177  (1873). 

<lid    not     demand    either    pos.ses.sion  *  Gibert    v.   Wa.shington    City,    etc. 

or  confirmation   of  lease  by  receiver.  R.   Co.,  33  Gratt.    (Va.)   586   (1880); 

New  York,  etc.  R.  Co.  v.  New  York,  Mercantile  Trust  Co.  v.  Missouri,  etc. 

etc.  R.  Co.,  58  Fed.  208  (1893).  R.  Co.,  41  Fed.  8  (1889). 

431 


239  INTERCOKPOUATE    RELATIONS  [PART    IH 


CHAPTER    XXII 


ULTRA  VIRES  AND  VOIDABLE  RAILROAD  LEASES 

§  239.  Distinction  between  Ultra  Vires  and  Irregular  Leases. 

§  240.  Enforcement  of  Executory  Ultra  Vires  Leases. 

§  241.  Delivery  of  Possession  under  Ultra  Vires  Lease. 

§  242.  Right  and  Duty  of  Disaffirmance. 

§  243.  Recovery  of  Property  after  Disaffirmance. 

§  244.  Recovery  on  Quantwn  meruit  for  Past  Use. 

§  245.  Improvements  made  by  Lessee  under  Ultra  Vires  Lease. 

§  246.  Effect  of  Ultra  Vires  Lease  upon  Stock  Subscriptions. 

§  247.  Guarantee  of  Ultra  Vires  Lease  Void. 

§  248.  Voidable  Railroad  Leases. 

§  249.  Leases  of  Railroads  for  Purpose  of  suppressing  Competition. 

§  250.  Remedy  of  State  —  Quo  Warranto. 

§  251.  Remedy  of  State  —  Injunction. 

§  239.    Distinction  between  Ultra  Vires  and  Irregular  Leases. 

—  There  is  an  obvious  distinction  between  a  want  of  power 
and  a  want  of  formalities  in  the  exercise  of  power.  More 
precisely,  the  exercise  by  a  corporation  of  a  power  not  con- 
ferred by  its  charter  or  the  laws  of  its  incorporation,  is  clearly 
distinguishable  from  the  irregular  exercise,  in  a  particular 
instance,  of  a  general  power  conferred  upon  a  corporation.^ 

1  In  Central  Transp.  Co.  v.  Pull-  be  the  foundation  of  any  right  of 
man  Car  Co.,  139  U.  S.  59  (1891),  action  upon  it.  When  a  corporation 
(11  Sup.  Ct.  Rep.  478),  Mr.  Justice  is  acting  within  the  general  scope  of 
Gray  said  :  "  A  contract  of  a  corpora-  the  powers  conferred  upon  it  by  the 
tion,  which  is  ultra  vires,  in  the  proper  legislature,  the  corporation,  as  well 
sense,  that  is  to  say,  outside  the  ob-  as  persons  contracting  with  it,  may 
ject  of  its  creation  as  defined  in  the  be  estopped  to  deny  that  it  had  corn- 
law  of  its  organization,  and  there-  plied  with  the  legal  formalities  which 
fore  beyond  the  powers  conferred  are  prerequisites  to  its  existence  or 
upon  it  by  the  legislature,  is  not  to  its  action,  because  such  requisites 
voidable  only,  but  wholly  void,  and  might  in  fact  have  been  complied 
of  no  legal  effect.  The  objection  to  with.  But  when  the  contract  is 
the  contract  is,  not  merely  that  the  beyond  the  powers  conferred  upon  it 
corporation  ought  not  to  have  made  by  existing  laws,  neither  the  cor- 
it,  but  that  it  could  not  make  it.  poration,  nor  the  other  party  to  the 
The  contract  cannot  be  ratified  by  contract,  can  be  estopped,  by  assent- 
either  party,  because  it  could  not  have  ing  to  it,  or  by  acting  upon  it,  to  show 
been  authorized  by  either.  No  per-  that  it  was  prohibited  by  those  laws, 
formance  on  either  side  can  give  the  The  doctrine  of  the  common  law,  by 
unlawful    contract    any    validity,    or  which  a  tenant  of  real  estate  is  es- 

432 


CHAP.    XXIl] 


ULTRA    VIRES    LEASES 


239 


A  lease  of  a  railroad,  without  legislative  authority,  is  wholly 
void,  and  the  parties  thereto  are  permitted  to  plead  their 
want  of  authority,  upon  the  ground  that  a  court  will  not  inter- 
fere in  aid  of  parties  to  an  illegal  enterprise.  Principles  of 
estoppel  and  ratification  are  inapplicable.  A  corporation 
cannot  ratify  that  which  it  was  without  power  to  do  in  the 
first  instance;  and  it  cannot  be  estopped  from  pleading  ultra 
vires,  because  all  persons  having  dealings  with  it  are  bound 
to  take  notice  of  the  limitations  of  its  charter/     If,  however, 


topped  to  deny  his  landlord's  title, 
has  never  been  considered  by  this 
court  as  applicable  to  leases  by  rail- 
road corporations  of  their  roads  and 
franchises.  It  certainly  has  no  bear- 
ing upon  the  question  whether  this 
defendant  may  set  up  that  the  lease 
sued  on,  which  is  not  of  real  estate, 
but  of  personal  property,  and  which 
includes,  as  inseparable  from  the  other 
property  transferred,  the  inalienable 
franchise  of  the  plaintiff,  is  unlawful 
and  void,  for  want  of  legal  capacity 
in  the  plaintiff  to  make  it." 

And  in  Davis  v.  Old  Colony  R.  Co., 
1.31  Mass.  260  (18S1),  (41  Am.  Rep. 
221),  Mr.  Justice  Gray,  then  Chief 
Justice  of  the  Supreme  Judicial 
Court  of  Massachusetts,  .said  :  "There 
is  a  clear  distinction,  as  was  pointed 
out  by  Mr.  Justice  Campbell  in  Za- 
briskie  v.  Cleveland,  etc.  R.  Co.,  23 
How.  (U.  S.)  398  (1859),  by  Mr. 
Justice  Hoar  in  Monument  Bank 
V.  Globe  AYorks,  101  Mass.  58  (1869) 
(3  Am.  Rep.  322),  and  by  Lord 
Cliancellor  Cairns  and  Lord  Mathorly 
in  .\shbury  Carriage,  etc.  Co.  v.  Riche, 
L.  R.  7  IL  L.  684  (1875),  between 
the  exercise  by  a  corporation  of  a 
jiower  not  conferred  upon  it,  varjnng 
from  the  objects  of  its  creation  as 
declared  in  the  law  of  its  organiza- 
tion, of  which  all  persons  dealing  with 
it  are  bound  to  take  notice;  anil  the 
abuse  of  a  general  power,  or  the  fail- 
ure to  complj'  with  prescribed  for- 
malities or  regulations,  in  a  partic- 
ular  instance,    when    such    abuse    or 


failure  is  not  known  to  the  other  con- 
tracting party." 

See  also  Miners'  Ditch  Co.  v.  Zeller- 
bach,  37  Cal.  543  (1869),  (99  Am.  Dec. 
300) ;  City  Fire,  etc.  Ins.  Co.  v.  Car- 
rugi,  41  Ga.  660  (1871);  Royal 
British  Bank  v.  Turquand,  6  El.  & 
Bl.  327  (18.56). 

'  Union  Pacific  R.  Co.  v.  Chicago, 
etc.  R.  Co.,  163  U.  S.  581  (1896),  (16 
Sup.  Ct.  Rep.  1173):  "The  general 
rule  is  that  a  contract  bj'  which  a 
railroad  companj'  renders  itself  in- 
capable of  performing  its  duties  to 
the  public,  or  attempts  to  absolve  it- 
self from  those  obligations  without  the 
consent  of  the  State,  or  a  contract  made 
by  a  corporation  beyond  the  scope  of 
its  powers,  express  or  implied,  on  a 
proper  construction  of  its  charter,  can- 
not be  enforced,  or  rendered  enforce- 
able bj'  the  application  of  the  doctrine 
of  estoppel ;  .  .  .  but  where  the  sub- 
ject-matter of  the  contract  is  not  for- 
eign to  the  purposes  for  which  the  cor- 
poration is  created,  a  contract  em- 
bracing 'whatever  may  fairly  be 
regarded  as  incidental  to,  or  consequen- 
tial upon,  those  things  which  the  leg- 
islature has  authorized,  ought  not,  vm- 
less  expressly  prohibited,  to  be  held  by 
judicial  construction  to  be  2dtra  vires.'  " 

A  legislative  act  purporting  to 
ratify  an  ultra  vires  lea.se,  is,  in  effect, 
a  new  grant  of  power.  The  accept- 
ance of  rent  under  an  ultra  vires  lease 
does  not  make  it  valid.  Ogdensburgh, 
etc.  R.  Co.  1'.  Vermont,  etc.  R.  Co., 
4  Hun  (N.  Y.),  268  (1875). 

433 


240 


INTERCORPORATE    RELATIONS 


[part  hi 


the  execution  of  the  lease  is  within  the  powers  of  the  contract- 
ing corporations,  but  either  has  failed  to  conform  to  statutory- 
regulations  designed  for  the  protection  of  its  stockholders, 
the  stockholders  may  ratify  the  lease  and,  as  already  shown, 
both  the  corporation  and  the  stockholders  may  be  estopped 
from  denying  its  validity.^ 

§  240.  Enforcement  of  Executory  Ultra  Vires  Leases.  —  While 
executed  contracts  made  by  corporations  in  excess  of  their 
legal  powers  have,  in  some  jurisdictions,  been  upheld  by  the 
courts,  and  parties  have  been  precluded  from  setting  up  as  a 
defence  to  actions  brought  by  or  against  corporations  their 
want  of  power  to  enter  into  such  contracts,  the  doctrine  has 
never  been  applied  to  mere  executoiy  contracts.^  ' 

Public  policy  forbids  ultra  vires  leases  of  railroads,  and  the 
authorities  are  practically  unanimous  in  holding  that  in  no 
way,  directly  or  indirectly,  will  the  courts  allow  an  action  to 
be  maintained  to  enforce  the  provisions  of  such  leases,  while 
they  remain  executory.^     They  will  not  aid  a  corporation  to 


'  Boston,  etc.  R.  Co.  v.  New  York, 
etc.  R.  Co.,  13  R.  I.  260  (1881) ;  Hum- 
phreys V.  St.  Louis,  etc.  R.  Co.,  37 
Fed.  307  (1889).  See  also  ante,  §  192  : 
"Acquiescence  and  Laches  of  Stock- 
holders";  ante,  §  196:  "Corporation 
may  be  estopped  from  alleging  Irregidar 
Execution  of  Lease. " 

2  United  States:  Safety  Insulated 
Wire,  etc.  Co.  v.  Baltimore,  74  Fed. 
135  (1890). 

Massachusetts:  In  White  v.  Buss, 
3  Cush.  449  (1849),  Chief  Justice 
Shaw  laid  down  the  rule  as  follows : 
"It  is  well  settled  by  the  authorities, 
that  any  promise,  contract  or  under- 
taking, the  performance  of  which 
would  tend  to  promote,  advance,  or 
carry  into  effect  an  object  or  purpose 
which  is  unlawful,  is  in  itself  void 
and  will  not  maintain  an  action." 

New  York :  Nassau  Bank  v.  Jones, 
95  N.  Y.  122  (1882),  (47  Am.  Rep.  14). 
Also  Jemison  v.  Citizens  Sa^^ngs  Bank, 
122  N.  Y.  142  (1890),  (25  N.  E.  Rep. 
264),  19  Am.  St.  Rep.  482;  Tracy  v. 
Talmadge,  14  N.  Y.  162  (1856). 

434 


England:  Ashbury  Railway  Car- 
riage, etc.  Co.  V.  Riche,  L.  R.  7 
H.  L.  653  (1875),  L.  R.  9  Ex.  224; 
Caledonian,  etc.  R.  Co.  v.  Magis- 
trates of  Helensburgh,  2  Macq.  391 
(1855). 

^  United  States:  Pullman  Car  Co. 
V.  Central  Transp.  Co.,  171  U.  S.  138 
(1898),  (18  Sup.  Ct.  Rep.  808);  St. 
Louis,  etc.  R.  Co.  v.  Terre  Haute,  etc. 
R.  Co.,  145  U.  S.  393  (1892),  (12  Sup. 
Ct.  Rep.  953) ;  Central  Transp.  Co.  v. 
Pullman  Car  Co.,  139  U.  S.  24  (1891), 
(11  Sup.  Ct.  Rep.  478);  Oregon  R., 
etc.  Co  .-v.  Oregonian  R.  Co.,  130  U.  S. 
1  (1889),  (9  Sup.  Ct.  Rep.  409) ;  Penn- 
sylvania R.  Co.  V.  St.  Louis,  etc.  R. 
Co.,  118  U.  S.  290  (1886),  (6  Sup.  Ct. 
Rep.  1094)  ;  Thomas  v.  Railroad  Co., 
101  U.  S.  71  (1879). 

Maine:  Brunswick  Gas  Light  Co. 
V.  United  Gas,  etc.  Co.,  85  Me.  532 
(1893),  (27  Atl.  Rep.  525,  35  Am.  St. 
Rep.  385). 

New  York:  Compare  Bath  Gas 
Light  Co.  V.  Claffy,  151  N.  Y.  24 
(1896),  (45  N.  E.  Rep.  390,  36  L.  R.  A. 


CHAP.    XXIl]  ULTRA    VIRES    LEASES  §   241 

enforce  its  unlawful  contracts.  They  will  not  assist  in  divert- 
ing corporate  funds  to  unauthorized  objects,  to  the  detriment 
of  stockholders  and  creditors  and  prejudice  of  the  rights  of 
the  State.  While  the  application  of  this  principle  may  allow 
a  corporation  to  repudiate  its  contracts  and  escape  its  obliga- 
tions, such  result  is  incidental,  and  must  be  borne  by  the 
suffering  party  as  a  penalty  for  participating  in  an  illegal  en- 
terprise. 

Lord  Mansfield  thus  tersely  stated  the  position  of  the  courts 
in  Holman  v.  Johnson,^  decided  in  1775:  "  The  objection 
that  a  contract  is  immoral  or  illegal  as  between  the  plaintiff 
and  defendant,  sounds  at  all  times  very  ill  in  the  mouth  of 
the  defendant.  It  is  not  for  his  sake,  however,  that  the  ob- 
jection is  ever  allowed;  but  is  founded  on  general  principles 
of  policy,  which  the  defendant  has  the  advantage  of,  contrary 
to  the  real  justice,  as  between  him  and  the  plaintiff,  by  acci- 
dent, if  I  may  say  so.  The  principle  of  public  policy  is  this: 
ex  dolo  vialo  non  oritur  actio.  No  court  will  lend  its  aid  to 
a  man  who  founds  his  cause  of  action  upon  an  immoral  or  an 
illegal  act." 

§  241.  Delivery  of  Possession  under  Ultra  Vires  Lease.  — 
It  has  been  held  that  the  principle  enunciated  by  many  courts 
that  a  party  to  an  ultra  vires  contract  who  has  received  the 
benefit  of  its  full  performance  is  estopped  from  questioning 
its  validity,  is  applicable  in  the  case  of  an  unauthorized  lease 
of  a  railroad  where  possession  has  passed,  upon  the  ground 
that  delivery  of  possession  constitutes  complete  execution 
on  the  part  of  the  lessor.^     The  weight  of  authority,  however, 

664);     Woodruff   v.    Erie   R.    Co.,   93  2  Camden,    etc.    R.    Co.    v.    May's 
N.  Y.  609  (1883).  Landing,  etc.  R.  Co.,  48  N.  J.  L.  5.30 
England:    East  Anglian  R.  Co.   v.  (1886),    (7    Atl.    Rep.    523).     In   this 
Eastern  Counties  R.  Co.,  11  C.  H.  775  case     (two     judges    dissenting),     the 
(1851)  ;    McGregor  v.   Dover,  etc.   R.  Court    allowed    a    recovery    of    rent 
Co.,  18  Q.  H.  618  (1852).  accruing  after  an  abandonment  of  an 
'  Holman  v.  Johnson,  1  Cowp.  341  idtra  vires  lease,  reaching  the  conclu- 
(1775).  sion   that   the    transaction   was  corn- 
Lord  Mansfield,  in  Smith  v.  Brom-  pleted  upon  the  part  of  the  lessor  by 
ley,   2   Doug.    696   (1760),   an   earlier  the  delivery  of  the  lea.sed  road,   and 
case,  says :  "If  the  act  is  in  itself  im-  that   the    other  party   should  not  be 
moral,  or  a  violation  of  the  general  allowed  to  plead  ultra  vires  when  sued 
laws  of  public  policy,  then  the  party  for   not    performing   its    part    of   the 
paying   shall    not    have  his    action."  contract.     The  Court,  however,  said 

435 


241 


INTERCORPORATE   RELATIONS 


[part    III 


supports  the  view  that  a  lease  is  a  continuing  contract,  as  to 
rent  and  as  to  occupancy,  and  is  executory  in  respect  of  its 
future   performance.^     Upon    the   principles    just    considered, 


that  the  question  is  different  where 
the  State  accuses  a  corporation  of 
exceeding  its  powers,  thus  apparently 
adopting  the  doctrine,  sometimes 
stated  by  courts,  that  the  State  alone 
can  question  ultra  vires  acts  of  cor- 
porations. This  doctrine,  however, 
while  reasonable  in  many  respects,  is 
opposed  to  the  great  weight  of 
authority. 

>  In  Pennsylv^ania  Co.  v.  St.  Louis, 
etc.  R.  Co.,  118  U.  S.  316  (1886),  (6 
Sup.  Ct.  Rep.  1094),  Mr.  Justice  Miller 
said :  "  It  is  argued  in  support  of  the 
decree,  that,  though  the  contract  of 
the  lease  was  void,  so  that  no  action 
could  originally  have  been  sustained 
upon  it,  there  has  been  for  ten  years 
such  performance  of  it,  in  the  use, 
possession  and  control  of  plaintiff's 
road  and  its  franchises  by  the  de- 
fendant, that  they  cannot  now  be 
permitted  to  repudiate  or  abandon  it ; 
that  it  now  presents  a  class  of  cases 
which  hold  that  where  a  void  contract 
has  been  so  far  executed  that  property 
has  passed  under  it  and  rights  have 
been  acquired  under  it,  the  courts 
will  not  disturb  the  po.ssession  of  such 
property.  .  .  .  We  know  of  no  well- 
considered  case  where  a  corporation, 
which  is  a  party  to  a  continuing  con- 
tract, which  it  had  no  power  to  make, 
seeks  to  retract  and  refuses  to  proceed 
further  can  be  compelled  to  do  so." 

And  in  Oregon  R.,  etc.  Co.  v.  Ore- 
gonian  R.  Co.,  130  U.  S.  37  (1889), 
(9  Sup.  Ct.  Rep.  409),  Mr.  Ju.stice 
Miller  said  :  "To  say  that  a  contract 
which  runs  for  ninety-six  years,  and 
which  requires  of  both  parties  to  it 
continual  and  actual  operations  and 
performance  under  it,  becomes  an 
executed  contract  by  such  perform- 
ance for  less  than  three  years  of  the 
term,  is  carrying  the  doctrine  much 
farther  than  it  has  ever  been  carried, 

436 


and  is,  decidedly,  a  misnomer.  This 
class  of  cases  is  not  governed  by  the 
doctrine  of  part  performance  in  a 
suit  in  equity  for  specific  performance, 
nor  is  this  a  suit  for  specific  perform- 
ance. This  is  an  action  at  law  to 
recover  money  under  a  contract 
which  is  void,  where  for  nearly  three 
years  the  parties  acted  under  it,  but 
in  which  one  of  them  refuses  longer 
to  be  bound  by  its  pro'visions ;  and 
the  argument  now  set  up  is  that  be- 
cause the  defendant  has  paid  for  all 
the  actual  use  it  made  of  the  road, 
while  engaged  in  the  actual  perform- 
ance of  the  contract  between  the 
dates  just  given,  it  is  thereby  bound 
for  more  than  ninety-three  years 
longer  by  the  contract  which  was 
made  without  lawful  authority  by  its 
president  and  board  of  directors.  We 
consider  this  proposition  as  needing 
no  further  consideration." 

So  in  Thomas  v.  Railroad  Co.  101 
U.  S.  86  (1879),  the  Court  said  :  "  But 
what  is  sought  in  the  case  before  us  is 
the  enforcement  of  the  unexecuted 
part  of  this  agreement.  So  far  as  it 
has  been  executed,  namely,  the  four 
or  five  years  of  action  under  it,  the 
accounts  have  been  adjusted,  and 
each  party  has  received  what  he  was 
entitled  to  by  its  terms.  There  re- 
mains unperfornaed  the  covenant  to 
arbitrate  with  regard  to  the  value  of 
the  contract.  It  is  the  damages  pro- 
Anded  for  in  that  clause  of  the  con- 
tract that  are  sued  for  in  this  action. 
Damages  for  a  material  part  of  the 
contract  never  performed ;  damages 
for  the  value  of  a  contract  which  was 
void.  It  is  not  a  case  of  a  contract 
fully  executed.  The  very  nature  of 
the  suit  is  to  recover  damages  for  its 
non-performance.  As  to  this  it  is 
not  an  executed  contract." 

See    also    Central   Transp.    Co.    v. 


CHAP.    XXIl]  ULTRA   VIRES    LEASES  §   242 

therefore,  no  action  can  l)e  maintained  upon  such  a  lease  for 
any  failure  to  further  perform  it,  and  the  lessee  may  surrender 
an  unexpired  term  without  liability  for  damages. 

§  242.  Right  and  Duty  of  Disaffirmance.  —  As  an  ultra 
vires  lease  of  a  railroad  is  forbidden  by  considerations  of  public 
policy,  and  involves  a  continuing  violation  of  the  obligations 
of  the  corporations  to  the  State,  it  is  the  duty,  as  well  as  the 
right,  of  the  parties  to  rescind  and  abandon  it  at  the  earliest 
possible  moment;  and  this  duty  is  a  continuing  one  which 
is  rendered  none  the  less  imperative  by  delay  in  its  performance.' 

This  right  —  and  corresponding  duty  —  of  rescission  is 
generally  spoken  of  in  the  decisions  as  belonging  to  the  lessee. 
Upon  principle,  however,  there  should  be  no  distin<'tion  be- 
tween the  right  and  obligation  of  the  lessee  and  of  the  lessor. 
They  are  both  parties  to  an  unlawful  contract  and  owe  the 
same  duty  to  disaffirm  it.  Practically,  however,  the  right 
may  be  said  to  be  unilateral,  owing  to  obstacles  placed  by  the 
courts  in  the  path  of  the  lessor  in  recovering  his  property  when 
the  lessee  has  not  repudiated  the  lease.  Practically,  also, 
the  duty  of  rescission  will  rest  lightly  upon  a  lessor  who  risks 
the  confiscation  of  his  property  by  obsei-v'ing  it.  Thus,  the 
Supreme  Court  of  the  United  States  has  held  that  the  parties 
to  an  unauthorized  lease  are  guilty  of  a  public  wrong  which 
]>recludes  a  court  of  equity  from  entertaining  a  bill  by  a  lessor 
for  relief  from  the  lease  and  for  a  return  of  the  property;  and 
has  intimated  that  neither  a  court  of  law  nor  of  equity  would 
grant  a  lessor,  under  such  a  lease,  any  relief  in  obtaining  its 

Pullman  Car  Co.,  139  U.  S.  24  (1891),  See  also  Pvillman  Car  Co.  v.  Central 

(11    Sup.   Ct.   Rep.   478);    Mallory  v.  Transp.  Co.,  171  U.  S.  lol  (1898),  (IS 

Hanaur    Oil    Work.s,    86    Tenn.    598  Sup.  Ct.  Rep.  808)  :   "The  right  of  re- 

(1888),  (8  S.  W.  Rep.  396).     Compare  covcry  must  rest  upon  a  disaffirmanee 

Ileims  Brewing  Co.  v.  Flannery,   137  of  the  contract."     Also  St.  Louis,  etc. 

111.  309  (1891),  (27  N.  E.  Rep.  286).  R.  Co.  r.  Terre  Haute,  etc.  R.  Co.,  145 

»  A  contract  made  by  a  corporation  U.  S.  393  (1892),   (12  Sup.  Ct.   Rep. 

which  is  unlawful  and  void  does  not  953) ;    Central  Transp.  Co.  v.  Pullman 

by  being  carried  into  execution   be-  Car  Co.,  139  U.  S.  24  (1891),  (11  Sup. 

come  lawful  and  valid.     The  proper  Ct.   Rep.   478) ;    Pennsylvania  Co.    i'. 

remedy  of  an  aggrieved  party  is  to  St.  Louis,  etc.  R.  Co.,  118  U.  S.  290 

disaffirm     the     contract.      Brunswick  (1886),     (6     Sup.     Ct.     Rep.     1094): 

Gas  Light  Co.  v.  United  States,  etc.  Thomas   v.    Railroad   Co.,    101    T'.    S. 

Co.,  85  Me.  5.32  (1893),  (27  Atl.  Rep.  71  (1879). 
525,  35  Am.  St.  Rep.  385). 

437 


§243 


INTERCORPORATE    RELATIONS 


[part  III 


property,  so  long  as  the  lessee  was  satisfied.'  And  the  Su- 
preme Court  of  Texas  has  carried  this  doctrine  to  its  logical 
conclusion  by  holding  that  a  lessor,  under  an  unauthorized 
lease,  will  not  receive  the  aid  of  the  courts  in  recovering  its 
railroad,  rent  or  a  quantum  meruit.''' 

This  doctrine  cannot  be  approved.  The  illegality  of  an 
ultra  vires  lease  involves  no  moral  turpitude,  and,  while  a 
court  of  equity  might  properly  decline  to  disturb  the  posses- 
sion of  property  acquired  thereunder,  a  court  of  law  should 
always  be  open  to  a  lessor  corporation  when  it  seeks  to  do  its 
duty,  —  to  abandon  an  illegal  continuing  contract  and  retake 
its  property.^  Am  action  for  such  a  purpose  is  not  in  affirm- 
ance, but  in  disaffirmance,  of  the  lease,  while  the  denial  of  a 
remedy  permits  the  lessee  to  retain  the  property  as  long  as  it 
chooses  and  gives  effect  to  an  illegal  lease.^ 

§  243.  Recovery  of  Property  after  Disaffirmance.  —  Upon  the 
abandonment  by  a  lessee  corporation  of  an  ultra  vires  lease, 
it  is  bound  upon  principles  of  natural  justice  to  return  the 
leased  property  to  the  lessor  or  make  compensation  for  its 


•  In  St.  Louis,  etc.  R.  Co.  v.  Terre 
Haute,  etc.  R.  Co.,  145  U.  S.  393 
(1892),  (12  Sup.  Ct.  Rep.  953),  Mr. 
Justice  Gray  said  :  "When  the  parties 
are  in  pari  delicto,  and  the  contract 
has  been  fully  executed  on  the  part 
of  the  plaintiff,  by  the  conveyance  of 
propertj%  or  by  the  payment  of 
money,  and  has  not  been  repudiated 
by  the  defendant,  it  is  now  equally 
well  settled  that  neither  a  court  of 
law  nor  a  court  of  equity  will  assist 
the  plaintiff  to  recover  back  the 
property  conveyed  or  money  paid 
under  the  contract."  This  language 
was  used  with  reference  to  an  ultra 
vires  lease  which  the  lessor  desired 
to  cancel  and  under  which  a  railroad 
had  been  transferred  to  and  operated 
without  objection  by  the  lessee  for 
seventeen  years.  The  Court  denied 
equitable  relief  and  used  the  language 
above  stated,  which  is  difficult  to 
reconcile  with  its  language  in  Pull- 
man Car  Co.  V.  Central  Transp.  Co., 
171   U.   S.   138  (1898),   (18  Sup.  Ct. 

438 


Rep.  808),  and  in  Central  Transp.  Co. 
V.  Pullman  Car  Co.,  139  U.  S.  24 
(1891).  (11  Sup.  Ct.  Rep.  478),  except 
upon  the  ground  that  the  cases  are 
distinguished  by  the  lessee's  repudia- 
tion of  the  lease  in  the  latter  cases. 
This,  in  efTect,  gives  the  lessee  the 
exclusive  right  of  repudiation,  for  if 
the  lessor  repudiates  he  is,  according 
to  the  decision,  without  remedy. 

^  Olcott  V.  International,  etc.  R. 
Co.  (Tex.  1894),  28  S.  W.  Rep.  728. 
See  note  to  §  243,  post:  "Recovery  of 
Property  after  Disaffirmance,"  for 
further  consideration  of  this  remark- 
able decision. 

^  That  ejectment  will  lie  to  recover 
possession  of  a  railroad,  see  St.  Louis, 
etc.  R.  Co.  V.  Terre  Haute,  etc.  R.  Co., 
33  Fed.  440  (1888);  Railroad  Co.  v. 
Johnson,  119  U.  S.  608  (1887),  (7  Sup. 
Ct.  Rep.  339). 

*  Parkersburgh  v.  BrowTi,  106  U.  S. 
503  (1882),  (1  Sup.  Ct.  Rep.  442), 
(case  of  invalid  bonds)  :  "The  en- 
forcement  of   such    rights   is   not   in 


CHAP.    XXIl]  ULTRA    VIRES    LEASES  §   243 

loss.^  However  much  the  contractual  powers  of  corporations 
may  be  Hmited  by  their  charters,  there  is  no  Umitation  upon 
their  power  to  make  restitution  of  property  acquired  under 
an  unlawful  lease;  "  nor,  as  corporations,  are  they  exempted 
from  the  common  obligation  to  do  justice  which  binds  indi- 
viduals, for  this  duty  rests  upon  all  persons  alike,  whether 
natural  or  artificial."  ^ 

The  Supreme  Court  of  the  United  States,  however,  in  a 
series  of  cases  of  controlling  authority,  holds  that  "in  no  way 
and  through  no  channels,  directly  or  indirectly,  will  the  courts 
allow  an  action  to  be  maintained  for  the  recovery  of  property 
delivered  under  an  illegal  contract  where,  in  order  to  maintain 
such  recovery,  it  is  necessary  to  have  recourse  to  that  contract. 
The  right  of  recovery  must  rest  upon  a  disaffirmance  of  the 
contract,  and  it  is  permitted  only  because  of  the  desire  of 
courts  to  do  justice  as  far  as  possible  to  the  party  who  has 
made  payment  or  delivered  property  under  a  void  agreement 
and  whi(^h  in  justice  he  ought  to  recover."  ^  Upon  these  prin- 
ciples, an  action  for  the  recovery  of  property  delivered  under 
an  invalid  lease  cannot  be  maintained  thereon  upon  its  rescis- 
sion, but  will  lie  upon  the  implied  contract  of  the  lessee  to  re- 
turn, or,  failing  in  that,  to  make  compensation  for  the  property 
which  it  has  no  right  to  retain.*     An  action  at  law  should  also 

affirmance  of  the  illegal  contract,  but  of  that  which  it  has  actually  received  ; 

is  in  disaffirmance  of  it."  for,  in  such  a  case,  to  maintain  the 

'  "To  say  that  a  corporation  can-  action  against  the  corporation  is  not 

not  sue  or  be  sued  upon  an  idtra  vires  to  affirm,  but  to  disaffirm,  the  illegal 

arrangement    is    one    thing.     To    say  contract."     Citing  White  v.  Franklin 

that  it  may  retain  the  proceeds  thereof  Bank,   22   Pick.    (Mass.)    181    (18.39); 

which  have  come  into  its  possession  Morville  v.  American  Tract  Soc,  123 

without    making    any    compensation  Mass.  129  (1877),  (25  .\m.  Rep.  40); 

whatever  to  the   person   from   whom  In  re  Cork,  etc.  R.  Co.,  L.  R.  4  Ch. 

it    has   obtained   them,    is   something  App.  748  (1869). 

\-erj'  different,  and  .savors  very  much  -  Manchester,   etc.   R.   Co.   v.  Con- 

of  an  inducement  to  fraud."     Green's  cord,  etc.  R.  Co.,  66  N.  H.  127  (1890), 

Brice's  Ultra  Vires  (2d  Am.  Ed.),  721.  (20  Atl.  Rep.  384,  49  Am.  St.  Rep. 

D&vis  V.  Old  Colony  R.  Co.,   131  582,  9  L.  R.  A.  689). 

Mass.  275  (1881),  (41  Am.  Rep.  221),  ^  Pullman     Car     Co.      v.     Central 

(per   Gray,    C.    J.):     "A   corporation  Transp.    Co.,    171    U.    S.    151    (189S), 

may  indeed  be  bound  to  refund  to  a  (18  Sup.  Ct.  Rep.  808),  (per  Peckham, 

person,    from    whom   it    has   received  .!.).     See  also  cases  cited  in  note  fol- 

money  or  property  for  a  purpose  un-  lowing, 

authorized  by  its  charter,   the   value  *  Central   Transp.    Co.    r.    Pullman 

439 


§244 


INTERCORPORATE   RELATIONS 


[part   III 


be  available  for  the  recovery  of  the  specific  property,  as  well 
as  a  suit  in  equity  for  an  accounting  and  restitution.* 

§  244.  Recovery  on  Quantum  Meruit  for  Past  Use.  —  Upon 
the  principle,  just  considered,  that  no  action  can  be  main- 
tained upon  an  unlau^ul  contract,  it  is  held  by  the  Supreme. 
Court  of  the  United  States  and  other  courts  that  no  recovery 
can  be  had  of  rent,  as  such,  due  under  an  ultra  vires  lease, 
although  the  lessee  before  disaffirmance  has  enjoyed  posses- 


Car  Co.,  139  U.  S.  24  (1891),  (11  Sup. 
Ct.  Rep.  478).  See  also  Pennsylvania 
R.  Co.  V.  St.  Louis,  etc.  R.  Co.,  118 
U.  S.  317  (1886),  (6  Sup.  Ct.  Rep. 
1094)  ;  Brunswick  Gas  Light  Co.  v. 
United  Gas,  etc.  Co.,  85  Me.  532 
(1893),  (27  Atl.  Rep.  525,  35  Am.  St. 
Rep.  389). 

In  Railway  Companies  v.  Keokuk 
Bridge  Co.,  131  U.  S.  389  (1889),  (9 
Sup.  Ct.  Rep.  770),  Justice  Gray  said  : 
"According  to  many  recent  opinions 
of  this  court,  a  contract  made  by  a 
corporation,  which  is  unlawful  and 
void  because  beyond  the  scope  of  its 
corporate  powers,  does  not,  by  being 
carried  into  execution,  become  lawful 
and  valid,  but  the  proper  remedj^  of 
the  party  aggrieved  is  by  disaffirming 
the  contract,  and  suing  to  recover,  as 
on  a  quantum  meruit,  the  value  of 
what  the  defendant  has  actuallj'^  re- 
ceived the  benefit  of. "  Citing  Louisi- 
ana V.  Wood,  102  U.  S.  294  (1800); 
Parkersburgh  v.  Brown,  106  U.  S.  487 
(1882),  (1  Sup.  Ct.  Rep.  442) ;  Chap- 
man V.  Douglas  County,  107  U.  S.  348 
(1882),  (2  Sup.  Ct.  Rep.  62);  Salt 
Lake  City  v.  Hollister,  118  U.  S.  256 
(1886),  (6  Sup.  Ct.  Rep.  1055). 

Compare,  however,  Olcott  v.  Inter- 
national, etc.  R.  Co.  (Tex.  1894),  28 
S.  W.  Rep.  728,  which  holds  that  a 
lessor,  party  to  an  iiltra  vires  lease,  will 
not  receive  the  aid  of  the  courts  to 
obtain  either  the  return  of  the 
property,  rent  or  quantum  meruit 
compensation ;  that  both  parties  are 
in  pari  delicto  and  that  the  Court 
will  leave  them  where  they  have 
deliberately    put     themselves.      This 

440 


remarkable  decision,  permitting  the 
absolute  confiscation  of  the  lessor's 
property,  is  the  not  illogical  outcome 
of  the  decision  of  the  Supreme  Court 
of  the  United  States  in  St.  Louis,  etc. 
R.  Co.  V.  Terre  Haute,  etc.  R.  Co.,  145 
U.  S.  393  (1892),  (12  Sup.  Ct.  Rep. 
593),  to  which  reference  was  made  in 
the  last  section. 

'  A  cross  bill  for  an  accounting,  etc., 
was  allowed,  under  the  circum.stances 
of  the  case,  in  Pullman  Car  Co.  v. 
Central  Transp.  Co.,  171  U.  S.  138 
(1898),  (18  Sup.  Ct.  Rep.  808),  and 
there  is  no  reason,  in  principle,  why 
such  a  bill  should  not  be  allowed  in 
all  cases  where  the  leased  property 
has  been  lost  or  destroyed.  In  the 
celebrated  case  referred  to,  the  Court, 
upon  the  principle  stated  in  the  text, 
decided  : 

(a)  That  the  lessor  was  entitled  to 
recover  from  the  lessee  the  value  of 
the  property  transferred  to  it  when 
the  lease  took  effect,  with  interest,  as 
that  property  had  substantially  dis- 
appeared and  could  not  be  returned. 

(b)  That  the  market  value  of  the 
lessor's  shares  was  no  measure  of  the 
value  of  the  leased  property,  although 
it  was  its  entire  plant. 

(c)  That  the  lessor  was  not  entitled 
to  recover  anything  for  the  breaking 
up  of  its  business. 

For  other  cases  as  to  the  proper 
remedy,  see  Louisiana  v.  Wood,  102 
U.  S.  294  (1880) ;  Da\'is  v.  Old  Colony 
R.  Co.,  131  Mass.  258  (1881),  (41  Am. 
Rep.  221);  New  Castle  Northern  R. 
Co.  V.  Simpson,  23  Fed.  214  (1885). 


CHAP.    XXIl] 


ULTRA    VIRES    LEASES 


§244 


sion  of  the  property  according  to  its  terms. ^  The  lessor,  how- 
ever, while  denied  a  recovery  of  the  stipulated  rent,  may  re- 
cover compensation  in  an  action  for  use  and  occupation  based 
upon  an  implied  agreement  on  the  part  of  the  lessee  to  pay 
the  value  of  such  use.^     In  such  an  action,  on  a  quantum  meruit 


*  Pullman  Car  Co.  v.  Central  Transp. 
Co.,  171  U.  S.  138  (1898),  (18  Sup. 
Ct.  Rep.  808);  Central  Transp.  Co. 
V.  Pullman  Car  Co.,  139  U.  S.  60 
(1891),  (11  Sup.  Ct.  Rep.  478);  Ore- 
gon R.,  etc.  Co.  V.  Oregonian  R.  Co., 
130  U.  S.  1  (1899),  (9  Sup.  Ct.  Rep. 
409);  Pennsylvania  R.  Co.  v.  St. 
Louis,  etc.  R.  Co.,  118  U.  S.  290 
(1886),  (6  Sup.  Ct.  Rep.  1094);  Cox 
V.  Terre  Haute,  etc.  R.  Co.,  133  Fed. 
371(1904);  Brunswick  Gas  Light  Co. 
V.  United  Gas,  etc.  Co.,  85  Me.  532 
(1893),  (27  Atl.  Rep.  525,  35  Am.  St. 
Rep.  389).  See  also  Union  Bridge 
Co.  V.  Troy,  etc.  R.  Co.,  7  Lans.  (N. 
Y.)  240  (1872),  altliough  this  case  is 
not  in  accordance  with  later  New 
York  authorities. 

In  Olcott  V.  International,  etc.  R. 
Co.  (Tex.  1894),  28  S.  W.  Rep.  728, 
referred  to  in  the  last  section,  the  Court 
denied  a  lessor  compensation  based 
either  upon  the  lease  or  upon  a  quan- 
tum meruit.  For  reasons  already 
pointed  out,  this  decision  is  as  far 
removed  from  good  law  as  it  is  from 
just  principles. 

-  Brunswick  Gas  Light  Co.  v. 
United  Gas,  etc.  Co.,  85  Me.  532 
(1893),  (27  Atl.  Rep.  525,  35  Am.  St. 
Rep.  389) ;  Manchester,  etc.  R.  Co.  v. 
Concord  R.  Co.,  66  N.  H.  100  (1890), 
(20  Atl.  Rep.  383,  49  Am.  St.  Rep. 
582,  9  L.  R.  A.  689).  While  the  Su- 
preme Court  of  the  United  States 
has  not  decided  the  preci.se  question 
whether  a  recovery  can  be  had  upon 
a  quantum  meruit  for  past  use  under 
an  ultra  vires  lease,  it  is  apparent 
from  its  language  in  Pullman  Car  Co. 
i\  Central  Transp.  Co.,  171  U.  S.  150 
(1898),  (18  Sup.  Ct.  Rep.  808),  and 
Central  Transp.  Co.   v.   Pullman  Car 


Co.,  139  U.  S.  60  (1891),  (11  Sup.  Ct. 
Rep.  478),  that  should  the  case  come 
before  it  such  recovery  would  be  al- 
lowed. Thus  in  the  latter  case  the 
Court  said:  "A  contract  ultra  vires 
being  unlawful  and  void,  not  because 
it  is  in  itself  immoral,  but  because  the 
corporation,  by  tlie  law  of  its  creation, 
is  incapable  of  making  it,  the  courts, 
while  refusing  to  maintain  any  action 
upon  the  unlawful  contract,  have  al- 
waj-s  striven  to  do  justice  between  the 
parties,  so  far  as  could  be  done  con- 
sistently with  atlherence  to  law,  by 
permitting  property  or  money,  parted 
with  on  the  faith  of  the  unlawful  con- 
tract, to  be  recovered  back,  or  com- 
pensation to  be  made  for  it.  In  such 
case,  however,  the  action  is  not  main- 
tained upon  the  unlawful  contract, 
nor  according  to  its  terms ;  but  on  an 
implied  contract  of  the  defendant  to 
return,  or,  failing  to  do  that,, to  make 
compensation  for  property  or  money 
which  it  has  no  right  to  retain.  To 
maintain  such  an  action  is  not  to 
affirm,  but  to  disaffirm,  the  unlawful 
contract."  Citing  Pittsburgh,  etc. 
R.  Co.  V.  Keokuk,  etc.  Bridge  Co.,  131 
U.  S.  371  (1881),  (9  Sup.  Ct.  Rep. 
770) ;  Salt  Lake  ttty  v.  HoUister,  118 
U.  S.  263  (1886),  (6  Sup.  Ct.  Rep. 
1055) ;  Chapman  v.  Douglas  Co.,  107 
U.  S.  355  (1882),  (2  Sup.  Ct.  Rep.  62) ; 
Parkersburgh  v.  Brown,  106  U.  S.  503 
(1882),  (1  Sup.  Ct.  Rep.  442) ;  Louisi- 
ana v.  Wood,  102  U.  S.  299  (1880); 
Hitchcock  v.  Galveston,  96  U.  S.  350 
(1887). 

See  also  cases  collected  in  dissent- 
ing opinion  of  Vann,  J.,  in  Bath  Gas 
Light  Co.  1'.  ClaPfy,  151  N.  Y.  45 
(1896),  (45  N.  E.  Rep.  390,  36  L.  U.  A. 
GG4). 

441 


I   244  INTERCORPORATE    RELATIONS  [PART    III 

the  lease  may  be  introduced  in  evidence  as  in  the  nature  of 
an  admission  of  what  is  a  reasonable  rental,  but  it  is  held  that 
it  cannot  govern  or  control  the  amount  to  be  allowed.* 

On  the  other  hand,  it  is  held  by  other  courts,  under  the 
leadership  of  the  New  York  Court  of  Appeals,  upon  principles 
of  estoppel,  that  the  lessee  is  bound  by  the  terms  of  the  lease 
for  the  time  he  remains  in  possession,  and  that  recovery  of 
past  due  rent  may  be  obtained  by  the  lessor,  in  an  action  on 
the  lease,  although  it  may  be  void  as  to  the  pubUc.^  As  said 
by  Chief  Judge  Andrews  in  Bath  Gas  Light  Co.  v.  Claffy:^ 
"  The  State  has  not  intervened,  and  the  possession  of  the 
property  has  now  been  restored  to  its  original  proprietors. 
The  contract  has  been  terminated  as  to  the  future,  and  all 
that  remains  undone  is  the  payment  by  the  lessee  of  the  un- 
paid rent.  We  think  the  demands  of  public  policy  are  fully 
satisfied  by  holding  that,  as  to  the  public,  the  lease  was  void, 
but  that,  as  between  the  parties,  so  long  as  the  occupation 
under  the  lease  continued,  the  lessee  was  bound  to  pay  the  rent, 
and  that  its  recovery  may  be  enforced  by  action  on  the  cove- 
nant. Public  policy  is  promoted  by  the  discouragement  of 
fraud,  and  the  maintenance  of  the  obligations  of  contracts, 
and  to  permit  a  lessee  of  a  corporation  to  escape  the  payment 
of  rent  by  pleading  the  incapacity  of  the  corporation  to  make 
the  lease,  although  he  has  had  the  undisturbed  enjoyment 
of  the  property,  would  be,  we  think,  most  inequitable  and 
unjust.  .  .  .  We  think  the  rule  which  should  be  applied  is 
that  the  lessee  is  bound  by  the  contract  so  long  as  he  remains 
in  possession." 

*  Brunswick     Gas     Light     Co.     v.  this  case,  Chief  Judge  -Andrews  also 

United    Gas,    etc.    Co.,    85    Me.    532  declared    that    the    decisions    of    the 

(1893),  (27  Atl.  Rep.  525,  35  Am.  St.  Supreme  Court  of  the  United  States, 

Rep.  389).  already  referred  to,  carry  the  doctrine 

2  Bath  Gas  Light  Co.  v.  Claffy,  151  of    ultra   vires   to    an    unjust    extent, 

N.  Y.  24  (1896),  (45  N.  E.  Rep.  390,  "and  the  rank  injustice  which,  as  it 

36  L.  R.  A.  664) ;    Woodruff  v.  Erie  seems    to    us,    these    cases    sanction, 

R.  Co.,  93  N.  Y.  609  (1883)  ;    Cam-  justifies  the  ob.servation  of  Lord  St. 

den,  etc.  R.  Co.  v.  May's  Landing,  etc.  Leonards  in  the  case  of  Eastern  Coun- 

R.  Co.,  48  N.  J.  L.  530  (1886),  (7  Atl.  ties  R.  Co.  v.  Hawkes,  5  H.  L.  Cas. 

Rep.  523).  370  (1855),  that  'the  safety  of  men 

^  Bath  Gas  Light  Co.  v.  Claffy,  151  in  their  daily  contracts  requires  that 

N.  Y.  34  (1896),  (45  N.  E.  Rep.  390,  the  doctrine  of  ultra  vires  should  be 

36  L.  R.  A.  664).     In  his  opinion  in  confined  within  narrow  limits.'" 

442 


CHAP.    XXIl]  ULTRA    VIRES    LEASES  §   245 

Notwithstanding  this  reasonini?  it  seems  to  follow  as  a  neoes- 
saiy  conclusion  from  the  premise  that  an  ultra  vires  lease  is 
void  that  no  action  of  any  kind  can  be  maintained  upon  it, 
and  that  no  principles  of  estoppel  can  give  it  vitality.  To 
hold  that  an  ultra  vires  lease  is  void,  and,  at  the  same  time, 
that  it  governs  the  rights  of  the  parties  in  the  matter  of  rent; 
that  it  is  vaUd  as  to  the  past  and  void  as  to  the  future,  is  il- 
logical, and  gives  a  controlling  effect  to  a  void  contract.  "  A 
void  instrument  governs  nothing."  ^  Nor  is  it  necessary  to 
adopt  the  New  York  rule  in  order  to  do  justice  to  the  parties. 
If  the  lessee  pays,  and  the  lessor  receives,  what  the  use  of  the 
property  is  reasonably  worth,  the  result  is  equitable,  although 
the  one  or  the  other  may  lose  the  benefit  of  the  stipulations  of 
an  illegal  contract. 

§  245.  Improvements  made  by  Lessee  under  Ultra  Vires 
Lease.  —  As  a  general  rule,  a  lessee  corporation  cannot  re- 
cover from  the  lessor  for  improvements  made  upon  the  leased 
property  during  its  occupancy  under  an  unauthorized  lease.^ 
This  rule  necessarily  applies  in  every  case  where  an  action  for 
such  recoveiy  must  be  based  upon  the  illegal  contract.  It 
is  clear,  however,  upon  the  principle  stated  by  the  Supreme 
Court  of  the  United  States  that  "  a  contract  ultra  vires  being 
unla^vful  and  void,  not  because  it  is  in  itself  immoral,  but 
because  the  corporation,  by  the  law  of  its  creation,  is  incapable 
of  making  it,  the  courts,  while  refusing  to  maintain  any  action 
upon  the  unlawful  contract,  have  always  striven  to  do  justice 
between  the  parties,"  ^  that  exceptions  to  the  rule  may  be  es- 
tablished where  it  is  not  necessary  to  rely  upon  the  lease.     Thus, 

'  Brunswick     Gas     Light     Co.     v.  6  Lea  (Tenn.^,  369  (L880),  (4  Am.  & 

United    Gas,    etc.    Co.,    85    Me.    541  Eng.   R.  Cas.  95),  was  the  case  of  a 

(1893),    (27    Atl.    Rep.    525,    35   Am.  lease  by  a  receiver  without  authority, 

St.  Rep.  389).  and,  under  the  circumstances  stated 

^  In  Middlesex,  etc.  R.  Co.  r.  Bos-  in  the  opinion,  the  Court  was  justified 

ton,  etc.  R.  Co.,  115  Mas.s.  347  (1874),  in    sa>nng    (p.    370):     "The    tenant 

(7  .\m.  Ry.  Rep.  469),  it  was  held  that  voluntarily  takes  his  chances  of  being 

a  lessee  under  an  wi<ra  viVc.s  lease  could  permitted  to  enjoy  the  expenditures 

not  recover  from  the  lessor  expenses  he   has   made   upon   the   land   of  an- 

of  renewing  the  road.  other." 

See   also   East  Tennessee,   etc.    R.  ^  Central   Transp.   Co.    v.    Pullman 

Co.   V.   Na.shville,   etc.   R.   Co.   (Tenn.  Car  Co.,  130  U.  S.  60  (1891),  (11  Sup. 

1897),  (51  S.  W.  Rep.  202).  Ct.    Rep.   478). 

State  V.  McMinnville,  etc.   R.  Co., 

443 


§    247  INTERCORPORATE    RELATIONS  [PART   III 

where  improvements  of  a  permanent  nature  have  been  made 
by  a  lessee  with  the  approval  of  the  lessor,  who  then  terminates 
the  lease  on  account  of  its  ultra  vires  character,  the  courts 
would  undoubtedly  allow  the  lessee  to  set  off  against  the  les- 
sor's demand  for  compensation  for  the  use  of  the  property, 
compensation  for  improvements  made  upon  it. 

§  246.  Effect  of  Ultra  Vires  Lease  upon  Stock  Subscriptions, 
—  If  a  railroad  company  has  power  to  lease  its  railroad,  sub- 
scriptions to  its  capital  stock  must  be  regarded  as  having  been 
made  in  view  of  the  possible  exercise  of  the  power.  If  a  lease 
is  unauthorized  it  is  void  and  without  effect  upon  contracts 
of  subscription.  In  neither  case  —  under  authorized  or  un- 
authorized lease  —  is  a  subscriber  discharged  upon  his  obliga- 
tion to*  pay  calls  and  fulfil  ^his  contract.^ 

The  conclusion  that  an  ultra  vires  lease,  being  void,  has 
no  effect  upon  stock  subscriptions  is,  obviously,  logical.  It  is 
in  marked  contrast  to  the  conclusion  reached  in  the  decisions 
examined  in  an  earlier  part  of  this  treatise  that  an  unau- 
thorized consolidation,  although  wholly  void,  discharges  sub- 
scribers.^ 

§  247.  Guarantee  of  Ultra  Vires  Lease  void.  —  Where  the 
contracting  corporations  to  a  lease  of  a  railroad  are  without 
authority  to  enter  into  it,  an  agreement  by  another  corpora- 
tion guaranteeing  its  performance,  it  is  equally  without  au- 
thority. A  guarantee  of  a  void  contract  is  itself  void.  A  con- 
tract to  fulfil  for  another  corporation  obligations  which  it 
has  no  power  to  assume  is  of  no  legal  effect.^ 

>  Ottawa,  etc.  R.  Co.  v.  Black,  79  See  also  Haj^es  v.  Ottawa,  etc.  R. 

III.  268  (1875)  :   "If  the  company  had  Co.,  61  111.  424  (1871) ;  Troy,  etc.  R. 

no   power  to  lease  the  road  and  its  Co.   v.    Kerr,    17    Barb.    (N.    Y.)    581 

franchises,    then    the    lease    is    void,  (1854). 

and  the  appellees  can,  when  they  ^  See  afite,  ^  ^7  :  " Rights  and  Rem- 
receive  their  stock,  apply  to  a  court  edies  of  Dissenting  Subscribers." 
of  equity,  and  have  the  lease  cancelled.  ^  Pennsylvania  R.  Co.  v.  St.  Louis, 
If,  on  the  other  hand,  the  charter  etc.  R.  Co.,  118  U.  S.  290  (1885).  (6 
empowers  the  company  to  make  Sup.  Ct.  Rep.  1094) ;  Coleman  v.  East- 
such  a  lease,  then  appellees  must  have  ern  Counties  R.  Co.,  10  Beav.  I  (1846) ; 
known  the  fact  when  they  subscribed,  Madison,  etc.  Plank  Road  Co.  v. 
and  the  exercise  of  a  power  granted  Watertown,  etc.  Plank  Road  Co.,  7 
by    the    charter    must    be    presumed  Wis.  59  (1858). 

to   have    been    contemplated    by    the  See  also  Pearce  v.  Madison,  etc.  R. 

appellees  when  they  gave  their  note."  Co.,  21  How.  (U.  S.)  441  (1858). 

444 


CHAP.    XXIl]  ULTRA    VIRES    LEASES  §    248 

In  Pennsylvania  Co.  v.  St.  Louis,  etc.  R.  Co.,  Mr.  Justice 
Miller  said:*  "  There  is  no  power  shown  in  any  of  these  com- 
panies to  accept  a  lease  of  the  complainant  such  as  the  one  in 
the  present  case,  and  perform  its  conditions,  and  they  cannot, 
therefore,  become  parties  to  such  a  contract  with  a  road  out- 
side the  State  which  chartered  them  any  more  than  the  prin- 
cipal company.  If  these  guaranteeing  companies  had  exe- 
cuted the  original  contract  of  lease  it  would  have  been  void 
for  want  of  authority  from  the  legislature  of  Indiana,  or  of  any 
other  State  by  whose  laws  they  are  incorporated  or  endowed 
with  corporate  power.  No  such  power  is  shown  in  them  to 
lease  roads  beyond  their  own  States.  Indeed,  while  there 
may  be  a  just  claim  of  authority  for  some  kind  of  running 
arrangement  between  two  connecting  roads  under  the  Indiana 
statutes,  there  is  no  connection  between  the  plaintiff's  road 
and  any  road  of  a  guaranteeing  company.  The  connection, 
even  by  traffic,  is  remote.  These  companies  might  as  well 
have  assumed  the  power  to  loan  them  money,  or  to  indorse 
their  notes,  or  any  other  commercial  transaction,  as  to  guar- 
antee the  performance  of  a  void  contract  by  one  company  to 
another." 

§  248.  Voidable  Railroad  Leases.  —  Officers  of  a  railroad 
company  stand  in  a  fitluciary  relation  to  the  corporation. 
They  cannot,  themselves,  take  a  lease  of  its  property  nor  lease 
property  to  it.^     They  cannot,  as  directors  of  one  corporation, 

'  Pennsylvania  Co.  I'.  St.  Louis,  etc.  will    relieve    against    them    whenever 

R.  Co.,  118  U.  S.  314  (1885),  (6  Sup.  their    enforcement    is    rca.sonably    re- 

Ct.  Rep.   1094).  si.stcd.      Directors  of  corporations,  anil 

^  In  Wardell  v.   Railroad  Co.,   103  all  persons  who  stand  in  a  fiduciary 

U.  S.  G58  (18S0),  the  Sujjreme  Court  relation    to    other    parties,    and    are 

of  the  United  States  laid  down  the  fol-  clothed  with  jiower  to  act  for  them, 

lowing  general   [jrinciples   relating  to  are  .subject  to  this  rule.     They  are  not 

the  obligations  of  officers  of  corpora-  permitted  to  occupy  a  position  which 

tions:    "It  is  among  the  rudiments  of  will  conflict  with  the  interests  of  the 

the  law  that  the  same  person  cannot  parties  they  represent  and  arc  bound 

act  for  himself,  and  at  the  same  time,  to  protect.     They  cannot,   as  agents 

with  respect  to  the  same  matter,  a.s  or  trustees,   enter    into    or  authorize 

the  agent  of  another  whose  interests  contrat-ts  on  behalf  of  others  for  whom 

are  conflicting.   .   .   .     The  law,  there-  tliey  are  apjiointed   to  act,   and  then 

fore,  will  always  condenm  the  trans-  personally  participate  in  the  benefits, 

actions  of  a  party  on  his  own  behalf.  Hence  all  arrangements  by  directors 

where,  in  respect  to  the  matter  con-  of  .a  railroad  company  to  secure  an 

cerned,  he  is  the  agent  of  others,  and  undue  advantage  to  themselves  at  its 

445 


§248 


INTERCORPORATE    RELATIONS 


[part    III 


lease  its  railroad  to  another  corporation  to  which  they  stand 
in  similar  relation.  The  rule  is  based  upon  considerations  of 
public  policy  and  works  independently  of  fraud  or  good  in- 
tention. Any  such  lease  is  voidable  at  the  option  of  either 
corporation.^  It  is  not  void,  and  may  become  valid  by  ac- 
quiescence.^ 

The  majority  of  the  stockholders  of  a  railroad  company,  in 
controlling  its  affairs,  stand  in  a  similar  position  of  trust  towards 
the  minority  stockholders.^  They  cannot  authorize  the  officers 
of  the  corporation  to  lease  its  railroad  to  another  corporation, 
owned  or  controlled  by  them,  unless  they  act  with  the  utmost 


expense  by  the  formation  of  a  new 
company  as  auxiliary  to  the  original 
one,  with  an  understanding  that  they, 
or  some  of  them,  shall  take  stock  in  it, 
and  then  that  valuable  contracts  shall 
be  given  to  it,  in  the  profits  of  which 
they,  as  stockholders  in  the  new  com- 
pany are  to  share,  are  so  many  un- 
lawful devices  to  enrich  themselves  to 
the  detriment  of  the  stockholders  and 
creditors  of  the  original  company,  and 
will  be  condemned  whenever  properly 
brought  before  the  court  for  con- 
sideration." 

'  Barr  v.  New  York,  etc.  R.  Co.,  125 
N.  Y.  263  (1891),  (26  N.  E.  Rep.  145)  ; 
Jessup  V.  Illinois  Central  R.  Co.,  43 
Fed.  483  (1890);  Meeker  v.  Winthrop 
Iron  Co.,  17  Fed.  48  (1883).  See  also 
ante,  §168:  "Voidable  Leases."  Also 
ante,   §   114:    "Voidable  Sales." 

A  complaint  in  a  stockholder's 
action  against  a  railroad  corporation 
and  its  directors  alleging  that  the 
latter,  as  officers  and  trustees  of  the 
defendant  company,  took  from  them- 
selves, as  trustees  and  officers  of 
another  company,  which  they  practi- 
cally owned  and  managed,  a  lease  of 
its  railroad  to  the  defendant  company 
at  an  exorbitant  rent,  and  thereby 
depleted  the  latter 's  funds,  states  a 
good   cause   of  action. 

Sage  V.  Culver,  147  N.  Y.  241 
(1895),    (41    N.   E.    Rep. '513). 

Stockholders    cannot    sue    for    the 

446 


profits  arising  from  a  lea.se  of  a  rail- 
road to  their  corporation,  in  which 
the  directors  wrongfully  participated, 
unless  they  also  take  steps  to  rescind 
the  lease.  Hitchcock  v.  Barrett,  50 
Fed.  653  (1892). 

2  Barr  v.  New  York,  etc.  R.  Co.,  125 
N.  Y.  263  (1891),  (26  N.  E.  Rep.  145)  ; 
Jessup  V.  Illinois  Central  R.  Co.,  43 
Fed.  483  (1890). 

In  Continental  Ins.  Co.  v.  New 
York,  etc.  R.  Co.,  187  N.  Y.  225,  238 
(1907),  (79  N.  E.  Rep.  1026),  the 
Court  said  with  respect  to  an  agree- 
ment settling  a  controversy  arising 
under  a  railroad  lease:  "Assuming 
that  the  fact  that  the  majority  of  the 
directors  of  the  Harlem  were  also 
directors  of  the  Central  rendered  the 
agreement  made  by  the  two  boards 
for  an  apportionment  of  the  interest 
reduction  between  the  two  companies 
voidable  at  the  election  of  the  Harlem 
stockholders,  as  doubtless  was  the 
case,  nevertheless  the  agreement  was 
not  absolutely  void,  but  could  be  rati- 
fied by  the  action  of  such  stock- 
holders, in  wliich  case  it  would  become 
binding  upon  the  company.  The 
right,  however,  to  avoid  a  contract 
made  by  common  directors  is  in  the 
corporation,  not  in  minority  stock- 
holders." 

'See  post,  §300:  "Trust  Relation 
of  Controlling  Corporation  to  Minority 
Stockholders." 


CHAP.    XXIl] 


ULTRA    VIRES    LEASES 


§  248 


good  faith  towards  the  whole  body  of  stockholders.     Courts 
of  equity  will  protect  the  interests  of  minority  stockholders.* 


'  In  Flynn  v.  Brooklyn  City  R.  Co., 
158  N.  Y.  507  (1899),  (53  N.  E.  Rep. 
.520)  the  New  York  Court  of  Appeals 
said:  "As  a  general  rule  courts  ha\e 
nothing  to  do  wnth  the  internal  man- 
agement of  business  corporations. 
Whatever  may  lawfully  be  done  by 
the  directors  or  stockholders,  acting 
through  majorities  prescribed  by  law, 
must  of  necessity  be  submitted  to  by 
the  minority,  for  corporations  can  be 
conducted  upon  no  other  basis.  All 
questions  within  the  scope  of  the  cor- 
porate powers  which  relate  to  the 
policy  of  administration,  to  the  ex- 
pediency of  proposed  measures,  or  to 
the  consideration  of  contracts,  pro- 
\aded  it  is  not  so  grossly  inadequate 
as  to  be  e%ndence  of  fraud,  are  beyond 
the  proN-ince  of  the  courts.  The  mi- 
nority directors  or  stockholders  can- 
not come  into  court  upon  allegations 
of  a  want  of  judgment  or  lack  of  effi- 
ciency on  the  part  of  the  majority  and 
change  the  course  of  administration. 
Corporate  elections  furnish  the  only 
remedy  for  internal  dissensions,  as  the 
majority  must  rule  so  long  as  it  keeps 
within  the  powers  conferred  by  the 
charter.  To  these  general  rules,  how- 
ever, there  are  some  exceptions,  and 
the  most  important  is  that  founded 
on  fraud.  While  courts  cannot  compel 
directors  or  stockholders,  proceeding 
by  the  vote  of  a  majority,  to  act 
wisely,  they  can  compel  them  to  act 
honestly,  or  undo  their  work  if  they 
act  otherwise.  Where  a  majority  of 
the  directors,  or  stockhoKlers,  or  both, 
acting  in  bad  faith,  carry  into  effect  a 
scheme  wliich,  even  if  lawful  upon  its 
face,  is  intended  to  circimivent  the 
minority  -stockholders  and  defraud 
them  out  of  their  legal  riglits,  the 
courts  interfere  and  remedy  the 
wrong.  Action  on  the  part  of  di- 
rectors or  stockholders,  pursuant  to 
a  fraudulent  scheme  designed  to  in- 


jure the  other  stockholders,  will  sus- 
tain an  action  by  the  corporation,  or, 
if  it  refuses  to  act,  by  a  stockholder 
in  its  stead  for  the  benefit  of  all  the 
injured  stockholders." 

Wormser  v.  Metropolitan  St.  R. 
Co.,  98  App.  Div.  (N.  Y.)  29  (1904), 
(90  N.  Y.  Supp.  714)  :  "Therefore, 
finding  as  we  do,  as  matter  of  law, 
that  the  Metropolitan  Street  Railway 
Company  had  the  power  and  capacity 
to  make  the  lease,  and,  as  matter  of 
fact,  that  it  was  authorized  by  the 
stockholders,  and  that  there  was  no 
fraud  or  wrong  perpetrated  upon 
such  stockholders  of  the  Metropolitan 
Street  Railway  Company  by  anj' 
persons  standing  in  the  relation  to 
them  of  trustees  or  in  any  fiduciary 
relation,  but  that  the  acts,  whether 
prudent  or  imprudent,  of  such  persons 
were  performed  in  perfect  good  faith, 
we  concur  with  the  court  at  Special 
Term  that  the  plaintiff  was  not  en- 
titled to  the  relief  demanded,  ami 
hence  that  the  complaint  was  properly 
dismissed." 

Where  the  directors  of  a  street 
railway  company,  with  the  approval 
of  the  majority  of  the  stockholders, 
leased  its  property  for  a  long  term  of 
j'ears  to  another  corporation  in  which 
they  became  interested,  it  was  held 
that  a  court  of  equity  would  not,  at 
the  suit  of  a  minority  stockholder, 
armul  the  lea.se,  in  the  absence  of 
proof  of  fraud  or  that  the  lease  was 
detrimental  to  the  interests  of  the 
lessor  corporation. 

Dickinson  v.  Consolidated  Traction 
Co.,  114  Fed.  2.32  (1902);  affirwaK 
119  Fed.  871  (1903). 

Where  a  les.see  of  a  railroad  was  the 
owner  of  a  majority  of  the  stock  of  the 
lessor  company  and,  with  knowledge 
of  that  fact,  the  lea.se  was  appro\('d 
by  the  liolders  of  a  large  part  of  the 
minority  .-itock  and  was  not  questioned 

447 


§   250  INTERCOUPORATE    RELATIONS  [PART    III 

"  The  right  of  action,  however,  belongs  to  the  corporation, 
and  should  be  brought  by  it  as  plaintiff,  but  when  it  will  not 
bring  the  suit  itself,  an  aggrieved  stockholder,  after  due  de- 
mand and  refusal,  or  unreasonable  neglect  to  proceed,  may 
bring  it  in  his  own  name  upon  making  the  corporation  a  party 
defendant.  Such  an  action  is  not  for  the  benefit  of  the  plain- 
tiff alone,  but  is  representative  in  character  and  for  the  benefit 
of  himself  and  all  other  stockholders  similarly  situated."  ^ 

§  249.  Leases  of  Railroads  for  Purpose  of  suppressing  Com- 
petition. —  Combinations  of  railroad  companies  for  the  pur- 
pose of  extinguishing  competition  are  contrary  to  pubUc  policy. 
The  form  of  combination  is  immaterial.  That  in  the  form  of 
a  lease  is  as  invalid  as  any  other. 

This  subject  is  considered  at  length  in  the  concluding  part 
of  this  treatise.^ 

§  250.  Remedy  of  State  —  Quo  Warranto.  —  When  a  rail- 
road company,  without  legislative  authority,  leases  its  railroad 
and  franchises  for  an  extended  term  to  another  corporation, 
it  thereby  abandons  the  use  of  its  franchises,  and  its  charter 
becomes  subject  to  forfeiture  in  quo  warranto  proceedings.^ 

by    any    stockholder    for    more    than  See    also    ante,    §    168:     "Voidable 

twenty-seven  years,  it  was  held  that  Leases." 

such  lease  would  not  be  set  aside  at  '  FlJ^ln  v.   Hrooklyn  City  R.   Co., 

the    suit    of    a   minority    stockholder  158  N.  Y.  508  (1899),  (53  N.  E.  Rep. 

where  the  matters  complained  of  did  520). 

not  appear  to  be  fraudulent  or  clearly  The  right  to  avoid  an  agreement 

inconsistent     with     the     exercise     of  settling    a    question    concerning    the 

honest  judgment.  terms  of  a  lease  rests  in  the  corpor.1- 

Wolf  V.  Pennsylvania  R.  Co.,   195  tion,    not    in    minority   stockholders. 

Pa.  St.  91   (1900),  (45  Atl.  Rep.  9.'^6).  unless    its    ratification    was    procured 

See  also:   Pondir  v.  New  York,  etc.  bj'    fraud    or    concealment,    and    in 

R.  Co.,  72  Hun  (N.  Y.),  384  (1893),  ignorance  of  the  true  state  of  facts. 

(25    N.     Y.    Supp.    560) ;     Glengary  Continental  Ins.  Co.  v.  New  York, 

Consol.    Min.    Co.    v.     Boehmer,     28  etc.  R.  Co.,  187  N.  Y.  225  (1907),  (79 

Colo.    1    (1900),   (62  Pac.   Rep.   839) ;  N.  E.  Rep.  1026). 

McIiCary   t\    Erie   Tel.    etc.     Co.,    38  See  also  Wallace  v.  Long  Island  R. 

Misc.    (N.   Y.)   3    (1902),    (76   N.   Y.  Co.,  12  Hun  (N.  Y.),  464  (1877). 

Supp.  712).     Compare  Shaw  v.  Davis,  -  See  post,  Part  V.:    "Combinations 

78  Md.  308  (1894),  (28  Atl.  Rep.  619,  of  Corporations." 

23  L.  R.  A.  294);   Miner  v.  Belle  Lsle  »  State  v.  Atchison,  etc.  R.  Co.,  24 

Ice  Co.,  93  Mich.  97  (1892),  (53  N.  W.  Neb.  143  (1888),  (38  N.  W.  Rep.  43, 

Rep.  218,  17  L.  R.  A.   412);  Meeker  8  .\m.  St.  Rep.  164);    Commissioners 

V.   Winthrop    Iron    Co.,    17    Fed.    48  of  Tippecanoe  Co.  v.  Lafayette,  etc. 

(1883).  R.  Co.,  50  Ind.  85  (1875).     In    East 

448 


CHAP.    XXIl] 


ULTRA    VIRES    LEASES 


§2ol 


In  State  v.  Atchison,  etc.  R.  Co}  the  Supreme  Court  of  Ne- 
braska said:  "  While  a  lessee  in.  a  proper  case,  or  assignee  or 
purchaser,  will  take  a  road  burdened  with  the  conditions, 
obligations  and  duties  assumed  by  the  original  corporation, 
yet  there  can  be  no  such  transfer  by  lease,  assignment  or 
sale  without  express  statutory  authority,  and  as  we  find  no 
such  authority  and  the  defendant  has  been  guilty  of  mis- 
user and  non-user  of  its  franchises,  they  are  subject  to  forfei- 
ture." =^ 

§  251.  Remedy  of  State  — Injunction.  — As  already  shown, 
the  remedy  of  the  State,  in  the  case  of  ultra  vires  acts  com- 
mitted by  a  corporation,  is  quo  warranto,  and,  in  the  case  of 
private  corporations,  this  remedy  is  exclusive.^  Courts  of 
equity  are  not  open  to  the  State  for  the  exercise  of  visitorial 
powers  over  such  corporations,  and  injunction  is  not  a  proper 
remedy  to  restrain  their  unauthorized  acts.     Lord  Cowper,  in 


Line,  etc.  R.  Co.  v.  State,  7.5  Tex.  434 
(1889),  (12  S.  W.  Rep.  G!)0),  <pio  ivar- 
rnnto  was  sustained,  forfeiting  the 
charter  of  the  defendant  railroad  com- 
pany because  of  an  illegal  transfer  of 
its  railroad  and  franchises.  See  also 
State  V.  Minnesota  Central  R.  Co.,  36 
Minn.  246  (188G),  (30  N.  W.  Rep. 
816). 

In  Eel  Ri\er  R.  Co.  v.  State,  155 
Ind.  4.33  (1900),  (57  N.  E.  Rep.  388), 
it  was  held  that  the  acts  of  a  domestic 
railroad  company  in  turning  over  all 
its  property  and  franchises  to  a  rival 
company  under  a  lease  in  perpetuity, 
and  in  acquiescing  in  the  destruction 
of  a  portion  of  its  railroad  in  order  to 
destroy  competition,  wore  sufficient 
grounfls  to  authorize  a  forfeiture  of  its 
francliises. 

'  State  V.  .\tchison,  etc.  R.  Co.,  24 
Neb.  163  (1888),  (38  N.  W.  Rep.  43, 
8  Am.  St.  Rep.  164).  In  this  case, 
however,  the  Court  said  that  for- 
feiture would  not  be  enforced  in  the 
first  instance,  and  the  lease  was  de- 
clared void. 

*  Even  the  consent  of  the  State  to  a 
transfer  may  not  prevent  forfeiture 
under     certain     circumstances.     This 


principle  is  illustrated  in  State  v.  St. 
Paul,  etc.  R.  Co.,  35  Minn.  225  (18S6), 
(28  N.  W.  Rep.  3):  "The  consent  of 
the  State  may  not  prevent  a  forfeiture 
of  the  corporate  franchise,  where  the 
corporation  disposes  of  and  abandons 
all  its  business  and  operating  fran- 
chises, so  that  there  is  nothing  left 
which  it  can  lawfully  do,  and  .so  that 
there  can  be  no  reason  for  keeping  it 
longer  in  life." 

^  Attorney  General  v.  Utica  Ins. 
Co.,  2  .Johns.  Ch.  371  (1817).  In  this 
case  Chancellor  Kent  declined  to  en- 
join an  insurance  company  from  tloing 
!i  banking  business.  The  equitable 
remedy  is,  however,  now  open  to  the 
State,  in  New  York,  under  the  Code  of 
Civil  Procedure,  in  relation  to  the 
"judicial  suporvi.sion"  of  corpora- 
tions. People  r.  Ballard,  134  N.  Y. 
269  (1892),  (.32  N.  E.  Rep.  54).  In 
Attorney  General  r.  Tudor  Ice  Co., 
104  Mass.  239  (1870),  (6  Am.  Rep. 
227),  where  an  injunction  to  restrain 
an  ice  coniijany  from  importing  teas 
was  refused,  the  cases  bearing  upon 
the  rights  of  the  State  in  a  court  of 
equity  are  collected  and  carefully 
considered. 

449 


§251 


INTERCORPORATE   RELATIONS 


[part    III 


a  very  early  English  case/  denied  the  attorney-general  a  remedy 
in  equity  against  a  corporate  excess  of  powers  upon  the  ground 
that  "  it  would  usurp  too  much  on  the  king's  bench";  and 
such  is  substantially  the  reason  of  the  rule  at  the  present  time  — 
adequate  remedy  at  law. 

This  rule  is  also,  undoubtedly,  applicable,  in  the  case  of  a 
guasi-public  corporation,  where  the  ultra  vires  act  relates  merely 
to  the  internal  affairs  of  the  corporation;  but  where  it  involves 
the  relations  of  the  corporation  to  the  State  and  may  injuri- 
ously affect  the  public  interests,  it  is  inapplicable,  and  the 
State  may  file  a  bill  in  equity  and  obtain  an  injunction  re- 
straining the  exercise  of  the  power  usurped.^  This  remedy 
is  especially  available  in  the  case  of  railroad  companies,  which 
exercise  the  power  of  eminent  domain  by  delegation  from  the 
State;  and  an  ultra  vires  lease  of  a  railroad  and  franchises 
forbidden  by  public  policy  may  be  restrained  in  its  execution 
and  performance  at  the  suit  of  the  State.  Where  such  a  lease 
is  not  only  unauthorized  but  is  forbidden  by  statutory  ^  or 


^  Attorney  General  v.  Reynolds, 
1  Eq.  Cas.  Ab.  (3d  Ed.)  131  (1705). 

*  The  attorney  general  has  the 
riglit,  when  the  property  of  the  sov- 
ereign, or  the  interests  of  the  public 
are  directly  concerned,  to  institute 
suit  for  their  protection,  by  informa- 
tion at  law  or  in  equity,  without  a 
relator.  Attorney  General  v.  Dela- 
ware, etc.  R.  Co.,  36  N.  J.  Eq.  031 
(1876). 

In  Attorney  General  v.  Great  North- 
ern R.  Co.,  1  Dr.  &  Sm.  154  (1860),  a 
railroad  conipanj^  was  restrained  from 
trading  in  coal  in  large  quantities. 
See  also  State  v.  Dodge,  etc.  R.  Co., 
53  Kan.  377  (1894),  (36  Pac.  Rep. 
747,  42  Am.  St.  Rep.  295) ;  Attorney 
General  v.  Jamaica  Pond  .\queduct, 
133  Mass.  361  (1882);  United  States 
V.  Western  Union  Tel.  Co..  50  Fed. 
Rep.  28  (1892),  affirmed,  160  U.  S.  53 
(1895),  (16  Sup.  Ct.  Rep.  210);  At- 
torney General  v.  Chicago,  etc.  R.  Co., 
35  Wis.  425  (1874);  Buck  Mountain 
Coal  Co.  V.  Lehigh  Coal,  etc.  Co.,  .50 
Pa.  St.  91  (1865),  (88  Am.  Dec.  534) ; 

450 


Attorney  General  v.  Mid-Kent  R.  Co., 
L.  R.  3  Ch.  App.  100  (1867);  Ware 
V.  Regent's  Canal  Co.,  3  De  Gex  &  J. 
212  (18.58);  Hare  v.  London,  etc.  R. 
Co.,  2  Johns.  &  Hem.  80  (1861).  CoTn~ 
pare,  however,  Attorney  General  v. 
Great  Eastern  R.  Co.,  L.  R.  11  Ch.  D. 
449  (1879). 

'  In  Stockton  r.  Central  R.  Co., 
50  N.  J.  Eq.  52  (1892),  (24  Atl.  Rep. 
964,  17  L.  R.  A.  97),  the  Attorhey 
General  of  New  Jersey  filed  a  bill  in 
equity  to  have  the  lea.se  of  the  Central 
Railroad  Company  of  New  Jersey  to 
the  Port  Reading  Railroad  Companj', 
a  small  New  Jersey  corporation  con- 
trolled by  the  Pliiladelphia  and  Read- 
ing Railroad  Company,  declared  to  be 
■ultra  nres  and  void,  and  for  an  injunc- 
tion against  taking  possession  there- 
under. The  Court  held  that  the 
lease  was,  in  effect,  a  lease  to  the 
Philadelphia  and  Reading  Railroad 
Company  —  a  foreign  corporation ; 
that  it  was  not  only  unauthorized,  but 
forbidden  by  the  New  Jersey  statute; 
that  its  effect  was  to  partially  destroy 


CHAP.    XXIIl]  LEASES    TO    FOREIGN    CORPORATIONS  §    252 

constitutional  *  provisions,  or  tends  to  the  creation  of  a  monop- 
oly,- the  inadequacy  of  quo  warranto  as  a  preventive  remedy 
is  apparent. 


CHAPTER    XXIII 


LEASES    TO    FOREIGN    CORPORATIONS 

§  252.     Authority   to   lease   must   be   derived   from    State   where   Railroad  is 

located. 
§  253.     Authority  to  lease  to  Foreign  Corporation. 
§  254.     Status  of  Foreign  Corporation  lca.sing  Railroad. 

§  252.  Authority  to  lease  must  be  derived  from  State  where 
Railroad  is  located.  —  The  charter  of  a  corporation  granted 
by  a  State  has  no  l)inding  force  propria  vigore  outside  its  terri- 
torial limits.  As  said  in  an  early  case:  "  Every  power  which  a 
corporation  exercises  in  another  State,  depends  for  its  validity 
upon  the  laws  of  the  sovereignty  in  which  it  is  exercised."^ 

While,   by   the  comity  between  States,   a   foreign   railroad 

competition  in  the  production  of  sale  tucky,  161  U.  S.  077,  (lS9<i),  (IG  .Sup. 

of  anthracite  coal;    that  it  was  ultra  Ct.  Rep.  714)),  where  the  Court  said 

vires,  and  tended  to  monopoly;    and  (p.  095) :    "It  is  contended  injunction 

granted  the  relief  prayed  for.     It  is  of  is    not    the    proper    remedy.     But    it 

interest  to  note  that  the  Central  Rail-  seems  to  us  if  the  Commonwealth  of 

road  Company  of  New  Jersey  is  now  Kentucky  can  sue  at  all  for  act  idtra 

controlled   by   the   Reading   Railroad  vires  by  a  corporation,  there  is  no  room 

Company   through   the  ownersliip   of  for  disputing  its  right  to  a  preventive 

stock  upon  which  it  has  issued  col-  injunction  in  tiiis  case.    For,  according 

lateral    trust    bonds  — a    convenient  to   very  reputable  authoiity,  and,  we 

alternative  to  a  lease.  think,  ujion  principle,  a  court  of  equity 

'  Tlie  State  may  maintain  a  suit  to  has  jurisdiction,  and  may,  in  an  action 

enjoin  a  railroad  company  from  pur-  by    the    State,    enjoin    a    corporation 

chasing  the  property  and  lines  of  other  from  exceeding  its  cliartered  jiowers, 

companies,   in   \iolation  of  Kentucky  or   doing   acts   otherwise    illegal    and 

Constitution,  §  201,  ])roviding  that  no  injurious  to  tlie  public." 

railroad    company    shall    accjuire,    by  '^  Stockton  v.  Central  R.  Co.,  50  N. 

purchase  or  otherwise,  any  parallel  or  .).  Eq.  52  (1892),  (21  Atl.  Rep.  964,  17 

competing    line.     Louisville,    etc.    R.  L.  R.  A.  97). 

Co.,   V.   Commonwealth,    97    Ky.   075  ^  Runyan  i'.  Coster's  Lessee,  14  Pet. 

(1895),  (31  S.  W.  Rep.  470)  (nfflrmcd  (U.  S.)  122  (1840). 
sub  nom.  Louisville,  etc.  R.  Co.  v.  Ken- 


451 


§   252  INTERCORPORATE    RELATIONS  [pART    III 

company  may  be  permitted  within  a  State  to  make  contracts 
and  exercise  ordinary  powers  in  the  genei'al  transaction  of 
business,  such  a  corporation  cannot  lease  or  take  a  lease  of 
a  raih-oad  without  the  consent  of  the  State  in  which  it  is  lo- 
cated.^ The  State,  in  authorizing  the  buikUng  of  a  raih'oad 
within  its  borders,  reserves  the  right  to  control  its  transfer. 

The  rule  that  a  railroad  lease  is  invalid  unless  each  corpo- 
ration is  authorized  thereto  by  the  State  of  its  creation,  requires 
the  additional  provision  that  the  State  in  which  the  railroad 
is  situated  shall  give  its  approval.  Only  in  a  case  where  a 
railroad  company  owns  a  railroad  in  a  foreign  State  will  the 
additional  requirement  impose  an  adcUtional  obligation. 

This  limitation  upon  the  power  of  a  corporation  in  a  foreign 
State  is  not  founded  upon  the  principle  of  ultra  vires.  A  cor- 
poration may  be  expressly  authorized  by  its  charter  to  trans- 
act business  in  foreign  countries  and  States.^  Its  articles  of 
association  —  when  formed  under  general  laws  —  may,  in 
terms,  authorize  it  to  lease  railroads  in  other  States.  The 
power  so  granted  or  assumed  can  be  exercised  only  by  per- 
mission of  the  foreign  State.  It  is  not  so  much  a  question  of 
corporate  power  as  of  the  right  to  exercise  it.^ 

'  Briscoe  y.  Southern  Kansas  R.  Co.,  undertakes,  by  a  lease  of  its  road,  to 
40  Fed.  2S0  (1889):  ''It  is  decided  in  get  rid  of  its  responsibility,  or  liabili- 
Bank  v.  F.arle,  13  Pet.  524  (1839),  that  ties  to  the  public,  which  it  assumed 
courts  of  justice  have  always  ex-  when  it  accepted  the  franchise,  it 
pounded  and  executed  contracts  ac-  would  be  exercising  an  extraordinary 
cording  to  the  law  of  ttie  place  in  power,  which  may  be  greatly  jjreju- 
which  they  are  made,  provided  that  dici.al  to  the  public,  and  therefore  is 
the  law  was  not  repugnant  to  the  laws  contrary  to  the  known  policy  of  a 
or  policy  of  their  own  country.  The  State,  and  injurious  to  its  interests 
court,  in  tlie  above  case,  held  the  rule  and  cannot  be  exercised  unless  the 
to  be  'that,  by  the  comity  of  nations.  State,  by  express  authority  conferred, 
foreign  corporations  are  allowed  to  authorizes  it  to  be  done."  See  also 
make  contracts  under  their  respective  Howard  v.  Chesapeake,  etc.  R.  Co., 
limits  not  contrary  to  the  known  11  .4pp.  Cas.  (D.  C.)  300  (1897). 
jiolicy  of  such  nations,  or  injurious  to  ^  An  examination  of  broad  charters 
their  interests.'  This  gives  a  railroad  granted  by  certain  States  will  disclose 
corporation  the  right  to  exercise  all  the  curious  fact  that  corporations  are 
its  ordinary  powers  growing  out  of  its  often  authorized  to  exercise  most  ex- 
franchise,  such  as  making  contracts  traordinary  powers,  provided  they  do 
iri  regard  to  the  transaction  of  its  busi-  not  exercise  them  within  the  limits  of 
iiess,  as  was  the  case  in  Railroad  Com-  the  State  granting  them, 
j^any  v.  Gebhanl,  109  U.  S.  527  (1883),  •■*  Where  the  incorporators  under  an 
(3  Sup.  Ct.  Rej).  363).     But  when  it  English  Companies' Act  inserted  in  the 

452 


CHAP.    XXIIl]  LEASES   TO    FOREIGN    CORPORATIONS 


§  253 


§  253.    Authority    to    lease    to    Foreign    Corporation.  —  As 

shown  in  the  last  section,  a  corporation  created  by  one  State 
cannot  take  a  lease  of  a  railroad  situated  in  another  State 
without  its  permission.  Many  States  have  passed  general 
laws  granting  this  permission  to  foreign  railroad  companies, 
which  have  already  been  referred  to.* 

Under  such  statutes,  a  lease  of  a  railroad  may  be  lawfully 
taken  by  a  foreign  corporation  provided  it  is,  itself,  acting 
within  the  powers  conferred  by  the  State  of  its  creation.  Thus, 
under  the  New  York  statute  authorizing  railroad  companies 
"  to  contract  with  each  other,"  it  was  held  that  a  New  York 
corporation  might  take  a  lease  of  a  railroad  in  Vermont,  ow^ned 
and  operated  by  a  corporation  of  that  State,  where  such  cor- 
poration was  given  by  its  charter  power  to  enter  into  such  a 
contract.^ 

Upon  the  principle  that  power  to  lease  to  a  foreign  corpora- 
tion must  be  clearly  expressed,  the  Supreme  Court  of  New 
Jersey  held  that  a  statute  of  that  State  authorizing  a  railroad 
and  canal  company  to  make  arrangements  for  connection  or 


articles  of  association  a  power  to  lease 
railroads  in  foreign  countries,  it  was 
Iield  that  the  corporation  acquired 
thereby  no  authority  to  lease  a  rail- 
road in  Oregon.  Power  to  act  in 
foreign  countries  cannot  be  so  created 
by  the  parties  themselves.  Oregon  R., 
etc.  Co.  V.  Oregonian  R.  Co.,  1.30  IT.  S. 
1  (1.S8!)),  (9  Sup.  Ct.  Rep.  409),  revers- 
inq  22  Fed.  245  (18S4),  and  23  Fed. 
2.32  (1885). 

'  See  ante,  §  ISO:  "What  Rdilroads 
may  he  Iraard.     Stntidori/  Provisions." 

^  Day  V.  Ogden.sburgh,  etc.  R.  Co., 
107  N.  Y.  129  (1887),  (13  N.  K.  Rep. 
705):  "It  is  next  argued  for  the  re- 
spondents that  the  arrangement  ex- 
pressed through  these  instruments, 
so  far  as  the  Ogdensburgh  &  Lake 
Champlain  Railroad  Com|)any  is  crm- 
cerned,  is  beyond  the  capacity  and 
pow(?r  of  that  corporation.  We  have 
soen  that  the  Vermont  Railroad  Com- 
pany had  corporate  powers,  and 
among  those  expressly  given  by  its 
charter  is  a  power  to  lease  its  road. 


It  had,  therefore,  contracting  capacity, 
and  was  a  good  jiarty  to  deal  with. 
The  Ogdonsburgh  &  Lake  Champlain 
Railroad,  on  its  part,  lacked  no  power 
expressly  given  by  statute  to  similar 
corporations  in  this  State,  nor  any 
which,  as  incident  and  necessary 
thereto,  might  enable  it  to  carry  on 
the  objects  of  the  incorjio ration.  .  .  . 
Unless  we  are  to  .  .  .  say  that  its 
operation  must  be  confined  to  con- 
tracts with  roads  ojjerating  in  and 
under  the  laws  of  this  State,  the  lease 
must  be  heUl  valid  between  tiie 
l)arties.  We  see  no  re;ison  for  such 
restriction  nor  .any  principle  of  p\iblic 
law  which  requires  it.  We  are  not  at 
liberty  to  create  it.  It  would  be 
legislation,  not  construction.  A  cor- 
poration given  capacitj'  to  contract, 
may  exerci.se  that  capacity  with  any 
party  in  or  outside  the  limits  of  the 
State,  unless  the  law-making  power  of 
that  other  State  forbids."  Compare 
Briscoe  v.  Southern  Kan.  K.  Co.,  10 
Fed.  273  (1889). 

453 


§254 


INTERCORPORATE    RELATIONS 


[part  hi 


consolidation  of  business  by  agreement,  contract  or  lease 
"  with  any  other  railroad  or  canal  company  in  this  State  or 
otherwise  "  did  not  authorize  a  lease  to  a  corporation  not  of 
that  State.^  The  Court  said:  "  No  power  is  given  to  lease  to 
a  company  out  of  this  State  unless  the  word  '  otherwise/ 
which  is  not  an  adverb  of  place,  is  held  to  mean  '  otherwhere.' 
It  is  an  inappropriate  word  to  express  such  meaning."  ^ 

A  Minnesota  statute  providing  that  "  any  railroad  corpora- 
tion may  lease  or  purchase  any  part  or  all  of  any  railroad  con- 
structed by  another  corporation  whose  lines  of  road  are  con- 
tinuous or  connected  with  its  own  "  has  been  held,  in  view  of 
its  title  and  other  statutory  provisions,  to  confer  authority 
only  for  a  lease  between  corporations  of  that  State. ^ 

§  254.  Status  of  Foreign  Corporation  leasing  Railroad.  — 
Statutes  authorizing  the  leasing  of  railroads  located  within 
the  State  to  corporations  of  another  State  often  define  the 
status,  and  prescribe  the  rights  and  duties,  of  the  foreign  lessee 
corporation.'* 


'  Black  V.  Delaware,  etc.  Canal  Co., 
24  N.  J.  Eq.  475  (1873).  Compare 
Stewart  v.  Lehigh  Valley  R.  Co.,  38 
N.  J.  L.  505  (1875). 

The  New  Jersey  act  of  1885,  forbid- 
ding any  lease  of  a  railroad  to  a 
■foreign  corporation  without  the  con- 
sent of  the  legislature,  could  not  be 
evaded  by  a  nominal  lease  to  a  do- 
mestic corporation  whose  stock  was 
owned  by  a  foreign  corporation,  which 
was  the  real  lessee.  Stockton  v.  Cen- 
tral R.  Co.,  50  N.  J.  Eq.  75  (1892), 
(24  Atl.  Rep.  964,  17  L.  R.  A.  97). 

^  Notwithstanding  the  reasoning  of 
the  Court,  it  seems  entirely  clear  that 
the  legislature  did  use  the  word 
"otherwise"  precisely  in  the  sense  of 
"otherwhere,"  and  intended  to  in- 
clude corporations  within  and  without 
the  State. 

*  Freeman  v.  Minneapolis,  etc.  R. 
Co.,  28  Minn.  443  (1881),  (10  N.  W. 
Rep.  594). 

In  St.  Louis,  etc.  R.  Co.  v.  Terra 
Haute,  etc.  R.  Co.,  33  Fed.  440  (1888), 
affirmed  145  U.  S.  393  (1892),  (12  Sup. 

454 


Ct.  Rep.  953),  it  was  held  that  a  lease 
of  a  railroad,  executed  by  an  Illinois 
railway  company  to  an  Indiana  com- 
pany, was  invalid,  because  the  latter 
company  was  not  authorized  to  ac- 
cept a  lease  from  an  Illinois  corpora- 
tion. 

*  The  following  contains  the  sub- 
stance of  several  statutes  relating  to 
foreign  lessee  corporations: 

Arkansas.  San.  &  H.  Dig.  1894, 
§  6334:  A  corporation  of  another 
State  being  a  lessee  of  a  railroad  in 
this  State,  shall  likewise  be  held 
liable  for  violation  of  laws  of  this 
State,  and  may  be  sued  and  sue  in 
all  cases,  and  for  the  same  causes 
and  in  the  same  manner,  as  a  corpora- 
tion of  this  State. 

Kansas.  G.  S.  1897,  ch.  70,  §  96: 
A  railroad  company  of  another  State 
which  shall  lease  a  railroad  in  this 
State  shall  possess,  in  this  State, 
all  the  rights,  powers,  pri^dleges  and 
franchises  conferred  by  the  laws  of 
this  State  upon  a  railroad  company  of 
this  State. 


CHAP.  XXIV]  TRACKAGE  CONTRACTS  §  255 

In  the  absence  of  express  statutory  provision,  a  corporation 
of  another  State  operating  a  domestic  railroad  takes  it  sub- 
ject to  all  the  conditions  and  burdens  attaching  to  it,  and  to 
the  obligations  respecting  the  operation  of  railroads  imposed 
by  the  laws  of  the  State  in  which  it  is  located  upon  railroad 
companies  generally.* 


CHAPTER    XXIV 


TRACKAGE    CONTRACTS 

§  255.  Nature  of  a  Trackage  Contract. 

§  256.  Express  Authority  not  necessary  for  Execution  of  Trackage  Contract. 

§  257.  Execution  of  Trackage  Contracts. 

§  258.  Assignability  of  Trackage  Contracts. 

§  2.59.  Con.struction  of  Trackage  Contracts. 

§  260.  Specific  Performance  of  Trackage  Contracts. 

§  261.  Liability  of  Proprietary  Company  to  Third  Persons. 

§  262.  Liability  of  Licensee  Company  to  Third  Persons. 

§  263.  Liability  to  Employees. 

§  255.  Nature  of  a  Trackage  Contract.  —  A  trackage  con- 
tract is  an  agreement  by  which  one  railway  company  lets  an- 
other company  into  a  joint  use  of  a  portion  of  its  tracks.  It 
is  clearly  distinguishable  from  a  lease  in  that  it  conveys  no 

Michigan.     P.   A.    1001,   Act.   No.  17G8:   A  railroad  company  of  another 

30,    page  50:     "The  foreign   railroad  State  which  shall  lease  a  railroad  in 

company  so  leasing  shall  operate  and  this    State    shall    possess    all    rights, 

hold   the   railroad   subject   to   all   the  powers,      privileges     and      franchises 

duties   and   obligations   and   with   all  possessed     by    corporations    of    thi.<; 

the   rights   and    privileges    prescribed  State.  , 

by   the   general   railroad   law   of   this  South  Dakota.     Anno.   Stat.    1901, 

State."  §  3906 :    Similar  to  Nebraska  statute. 

Missouri.     R.    S.     1899,     §     1060:  supra. 
If    a    railroad    company    of    another  Wi/otninrj.     R.    S.    1899,    §    3206: 

State   shall    lease    a    railroad    in    this  Similar   to    Nebraska   statute,   stipra. 

State  it  shall  be   held  liable  for  the  Also    confers    the    right    of    eminent 

violation  of  any  laws  of  this   State,  domain. 

and  may  sue  and  be  sued  for  the  same  '  McCandless  v.  Richmond,  etc.  R. 

causes   and   in   the   same    manner   as  Co.,   .38  S.   C.    103    (1892),    (16  S.   E. 

a  corporation  of  this  State.  Rep.  429,  18  L.  R.  A.  440). 


Nebraska.     Comp.    Stat.     1901,     § 


455 


§  255 


INTERCORPORATE    RELATIONS 


[part    III 


estate  in  the  property  and  no  right  to  its  exclusive  possession.' 
It  is  in  the  nature  of  a  Uceiise  —  although  non-revocable  and 
enforceable  —  or  a  grant  of  a  privilege  for  hire.^ 

Trackage  contracts  may  be  made  upon  any  basis  the  con- 
tracting corporations  determine.  Contracts  upon  a  "  wheel- 
age  "  or  "  mileage  "  basis  are  common. 

In  England,  the  right  of  a  railway  company  to  work  its 
traffic  over  a  portion  of  the  line  of  another  company  does  not, 
as  a  general  rule,  depend  upon  the  ability  of  the  two  corpora- 
tions to  agree  upon  a  contract.  Many  railway  acts  grant  the 
right  to  one  company  to  exercise  "running  powers" — as 
they  are  designated  —  over  the  tracks  of  another  and  provide 


'  Union  Pacific  R.  Co.  v.  Cliicago, 
etc.  R.  Co.,  163  U.  S.  5S3  (1895), 
(16  Sup.  Ct.  Rep.  1173):  "The  con- 
tract in  this  regard  was  realh^  an  agree- 
ment for  trackage  rights,  for  running 
arrangenients,  a  'terminal  contract' 
with  compensation  upon  a  'mileage' 
or  'wheelage'  basis  .  .  .  (p.  593) 
The  stipulations  of  the  contract  re- 
lating to  the  use  of  the  Rock  Island 
tracks  between  South  Omaha  and 
Lincoln  by  the  Pacific  Company 
did  not  embrace  the  acquisition  of 
right  of  way  or  real  estate." 

A  statutory  right  in  one  corpora- 
tion to  use  the  land  of  another  com- 
pany for  the  purpose  of  making  con- 
nections has,  however,  been  held  to 
be  an  "interest  in  lands"  within  the 
provision  of  the  Statute  of  Frauds. 
Port  Jervis,  etc.  R.  Co.  v.  New  York, 
etc.  R.  Co.,  132  N.  Y.  445  (1892), 
(30  N.  E.  Rep.  855). 

A  railroad  <;ompany  owning  a  rail- 
road between  two  points  entered 
into  an  agreement  with  another  com- 
pany called  a  lease  by  wliich  the  latter 
company  was  given  the  right  to  use 
the  tracks  between  such  points,  the 
agreement  ])ro^^ding  that  "said  rail- 
road shall  be  operated  by  the  parties 
hereto  jointlj'."  It  was  held  that 
the  agreement  was  merely  a  grant  of 
trackage  rights  and  not  a  merging  of 
the  business  of  the  two  companies. 

456 


Central  Trust  Co.  v.  Colo.  Midland 
R.  Co.,  89  Fed.  560  (1898). 

An  agreement  by  which  one  rail- 
road company  obtains  trackage  rights 
over  the  road  of  another  and  a  joint 
use  of  terminals,  yards  and  other 
facilities,  and  by  which  a  third  com- 
pany obtains  also  the  joint  use  of 
such  yard  and  facilities  and  which 
is  of  benefit  to  the  public  in  facilitat- 
ing the  transportation  of  freight,  is 
valid. 

Georgia  R.,  etc.  Co.  v.  Maddox, 
116  Ga.  64  (1902),  (42  S.  E.  Rep. 
315). 

2  In  Coney  Island,  etc.  R.  Co.  v. 
Brooklyn  Cable  Co.,  53  Hun  (N.  Y.), 
170  (1889),  (6  N.  Y.  Supp.  108),  the 
Court  said:  "The  contract  here  is 
a  mere  license  or  privilege  for  hire. 
It  is  not  a  lease  conveying  an  interest 
in  the  realty  but  an  agreement  con- 
taining mutual  stipulations  in  the 
nature  of  a  license.  It  is  clear  the 
intent  was  to  permit  the  first  licensee 
to  run  its  cars  over  the  tracks  men- 
tioned. Had  it  been  designed  to 
cover  any  more  than  such  a  privilege 
other  terms  would  have  been  used  to 
indicate  such  an  intention." 

See  also  Richmond,  etc.  R.  Co.  v. 
Durham,  etc.  R.  Co.,  104  N.  C.  658 
(1889),  (40  Am.  &  Eng.  R.  Cas.  488, 
10  S.  E.  Rep.  659). 


CHAP.  XXIV] 


TRACKAGE  CONTRACTS 


§  256 


that  in  case  of  disagreement  as  to  the  compensation  to  be  paid 
the  matter  shall  be  submitted  to  arbitration.' 

Similar  statutes  compelling  railroad  companies  to  furnish 
facilities  to  intersecting  roads  for  the  purpose  of  making  track 
connections,  and  providing  for  the  ascertainment  of  com- 
pensation therefor,  have  been  enacted  in  many  American 
States.2 

§  256.  Express  Authority  not  necessary  for  Execution  of 
Trackage  Contract.  — Express  statutor}^  authority  is  not  neces- 
saiy  to  enalile  a  railroad  company  to  enter  into  a  trackage 
contract  granting  to  another  company,  in  common  with  itself, 
the  right  to  use  a  portion  of  its  tracks  and  facilities,  not  re- 
quired for  the  exercise  of  its  own  franchises.  The  rule  that 
a  railroad  company  cannot,  without  legislative  authority, 
alienate  its  franchises  or  propei'ty  necessary  for  the  discluu'ge 
of  its  duties  to  the  public,  has  no  application.  The  owner 
of  the  railroad  under  such  a  contract  transfers  no  franchise, 
parts  with  no  property  and  is  not  excluded  from  the  use  and 


'  For  general  statute  see  Railway 
Clauses  Act  of  1845,  §  92. 

Where  an  act  provided  that  the 
running  powers  granted  were  to  be 
exercised  upon  terms  to  be  agreed 
upon,  or  in  default  of  agreement  to 
be  settled  by  arbitration,  and  the 
owners  of  the  railway  were  to  make 
all  arrangements  required  by  the 
agreement  or  arbitration,  it  was  held 
that  "terms"  included  the  necessary 
arrangements  for  regulating  the  joint 
traffic.  Swansea,  etc.  R.  Co.  i\ 
Swansea,  etc.  R.  Co.,  3  Ry.  &  C.  T. 
Cases,  .330  (1879). 

Where  an  act  gave  a  railway  com- 
pany running  powers  over  part  of 
the  line  of  another  company  for 
"local  traffic"  it  was  held  that  that 
phrase  meant  "traffic  from  one  known 
station  to  another  on  tlie  line." 
Midland  R.  Co.  v.  Manchester,  etc. 
R.  Co.,  22  L.  T.  Rep.  001  (1S70). 
See  also  Plymouth,  etc.  R.  Co.  v. 
Great  Western  R.  Co.,  6  Ry.  &  C.  T. 
Cases,  101  (18S9). 

For  other  cases  construing  acts  of 


Parliament  granting  running  powers 
and  providing  for  the  ascertainment 
of  compensation  see  Midland  R.  Co. 
V.  Neath,  etc.  R.  Co.,  2  Ry.  &  C.  T. 
Cases,  3(56  (1876);  Caledonia  R.  Co. 
V.  North  British  R.  Co.,  2  Ry.  &  C.  T. 
Cases,  271  (1875);  Taff  Vale  R.  Co. 
V.  Ryhmney  R.  Co.,  2  Ry.  &  C.  T. 
Cases,  176  (1875);  South  Devon  R. 
Co.  V.  Devon,  etc.  R.  Co.,  2  Ry.  it 
C.  T.  Cases,  348  (1876). 

2  See  New  York  statute  construed 
in  Port  Jervis,  etc.  R.  Co.  v.  New 
York,  etc.  R.  Co.,  132  N.  Y.  439 
(1892),  (30  N.  E.  Rep.  855).  Also 
Pennsylvania  statute  construed  in 
Altoona,  etc.  R.  Co.  v.  Beecli  Creek 
R.  Co.,  177  Pa.  St.  443  (1896),  (35 
Atl.  Rep.  734). 

An  Ohio  statute  authorizing  rail- 
road companies  to  make  "running 
arrangements  "  with  other  companies 
is  construed  in  Stanley  x'.  Cleveland, 
etc.  R.  Co.,  IS  Ohio  St.  552  (1860). 

For  charter  provision  see  Olcott  ?'. 
Tioga  R.  Co.,  27  N.  Y.  546  (1863), 
(84  .\m.  Dec.  298). 

457 


§  256 


INTERCORPORATE   RELATIONS 


[part  lit 


enjoyment  of  its  property  and  franchises.  It  merely  grants 
the  surplus  use  of  its  tracks.* 

In  Union  Pacific  R.  Co.  v.  Chicago,  etc.  R.  Co."^  the  Supreme 
Court  of  the  United  States  said:  "  By  the  contract  the  Pacific 
Company  parted  with  no  franchise,  and  was  not  excluded 
from  any  part  of  its  property  or  the  full  enjoyment  of  it.  What 
it  agreed  to  do  was  to  let  the  Rock  Island  into  such  use  of 
the  bridge  and  tracks  as  it  did  not  need  for  its  own  purposes. 
This  did  not  alien  any  property  or  right  necessary  to  the  dis- 
charge of  its  public  obligations  and  duties,  but  simply  widened 
the  extent  of  the  use  of  its  property  for  the  same  purposes  for 
which  that  property  was  acquired,  to  its  own  profit  so  far  as 
that  use  was  concerned,  and  in  the  furtherance  of  the  demands 
of  a  wise  public  policy.  If,  by  so  doing,  it  may  have  assisted 
a  competitor,  it  does  not  lie  in  its  mouth  to  urge  that  as  ren- 
dering its  contract  illegal  as  opposed  to  public  policy.  Ability 
to  perform  its  own  immediate  duties  to  the  public  is  the  limi- 
tation on  its  jus  disponendi  we  are  considering,  and  that 
limitation  had  no  application  to  such  a  use  as  that  in  question." 

One  railroad  company,  however,  has  no  implied  power  to 
grant  to  another  company  such  extensive  running  privileges  as 
to  amount,  practically,  to  turning  over  to  the  latter  the  control 
of  its  road.^ 


1  See  ante,  §  172:  "Leases  of  Sur- 
plus Property." 

2  Union  Pacific  R.  Co.  v.  Chicago, 
etc.  R.  Co.,  163  U.  S.  589  (1896),  (16 
Sup.  Ct.  Rep.  1173),  per  Fuller,  C.  J., 
affirming  51  Fed.  309  (1892). 

*  "Corporations  may  make  all 
necessary  arrangements  for  cheaply 
and  expeditiously  developing  or  car- 
rying on  their  particular  business; 
but  it  is  another  thing,  going  beyond 
this,  to  enter  into  contracts,  for  in- 
stance, by  which  the  exclusive  con- 
trol or  the  exclusive  right  of  working 
the  line  is  handed  over  to  other 
parties.  All  such  arrangements, 
whatever  their  form,  however  dis- 
guised, are  ultra  vires  and  void." 
Green's  Brice's  Ultra  Vires  427. 
See  also  Earle  v.  Seattle,  etc.  R.  Co., 

458 


46  Fed.  909  (1893);  Ohio,  etc.  R. 
Co.  V.  Indianapolis,  etc.  R.  Co.,  5  Am. 
L.  Reg.  (n.  s.)  733  (1866);  Attorney 
General  i\  Great  Eastern  R.  Co., 
L.  R.  11  Ch.  Div.  449  (1879);  John- 
son V.  Shrewsbury,  etc.  R.  Co.,  3 
De  Gex,  M.  &  G.  914  (1853) ;  Gardner 
V.  London,  etc.  R.  Co.,  L.  R.  2  Ch. 
App.  212  (1867);  Beman  v.  Ruf- 
ford,  6  Eng.  L.  &  Eq.  106  (1851), 
(15  Jur.  914). 

Under  the  English  Railway  Clauses 
Consolidation  Act  (8  and  9  Vict.  ch. 
20),  it  has  been  held  that  one  rail- 
road company  may  make  a  contract 
with  another  for  the  use  of  its  line 
and  may  pay  tolls  sufficient  to  make 
dividends  upon  the  preference  stock 
of  the  latter.  South  York.shire  R., 
etc.  Co.  V.  Great  Northern  R.  Co.,  9 


CHAP.  XXIV]  TRACKAGE  CONTRACTS  §  257 

The  power  of  a  railroad  company  to  accept  a  grant  of  run- 
ning privileges  depends  upon  the  limitations  of  its  charter. 
It  cannot  exercise  running  powers  over  a  railroad  beyond  its 
authorized  termini.  It  cannot  use  a  trackage  contract  as  a 
means  of  extending  the  limits  within  which  it  may  operate 
a  railroad.^  But,  within  the  limits  prescribed  by  its  charter, 
a  railroad  company  has  implied  power  to  acquire  running  privi- 
leges over  the  railroad  of  another  company,  wherever  such 
privileges  furnish  it  an  advantageous  means  of  reaching  a 
desired    point.^ 

§257.  Execution  of  Trackage  Contracts. — The  corporate 
power  —  implied  or  expressly  conferred  —  involved  in  the 
authorization  and  execution  of  a  trackage  contract  may  be 
exercised  by  the  board  of  directors  of  a  railroad  company  in 
the  management  of  the  regular  business  of  the  corporation.^ 
The  power  of  the  directors,  however,  is  not  so  exclusive  as  to 
preclude  action  by  the  stockholders.* 

The  New  York  Court  of  Appeals  has  intimated  that  the 
right  conferred  by  a  statute  authorizing  a  railroad  company  to 
"  intersect,  join  and  unite  its  railroad  with  any  other  railroad  " 

Exch.    55    (1853).     CoiUra,    Simpson  '  Elkins  i'.  Camden,  etc.  R.  Co.,  36 

V.     Denison,     10    Hare,     51     (1852);  N.     J.     Eq.     241     (1882).     See    also 

compare  Green    Bay,   etc.   R.  Co.   v.  Nashua,   etc.   R.  Co.   v.   Boston,  etc. 

Union  Steamboat  Co.,    107  U.  S.  98  R.  Co.,   27  Fed.  821   (1886),  reversed 

(1882),  (2  Sup.  Ct.  Rep.  221).  on    other    grounds,    136    U.    S.    356 

In  Charlton  v.  Newcastle,  etc.    R.  (1890),  (10  Sup.  Ct.  Rep.  1004). 

Co.,    5    Jur.    (n.     s.)    1006    (1859),    a  Where   a    trackage    contract    from 

contract  for  the  joint  use  of  railroads  a   railroad  company   to  a   receiver  of 

and    division    of    profits,    antecedent  another  company  provided  that  any 

to    an    amalgamation,    was    declared  jjurchaser  of   the   road   of   the   latter 

ultra  vircfs  and  void.  company  at    foreclosure    sale    might 

'  Naugatuck  R.  Co.  v.  Waterbury  elect  to  continue  the  contract,  it  was 

Button    Co.,    24  Conn.    482    (1856);  held   that   the   use   of  the   tracks  by 

London,   etc.  R.  Co.   v.   London,   etc.  a  purchaser  at  such  sale  for  five  years, 

R.    Co.,    4    De    G.   &   J.    362    (1859);  paying    the    stipulated    rental    which 

Simpson    v.    Denison,     10    Hare,    51  was  acceptetl,    would   be   deemed   an 

(1852);    Ohio,  etc.  R.  Co.  v.  Indian-  election    to    continue    the    contract, 

apolis,    etc.    R.    Co.,    5    Am.    L.    Reg.  and  would  bind  both  parties. 

(n.  s.)  733  (1800).  Terre  Haute,  etc.  R.  Co.  v.  Peoria, 

2  Midland  R.  Co.  v.  Great  Western  etc.   R.   Co.,    167    111.    296   (1897),  (47 

R.  Co.,  L.  R.  8  Ch.  App.  841  (1873);  N.  E.  Rep.  513). 

Great  Northern  R.  Co.  v.  Manchester,  *  Union  Pacific  R.  Co.  v.  Chicago, 

etc.    R.   Co.,   5   De  Gex  &   Sm.    138  etc.  R.  Co.,  163  U.  S.  564  (1895),  (16 

(1851).  Sup.  Ct.  Rep.  1173). 

459 


§  258 


INTERCORPORATE    RELATIONS 


[part   III 


upon  the  property  of  the  company  owning  the  latter  railroad, 
and  requiring  such  company  "  to  grant  the  facilities  "  needed 
for  the  purpose,  is  an  interest  in  lands  which  can  only  be  created 
by  a  written  instrument.^  It  may  well  be  doubted,  however, 
apart  from  statutory  provision  whether  a  mere  trackage  con- 
tract running  for  less  than  a  year  comes  within  the  Statute  of 
Frauds.^ 

§  258.  Assignability  of  Trackage  Contracts.  —  A  trackage 
contract,  upon  consideration,  while  partaking  of  the  nature 
of  a  license,  is  essentially  a  valid  and  enforceable  contract 
between  the  parties.^ 

It  is,  however,  a  license  in  the  sense  that  it  confers  a  per- 
sonal privilege.  A  railroad  company  in  letting  another  cor- 
poration into  the  use  of  its  tracks  agrees  only  that  that  par- 
ticular corporation  may  exercise  the  privilege.  A  trackage 
contract  creates  no  transferable  interest,  and,  without  a  stipu- 
lation to  that  effect,  is  not  assignable.* 


'  Port  Jervis,  etc.  R.  Co.  v.  New 
York,  etc.  R.  Co.,  132  N.  Y.  439 
(1892),  (30  N.  E.  Rep.  855,  52  Am. 
&  Eng.  R.  Cas.  107). 

^  Where  an  oral  agreement  for 
trackage  rights  has  been  executed  an 
action  will  lie  for  use  and  occupation. 

South  Carolina  Terminal  Co.  v. 
South  Carolina,  etc.  R.  Co.,  52  S.  C. 
1  (1898),  (29  S.  E.  Rep.  565). 

^  Louisville,  etc.  R.  Co.  v.  Ken- 
tucky, etc.  R.  Co.,  95  Kj\  550  (1894), 
(26  S.  W.  Rep.  532). 

*  Coney  Island,  etc.  R.  Co.  v. 
Brooklyn  Cable  Co.,  53  Hun  (N.  Y.), 
171  (1889),  (6  N.  Y.  Supp.  108): 
"The  question  is  not  whether  a  cor- 
poration can  sell  or  assign  its  fran- 
chises, but  whether  the  agreement 
in  question  became  vested  in  the 
defendant  so  that  It  can  enforce 
it  against  the  plaintiff.  .  .  .  This 
agreement  was  not  a  lease,  and  is, 
therefore,  not  a  subject  of  subletting 
to  different  parties  to  be  conjointly 
used  with  the  original  parties." 

South  Side,  etc.  R.  Co.  v.  Second 
Avenue    R.    Co.,     191    Pa.    St.    509 

460 


(1899),  (43  Atl.  Rep.  346):  "The 
Pittsburgh  and  Birmingham  Com- 
pany was  the  owner  of  the  tracks 
(de  facto  at  least  for  a  term  of  years) 
and  the  Second  Avenue  Passenger 
Railway  Company  was  a  licensee, 
or  at  most  a  sub-lessee.  The  latter 
had  no  rights  but  those  the  agree- 
ment gave  it,  the  former  had  all  the 
rights  of  ownership  that  the  agree- 
ment did  not  part  with.  This  is 
explicitly  recognized  in  the  provision 
that  if  it  should  allow  any  other 
company  as  licen.see  to  use  its  tracks 
a  proportionate  credit  should  be 
allowed  the  Second  Avenue  company. 
The  allowance  of  another  company 
to  come  in  as  a  licensee  was  by 
virtue  of  the  rights  of  ownership. 
The  latter  company  had  no  such 
rights,  and  could  not  divide  or  share 
or  part  with  its  privileges,  except 
to  an  assignee  within  tlie  terms  of 
the  agreement." 

Under  a  contract  for  the  use  of 
terminal  facilities,  tracks,  etc.,  by 
one  railroad  companj'  with  another, 
containing     a     provision     that     the 


CHAP.    XXIV] 


TRACKAGE    CONTRACTS 


§  259 


§  259.  Construction  of  Trackage  Contracts.  —  The  term  of 
a  trackage  contract  is  fixed  by  the  stipulations  therein.  When 
no  time  is  stated  it  seems  clear,  as  a  general  rule,  that  the  con- 
tract is  terminable  at  the  option  of  either  party  after  reasonable 
notice.  An  intention  to  make  a  perpetual  arrangement  should 
be  clearly  expressed.^ 

In  an  English  case,  however,  it  was  held  that  an  agreement 
between  two  railway  companies  wherein  one  was  granted 
running  powers  and  the  other  certain  facilities  for  making 
shipments,  and  containing  mutual  stipulations  as  to  the  ship- 
ment of  goods  over  each  other's  lines,  but  not  containing  any 
provision  as  to  the  time  for  which  it  should  endure,  was  a  per- 
manent and  not  a  terminable  contract,  and  that  a  notice  to 
terminate  was  invalid.^     But  as  this  contract  was  authorized 


e;rantee  should  not,  by  any  contract 
with  any  other  railroad  corporation, 
give  to  such  corporation  the  right 
for  its  trains  to  pa.ss  over  or  use  the 
railroad  of  the  grantor  without  its 
consent,  it  was  held  that  the  rightT  to 
use  such  tracks,  etc.,  did  not  pass  to 
the  successors  or  assigns  of  the  grantee 
without  the  consent  of  the  grantor 
under  the  provisions  of  the  contract. 
Tcrre  Haute,  etc.  R.  Co.  v.  Peoria, 
etc.  R.  Co.,  61    111.  App.  405  (1895). 

Where  a  trackage  contract,  in 
terms,  runs  to  the  assignees  of  the 
parties,  and  both  parties  recognize 
another  company  as  the  successor 
in  interest  of  one  of  them,  "a  court 
of  equity  will  treat  the  assignee  in 
fact  as  the  legal  assignee,  possessed 
of  the  riglits  and  charged  with  the 
obligations  of  the  original  party  to 
the  contract."  Chicago,  etc.  R.  Co. 
V.  Denver,  etc.  R.  Co.,  14.3  U.  S.  608 
(1891),  (12  Sup.  Ct.  Rep.  479),  af- 
firming 45  Fed.  304  (1891),  s.  c. 
46  Fed.  145  (1890). 

'  In  Boston,  etc.  R.  Co.  v.  Boston, 
etc.  R.  Co.,  5  Cush.  (Mass.)  375 
(1850),  it  was  held  that  the  right 
granted  by  the  legislature  to  one 
railroad  company  to  use  the  tracks 
of  another  did  not  become,  ujion  its 
exercise,    a    permanent    contract    be- 


tween the  corporations,  for  such  use, 
perpetual  in  its  character,  but  that 
"  it  was  rather  in  the  nature  of  a 
lease  for  an  indefinite  period  of  time, 
with  liability  to  pay  as  long  as  it 
might  be  used."  It  was  also  held 
tliat  no  perpetual  obligation  to  use 
the  tracks  could  be  inferred  from  an 
obligation  imposed  upon  the  jiro- 
prietary  conipanj'  to  make  expensive 
and  permanent  additions  to  its 
property  to  accommodate  such  use. 
See  also  Canal,  etc.  R.  Co.  v.  St. 
Charles  Street  R.  Co.,  44  La.  Aim. 
1069  (1892),  (11  So.  Rep.  702). 

A  trackage  contract  is  not  invalid 
because,  within  its  prescribed  dura- 
tion, the  charter  of  one  of  the  com- 
panies expires  by  limitation,  pro- 
vision being  made  in  the  contract 
for  such  contingenc)'.  Union  Pacific 
R.  Co.  V.  Chicago,  etc.  R.  Co.,  163  U.  S. 
592  (1895),  (16  Sup.  Ct.  Rep.  1173). 

2  Llanelly,  etc.  R.  Co.  r.  London, 
etc.  R.  Co.,  L.  R.  7  H.  L.  Cas.  550 
(1875),  (45  L.  J.  Ch.  D.  539,  23  W.  R. 
927,  32  L.  T.  575).  In  this  case 
Lord  Cairns  compared  trackage  con- 
tracts with  contracts  of  partnership 
and  of  hiring  and  service  in  respect 
to  their  terminable  nature "(]>.  559): 
"Reference  was  made  to  the  well- 
known    cases   of    contracts    of    hiring 

461 


§  259 


INTERCORPORATE    RELATIONS 


[part   III 


by  the  Railway  Clauses  Act,  under  which,  in  case  any  differ- 
ences arose  in  its  working,  they  might  be  made  the  subject 
of  arbitration,  the  decision  cannot  be  considered  of  general 
application. 

Where  one  railroad  company  grants  to  another  the  right  to 
use  a  portion  of  its  line,  it  necessarily  undertakes  to  furnish 
those  facilities  necessary  to  the  exercise  of  the  privilege  granted. 
Thus,  in  an  English  case,  where  one  railroad  company  had 
acquired  running  powers  over  the  line  of  another  and  had 
equipped  it  with  the  block  signal  system,  it  was  held  that  the 
latter  company  was  bound  to  work  the  system  —  that  it  was 
a  reasonable  facility  which  the  company  was  bound  to  afford.^ 

Where  two  railroad  companies  entered  into  a  contract 
wherein  the  use  of  certain  tracks  and  terminal  facilities  was 
granted,  it  was  held  that  the  expenses  necessaiy  to  such  use 
and  the  exercise  of  such  facilities  must  be  borne  entirely  by 
the  grantor  company.^ 


and  service  and  contracts  of  partner- 
ship. These  cases  appear  to  me  to 
have  no  analogy  whatever  to  the 
present.  With  regard  to  contracts 
of  hiring  and  service,  assigning  to 
each  of  them  certain  notices  by 
which  they  can  be  terminated;  and 
they  are,  besides,  engagements  which 
depend  upon  the  personal  confidence 
which  one  of  the  parties  reposes  in 
the  other  and  which  in  their  nature 
cannot  be  supposed  to  be  of  a  per- 
petual character.  With  regard  to 
contracts  of  partnership  they  also 
are  already  ruled  and  settled,  by 
law,  to  be  capable  of  termination  at 
any  moment  unless  a  definite  limit 
is  prescribed  upon  the  face  of  them. 
And,  the  law  being  well  settled,  when 
you  have  a  contract  of  that  kind,  you 
apply  the  understood  law,  and  j'ou 
hold  that  the  parties  knowing  what 
the  law  was,  must  be  supposed  to 
have  intended  to  enter  into  a  partner- 
ship which  could  at  any  time  be  ter- 
minated if  they  did  not  provide  upon 
the  face  of  their  contract  that  it  should 
be  a  continuing  partnership." 

In  Railway  Co.  v.   Neel,  56  Ark. 

462 


279  (1892),  (19  S.  W.  Rep.  963),  a 
trackage  contract  was  held  not  to 
constitute  a  partnership  between  the 
railroad  companies,  and  not  to  make 
one  company  the  agent  of  the  other 
for  the  purpose  of  receiving  freight. 
The  Court  said  (p.  287):  "The  con- 
tract between  the  two  railway  com- 
panies did  not  constitute  a  partner- 
ship between  thein  nor  did  it  make 
the  Swan  Lake  railroad  the  agent 
of  the  appellant  company  for  the 
purpose  of  receiving  freight  for  and 
on  its  behalf.  .  .  .  The  contract 
plainly  intended  to  confer  a  license 
upon  the  Swan  Lake  railroad  to  run 
its  trains  over  the  appellant  com- 
pany's track  between  Bob  Roy  and 
Pine  Bluff.  It  created  no  other  right, 
unless  it  was  to  limit  the  appellant's 
rights  to  make  certain  charges  for 
freight  and  passengers." 

'  Great  Western  R.  Co.  v.  Bristol 
Port  R.,  etc.  Co.,  5  Ry.  &  C.  T.  Cases, 
94  (1885). 

2  Elmira  Rolling  Mill  Co.  v.  Erie  R. 
Co.,  28  N.  J.  Eq.  400  (1877),  (14  Am. 
Ry.  Rep.  199). 

A  contract  by  which  one  company 


CHAP.  XXIV] 


TRACKAGE  CONTRACTS 


§  259 


The  rights  of  the  parties  under  a  trackage  contract  are 
measured,  with  respect  to  the  use  of  track,  by  the  terms  of  the 
contract,  and  the  provisions  of  the  Interstate  Commerce  Act 
apply  to  the  situation  and  cannot  authorize  a  different  use  of 
the  track.* 

A  stipulation  in  a  contract  between  three  railroad  companies 
respecting  the  use  of  a  common  yard  that  the  "  necessary 
expenses  "  should  be  equally  shared  among  them,  did  not 
include  the  extraordinaiy  expense  of  a  judgment  obtained 
against  one  of  the  companies  for  injuries  sustained  by  an 
employee,  through  its  negligence.^     But,  under  an  agreement 

granted  to  another  a  running  privilege  Columbus,  etc.  R.  Co.  v.  Pennsyl- 

into  a  city  provided  for  the  payment       vania  Co.,  143  Fed.  757  (1906). 

of  a  certain  sum  for  each  car  drawn  Two    railroad    companies    entered 


over  the  first  company's  track,  "e.x- 
cepting  only  empty  freight  cars  and 
such  loaded  freight  cars  as  .  .  .  arc 
hauled  over  said  first  party's  line  of 
railroad."  Held,  that  the  exemption 
was  not  ambiguous,  and  that  the  first 
clause  covered  all  freight  cars.  Louis- 
ville, etc.  Co.  V.  Louisville  S.  R.  Co., 
100  Ky.  690  (1897),  (39  S.  W.  Rep. 
42). 

One  railroad  company  granted  to 
another  the  joint  u.se  of  its  terminal 
property  and  of  a  short  track  running 
to  it  under  an  agreement  providing 
that  if  the  business  required  it  addi- 
tional property  should  be  acquired 
by  one  or  both  companies  and  in- 
cluded in  tlie  joint  use.  The  licensee 
company  sub.sequently  purchased  ad- 
ditional property  and  a  readjustment 
of  the  rental  was  made.  In  all  the 
agreements  provision  was  made  for 
apportioning  the  cost  of  maintenance 
etc.  upon  a  wheelage  basis  —  the  "car 
and  engine  mileage  use  of  .saitl  j)rop- 
crty."  It  was  held  that  the  agree- 
ments contemplated  the  joint  use  of 
the  property  as  a  whole  and  that  wheel- 
age  was  to  be  computed  on  cars  and 
engines  passing  to  the  terminal  i)rop- 
erty  over  the  short  track  without  re- 
gard to  whether  they  actually  used 
the  part  of  the  terminal  property 
owned  by  the  proprietary  company. 


into  a  contract  bj'  which  one  obtained 
from  the  other  the  permanent  right  to 
use,  jointly  witii  the  proprietary  com- 
pany, a  portion  of  its  tracks.  This 
use  continued  until  the  licensee  com- 
pany became  insolvent  and  all  its 
property  and  franchises  were  sold  to 
another  company,  which  for  some 
time  used  the  tracks  as  before. 
Subsequently  the  purchasing  com- 
pany abandoned  such  use,  but  it  was 
held  that  it  had  become  liable  for  the 
obligations  of  the  licensee  company. 

South  Carolina  R.  Co.  v.  Wilming- 
ton, etc.  R.  Co.,  7  S.  C.  410  (1875). 

'  The  duty  of  a  railroad  company, 
operating  its  own  road,  to  serve  the 
local  stations  on  its  lines,  does  not 
apply  to  a  company  that  has  only  a 
running  privilege  for  through  trains 
over  a  part  of  the  road  of  another 
company  which  it  does  not  control. 
In  such  a  case  the  company  is  not 
required  to  disregard  the  conditions 
of  its  agreement,  and  does  not  violate 
the  provisions  of  the  Interstate  Com- 
merce Act  by  not  receiving  and  dis- 
charging traffic  on  the  tracks  of  the 
])roprietary  comjiany.  .\lford  v.  Chi- 
cago, etc.  R.  Co.,  2  Int.  Com.  Rep. 
771    (1S9{)). 

2  Culf,  etc.  R.  Co.  I'.  Galveston,  etc. 
R.  Co.,  83  Tex.  .509  (1892),  (18  S.  W. 
Rep.  950,  52  .\m.  &  Eng.  R.  Cas.  99). 

403 


260 


INTERCORPORATE    RELATIONS 


[part  in 


between  the  parties  to  such  a  contract  that  the  cost  of  main- 
taining the  tracks  jointly  used  should  be  jointly  l)orne,  it  was 
held  that  damages  paid  to  employees  injured  while  engaged  in 
the  work  of  maintenance  were  a  part  of  the  cost  of  mainte- 
nance and  properly  chargeable  to  the  joint  account.' 

A  provision  in  a  trackage  contract  between  two  street  rail- 
road companies  that,  in  case  the  licensee  company  should  use 
steam  as  a  motive  power,  either  party  might  terminate  the 
contract  upon  six  months'  notice  was  held  not  to  authorize 
such  termination  upon  the  ground  that  the  Ucensee  had  in- 
stalled an  electrical  system.^ 

The  practical  construction  which  the  parties  to  a  trackage 
contract  have  put  upon  it  is  a  safe  guide  to  the  intention  of 
the  parties  when  its  meaning  is  in  doubt. ^ 

§  260.  Specific  Performance  of  Trackage  Contracts.  —  Track- 
age contracts  are  of  such  a  nature  that,  as  a  general  rule,  a 
judgment  for  damages  would  furnish  an  inadequate  remedy 
for  their  breach.  When  such  a  contract  is  not  unconscionable 
or  inequitable  and  the  company  seeking  its  enforcement  has 


Under  a  contract  by  a  city  with  a 
railroad  company  by  which  it  per- 
mits the  company  to  construct  a  track 
through  its  streets,  on  condition  that 
the  company  permit  other  railroad 
companies  to  use  the  track,  on  pay- 
ing a  'pro  rata  share  of  the  cost  of 
construction,  without  placing  any 
limit  on  the  time  when  other  roads 
may  come  in,  or  their  number,  a  delay 
in  making  application  of  nine  years 
after  its  completion,  during  which  two 
othe^  roads  have  come  in,  is  no 
ground  for  excluding  an  applicant. 
Louisville,  etc.  R.  Co.  ik  Mississippi, 
etc.  R.  Co.,  92  Tenn.  681  (1893),  (22 
S.  W.  Rep.  920). 

1  Louisville,  etc.  R.  Co.  r.  Chesa- 
peake, etc.  R.  Co.,  21  Ky.  Law  Rep. 
875  (1899),  (53  S.  W.  Rep.  277). 

*  Prospect  Park,  etc.  R.  Co.  v. 
Coney  Island,  etc.  R.  Co.,  144  N.  Y. 
152  (1894),  (39  N.  E.  Rep.  17,  26 
L.  R.  A.  610). 

As  to  construction  of  a  trackage 
contract  in  view  of  consolidation  — 

464 


whether  it  extends  to  subsequently 
acquired  lines,  see  Lancashire,  etc.  R. 
Co.  V.  East  Lancashire,  etc.  R.  Co., 
5  H.  L.  Cas.  792  (1856),  (2  Jur.  (n.  s.) 
767,  25  L.  J.  Ex.  278). 

^  Columbus,  etc.  R.  Co.  v.  Penn- 
sylvania Co.,  143  Fed.  757  (1906): 
"This  not  .so  clearly  from  the  unaided 
construction  of  the  language  of  the 
contract  .  .  .  but  because  of  the  con- 
struction which  the  parties  for  so  many 
years  of  operation  under  the  contract 
put  upon  it.  This  is  a  very  safe 
guide  in  cases  of  doubt  in  finding  the 
intention  of  the  parties.  Their  con- 
current action  in  taking  up  the  execu- 
tion of  their  contract,  while  their 
minds  were  still  conscious  of  the 
understanding  they  had  when  mak- 
ing it  and  pursuing  its  execution 
without  question,  maj',  with  confi- 
dence, be  relied  upon  as  indicating 
what  they  meant  when  they  made  it." 

See  also  Chicago  Great  Western  R. 
Co.  V.  Northern  Pacific  R.  Co.,  101 
Fed.  792  (1900). 


CHAP.    XXn  ]  TRACKAf.K    COXTRACTS  §   260 

acted  in  good  faith,  a  court  of  equity  will  decree  its  specific 
performance.  It  is  not  an  objection  to  such  a  decree  that  it 
involves  continuous  acts  and  constant  supervision.  The  court 
will  adapt  the  remedy  to  the  wrong.' 

In  Union  Pacific  R.  Co.  v.  Chicago,  etc.  R.  Co.^  Mr.  Chief 
Justice  Fuller  said:  "  The  jurisdiction  of  courts  of  equity  to 
decree  the  specific  performance  of  agreements  is  of  a  very 
ancient  date,  and  rests  on  the  ground  of  the  inadequacy  and 
incompleteness  of  the  remedy  at  law.  Its  exercise  prevents 
the  intolerable  travesty  of  justice  involved  in  permitting  parties 
to  refuse  performance  of  their  contracts  at  pleasure  by  electing 
to  pay  damages  for  the  breach.  It  is  not  contended  that 
multiplicity  of  suits  to  recover  damages  for  the  refusal  of 
defendants  to  perform  would  afford  adequate  relief,  nor  could  it 
be,  for  such  a  remedy,  under  the  circumstances,  would  neither 
be  plain  nor  complete,  nor  a  sufficient  su])stitute  for  the  remedy 
in  equity,  nor  would  the  interests  of  the  public  be  subserved 
thereby.  But  it  is  objected  that  equity  will  not  decree  specific 
performance  of  a  contract  requiring  continuous  acts  involving 
skill,  judgment  and  technical  knowledge,  nor  enforce  agree- 
ments to  arbitrate,  and  that  this  case  occupies  that  attitude. 
We  do  not  think  so.  The  decree  is  complete  in  itself,  is  self- 
operating  and  self-executing,  and  the  provision  for  referees  in 
certain  contingencies  is  a  mere  matter  of  detail  and  not  of 
the  essence  of  the  contract.     It  must  not  be  fofgotten  that, 

»  United  States:    Union  Pacific  R.  Chicago,   etc.    R.   Co.,    141    I'ed.    78.5 

Co.  V.  Chicago,  etc.  R.  Co.,  103  U.  S.  (190.5). 

564  (1895),  (10  Sup.  Ct.  Rep.  1173),  Alabama:     South,    etc.    R.    Co.    v. 

«//irwinj/ 51  Fed.  309  (1892);   s.  c.  47  Highland,    etc.    R.    Co.,    98   Ala.    400 

Fed.    15   (1891);    .Joy  v.   City  of  St.  (1893),  (13  So.  Rep.  682,  39  Am.  St. 

Louis,  138  U.  S.  1  (1891),  (11  Sup.  Ct.  Rep.  74). 

Rep.   243) ;    affirining  s.   c.  sub  nam.  New  York :  Pro.^pect  Park,  etc.  R. 

Central  Trust  Co.  v.  Wabash,  etc.  R.  Co.  v.  Coney  Island,  etc.  R.  Co.,  144 

Co.,  29  Fed.  .540  (1880);   Railroad  Co.  N.  Y.  152  (1894),  (.39  N.  E.  Rep.  17, 

V.  Ailing,  99  U.  S.  403  (1878).  20  L.  R.  A.  610);    Lawrence  v.  Sara- 

A  trackage  contract  for  a  long  term  toga    Lake     R.    Co.,    36     Hun,     407 

of  years  with   rental   on   a  wheelage  (1885). 

basis,    is    specifically    enforceable    in  England:  Wolverhampton,  etc.  R. 

equity  upon  the  ground  of  the  avoid-  Co.  v.  London,  etc.  R.  Co.,  L.  R.  10 

ance  of  a  niulti|)licity  of  suits  which  Ef|.  433  (1873). 

would  afford  inadequate  relief  and  be  '^  Union  Pacific  R.  Co.  i'.  Chicago, 

vexatious  and  expensive.  etc.  R.  Co.,  163  U.  S.  600  (1895),  (16 

Grand   'IVuid<    Wc-stcni    R.    Co.    r.  Sup.  Ct.  Rep.  1173). 

465 


§   261  INTERCORPORATE    RELATIONS  [PART    III 

in  the  increasing  complexities  of  modern  business  relations, 
equitable  remedies  have  necessarily  and  steadily  been  expanded, 
and  no  inflexible  rule  has  been  permitted  to  circumscribe 
them.  As  has  been  well  said,  equity  has  contrived  its  reme- 
dies '  so  that  they  shall  correspond  both  to  the  primary  right 
of  the  injured  party,  and  to  the  wrong  by  which  that  right  has 
been  violated;'  and  'has  always  presei*ved  the  elements  of 
flexibility  and  expansiveness,  so  that  new  ones  may  be  invented,, 
or  old  ones  modified,  in  order  to  meet  the  requirements  of 
eveiy  case,  and  to  satisfy  the  needs  of  a  progressive  social 
condition  in  which  new  primary  rights  and  duties  are  con- 
stantly arising  and  new  kinds  of  wrongs  are  constantly  com- 
mitted.' "  ' 

§  261.  Liability  of  Proprietary  Company  to  Third  Persons.  — 
Upon  the  principle  that  a  corporation  owing  duties  to  the 
public  cannot  shift  the  responsibility  for  their  performance 
without  the  consent  of  the  State,  a  railroad  company,  permit- 
ting another  company  to  use  its  tracks,  remains  liable  for 
injuries  to  third  persons  —  passengers,  travellers  at  crossings 
and  others  —  caused  by  the  negligence  of  employees  of  the 
latter  company  in  running  its  trains,  to  the  same  extent  as  if 
they  were  its  own  employees  upon  its  own  trains.  The  negli- 
gence of  the  licensee  company  is  the  negligence  of  the  pro- 
prietary company.^ 

'  Pom.  Eq.  Jur.  §  111.  held  liable  for  the  negligence  of  the 

^  United  States:    Central  Trust  Co.  latter  company. 

V.   Denver,  etc.   R.   Co.,   97  Fed.   239  Indiana:   Indianapolis,  etc.  R.  Co. 

(1899).  V.  Solomon,  23  Ind.  534  (1864). 

Georgia:     Central    R.,    etc.    Co.    v.  Kentucky:  Louis\'ille,  etc.  R.  Co.  v. 

Perry,  58  Ga.  461  (1877).  Breeden's  admx.,  Ill  Ky.  729  (1901), 

Illinois:       Pennsylvania      Co.      v.  (64  S.  W.  Rep.  667). 

Ellett,  132  111.  654  (1890),  (24  N.  E.  Minnesota:  Heron  v.  St.  Paul,  etc. 

Rep.    559);     Peoria,    etc.    R.    Co.    v.  R.  Co.,  68  Minn.  542  (1897),  (71  N.  W. 

Lane,  83  111.  448  (1876);   Toledo,  etc.  Rep.  706). 

R.  Co.  V.  Rumbold,  40  111.  143  (1866) ;  Missouri:   Sinclair  v.  Missouri,  etc. 

Pennsylvania  R.  Co.  v.  Greso,  79  111.  R.  Co.,  70  Mo.  App.  588  (1897). 

App.   127  (1898);    Cleveland,  etc.  R.  New  Jersey:    Delaware,  etc.  R.  Co. 

Co.    V.     Bender,     69     111.    App.     262  v.  Salmon,  39  N.  J.  L.  299  (1877),  (23 

(1896).  Am.  Rep.  214). 

In  Pittsburgh,  etc.  R.  Co.  v.  Camp-  Neiv  York :   Compare  Cain  r.  Syra- 

bell,  86  111.  443  (1877),  the  lessee  of  a  cuse,  etc.  R.  Co.,  20  Misc.  459  (1897), 

railroad,  who,  by  contract,  permitted  (45  N.  Y.  Supp.  538),  affirmed  27  App. 

another  company  to  use  its  road,  was  Div.  376  (1898),  (50  N.  Y.  Supp.  1). 

466 


CHAP.  XXIV] 


TRACKAGE  CONTRACTS 


§261 


In  Pennsylvania  Co.  v.  Ellett  ^  the  Supreme  Court  of  Illinois 
said:  "  The  law  has  become  settled  in  this  State,  by  an  un- 
broken line  of  decisions,  that  the  grant  of  a  franchise,  giving 
the  right  to  build,  own  and  operate  a  railway,  carries  with  it 
the  duty  to  so  use  the  property  and  manage  and  control  the 
railroad  as  to  do  no  unnecessary  damage  to  the  person  or  prop- 
erty of  others;  and  where  injuiy  results  from  the  negligent 
or  unlawful  operation  of  the  railroad,  whether  by  the  corpo- 
ration to  which  the  franchise  is  granted,  or  by  another  corpo- 
ration, or  by  individuals  whom  the  owner  authorizes  or  permits 
to  use  its  tracks,  the  company  owning  the  railway  and  fran- 
chise will  be  liable.  .  .  .  The  public  may  look  for  indemnity 
for  injury  resulting  from  the  wrongful  or  unlawful  operation 
of  the  road,  to  that  corporation  to  which  they  have  granted 
the  franchise,  and  thus  delegated  a  portion  of  the  public  seiw- 
ice;  and  for  this  purpose  the  company  whom  it  permits  to 
use  its  tracks,  and  its  sei^vants  and  employees,  will  be  regarded 
as  the  servants  and  agents  of  the  owner  company."  ^ 


North  Carolina:  Aycock  v.  Rail- 
road Co.,  89  N.  C.  321  (1883).  Com- 
pare Sellars  v.  Richinoncl,  etc.  R.  Co., 
94  N.  C.  ().')4  (1880),  (25  Am.  &  Eng. 
R.  Cas.  451)  —  a  case  in  which  a  cor- 
rect result  is  reached  through  a  mani- 
festly erroneous  course  of  reasoning. 

Texas:  Ray  v.  Pecos,  etc.  R.  Co. 
35  Tex.  Civ.  App.  123  (1904),  (80 
S.  W.  Rep.  112). 

Wisconsin:  Jefferson  v.  Chicago, 
etc.  R.  Co.,  117  Wis.  549  (1903),  (94 
N.  W.  Rep.  289).  In  this  case  where 
it  was  .sought  to  recover  damages 
from  the  owner  of  a  railroad  caused 
by  fire  resulting  from  the  failure  of 
the  licensee  to  use  a  proper  spark 
arrester  the  Court  said  (p.  552) : 
"When  a  railroad  company  permits 
another  to  make  joint  use  of  its 
track,  it  is  liable  for  injuries  caused 
to  persons  or  property  for  the  action- 
able negligence  of  such  licensee.  It 
has  received  its  franchisees  subject  to 
certain  well-defined  duties  as  to  the 
machinery  which  it  uses.  It  cannot, 
wliile  exercising  their  franchises  allow 


others  to  cotne  in  with  defective  ma- 
chinery and  use  the  f/uasi-public  high- 
way jointly  with  it  and  escape  the 
duty  laid  upon  it  by  its  charter  to 
use  safe  machinery." 

Enqland :  In  England  as  railway 
companies  are  compelled  to  grant  run- 
ning powers  to  otlier  companies,  an 
absolute  liability  for  the  negligence  of 
the  working  company  is  manifestly 
inequitable.  The  rule  of  liability 
there  is:  The  proprietary  company  is 
prima  facie  liable  for  injuries  received 
upon  its  lines,  but  is  entitled  to  show 
that  the  injury  was  caused  by  the 
negligence  of  another  company  in 
violation  of  the  latter's  agreement  to 
provide  for  the  safety  of  its  trains. 
Ayles  V.  South  Eastern  R.  Co.,  L.  R. 
3  E.x.  146  (1808),  (37  L.  J.  E.x.  104). 

'  Pennsylvania  Co.  v.  Ellett,  132 
111.  0.59  (1890),  (24  N.  E.  Rep.  559). 

2  The  fact  that  a  railroad  company 
grants  to  another  company  a  right  to 
use  its  tracks  does  not  furnish  an 
owner  of  land  over  which  the  pro- 
prietary   company     has    accjuired    a 

467 


§  2G2 


INTERCORPORATE    RELATIONS 


[part  in 


§  262.    Liability  of  Licensee  Company  to  Third  Persons.  —  A 

railroad  company  operating  trains  upon  the  tracks  of  another 
company  under  a  trackage  contract  is  Uable  for  its  own  negh- 
gence.*  Its  responsibility  for  its  acts  and  omissions  is  not 
affected  by  the  fact  that  the  proprietary  company  is  also  liable. 
A  licensee  railroad  company  is  liable  for  something  more 
than  the  negligence  of  its  own  employees.  When  it  obtains 
the  right  to  run  its  trains  over  the  tracks  of  another  company 
it  makes  the  tracks  so  used  its  own,  to  the  extent  that  it  is 
responsible  to  persons  injured  upon  or  by  its  trains  for  any 
failure  to  maintain  the  tracks  in  a  safe  condition.^     It  is  like- 


right  of  way,  any  ground  for  claiming 
additional  damages.  Miller  v.  Green 
Bay,  etc.  R.  Co.,  59  Minn.  169  (1894), 
(60  N.  W.  Rep.  1006,  26  L.  R.  A. 
443). 

'  Illinois:  Pennisylvania  Co.  v. 
Ellett,  132  111.  G54  (1890),  (24  N.  E. 
Rep.  559);  Wabash,  etc.  R.  Co.  v. 
Peyton,  106  111.  534  (1883),  (46  Am. 
Rep.  705) ;  Pfeoria,  etc.  R.  Co.  v.  Lane, 
83  111.  448  (1876);  Toledo,  etc.  R.  Co. 
V.  Rumbold,  40  111.  143  (1866);  St. 
Louis,  etc.  R.  Co.  v.  Rowley,  90  III. 
App.  653  (1900) ;  Pennsylvania  R.  Co. 
V.  Gre.so,  79  111.  App.  127  (1898); 
Cleveland,  etc.  R.  Co.  v.  Bender,  69 
111.  App.  262  (1896). 

The  fact  that  the  company  owning 
a  railroad  track  upon  which  a  collision 
occurred  was  also  negligent,  does  not 
e.xcuse  the  negligence  of  another  com- 
pany using  such  track  under  an  agree- 
ment with  the  owner.  Chicago,  etc. 
R.  Co.  V.  Mitchell,  70  111.  App.  188 
(1897). 

Indiana:  Cleveland,  etc.  R.  Co.  v. 
Berry,  152  Ind.  607  (1899),  (53  N.  E. 
Rep.  415,  46  L.  R.  A.  33);  Pitts- 
burgh, etc.  R.  Co.  V.  Thompson,  21 
Ind.  App.  355  (1898),  (50  N.  E.  Rep. 
828);  Wabash  R.  Co.  v.  Williamson, 
3  Ind.  App.  190  (1891).  Compare 
Cincinnati,  etc.  R.  Co.  v.  Paskins,  36 
Ind.  3S0  (1871),  (5  Am.  Ry.  Rep. 
570) ;  Cincinnati,  etc.  R.  Co.  v.  Town- 
send,  39  Ind.  38  (1872). 

468 


Kansas:  Chicago,  etc.  R.  Co.  v. 
Posten,  59  Kan.  449  (1898),  (53  Pac. 
Rep.  465) ;  Chicago,  etc.  R.  Co.  v. 
Martin,  59  Kan.  437  (1898),  (53  Pac. 
Rep.  461);  Chicago,  etc.  R.  Co.  v. 
Groves,  56  Kan.  601  (1896),  (44  Pac. 
Rep.  628). 

Maine :  Webb  v.  Portland,  etc.  R. 
Co.,  57  Me.  117  (1869). 

Missouri :  Sinclair  v.  Missouri,  etc. 
R.  Co.,  70  Mo.  App.  588  (1897). 

Neio  York :  McGrath  v.  New  York 
Central,  etc.  R.  Co.,  63  N.  Y.  522 
(1876);  Leonard  v.  New  York  Cen- 
tral, etc.  R.  Co.,  10  J.  &  S.  (Sup.  Ct.) 
225  (1877). 

For  consideration  of  liability  of 
licensee  company  to  proprietarj'  com- 
pany for  its  negligence  see  Central 
Trust  Co.  V.  Colorado  Midland  R.  Co., 

89  Fed.  560  (1898). 

^  Where  a  railroad  company  pro- 
cures, by  contract  with  another  com- 
pany, the  right  of  running  its  trains 
into  and  out  of  a  depot  over  the  track 
of  the  latter,  it  thereby  makes  that 
portion  of  the  track  so  used  its  own, 
in  so  far  that  it  will  be  responsible  for 
all  injuries  resulting  from  negligence 
in  keeping  or  permitting  it  to  be  in  an 
unsafe  condition.  Wabash,  etc.  R. 
Co.  V.  Peyton,  106  111.  534  (1883),  (46 
Am.  Rep.  705). 

In  St.  Louis,  etc.  R.  Co.  i".  Rowley, 

90  111.    App.    656    (1900),    the   Court 
said;    "The  right  of  way  of  the  track 


CHAP.    XXIV] 


TRACKAGE    CONTRACTS 


§  2G2 


wise  liable  to  persons  so  injured  for  the  negligence  of  the  em- 
ployees of  the  proprietary  company  in  the  operation  of  that 
portion  of  the  road  over  which  it  has  running  privileges.  To 
that  extent  they  become  its  employees.' 


upon  which  plaintiff  in  error's  train 
was  running,  belonged  to  the  C.  P.  & 
St.  L.  Ry.  Co.,  which  company 
managed  and  cared  for  it,  the  de- 
fendant in  error  paying  for  using  the 
rails  upon  a  wheelage  basis.  This 
fact  would  not,  however,  excuse  de- 
fendant in  error  for  damages  caused 
by  the  condition  of  the  right  of  way. 
When  it,  as  a  common  carrier,  used 
the  tracks  upon  such  right  of  way,  it 
became  liable  for  damages  caused  by 
its  improper  condition  to  the  same 
extent  as  if  it  owned  or  leased  it." 
Semble  that  a  licensee  company  is 
liable  for  damages  occasioned  by  a 
failure  to  maintain  fences,  Toledo,  etc. 
R.  Co.  r.  Rumbold,  40  111.  143  (1866). 
.\nd  see  Pittsburgh,  etc.  R.  Co.  v. 
Thomp.son,  21  Ind.  App.  355  (1898), 
(50  N.  E.  Rep.  828)  (under  the  Indiana 
Statute).  See  also  Sinclair  ?".  Mis- 
souri, etc.  R.  Co.,  70  Mo.  App.  588 
(1897);  Louisville,  etc.  R.  Co.  v. 
Breeden's  Admx.,  Ill  Ky.  729  (1901), 
(64  S.  W.  Rep.  067). 

*  In  Leonard  v.  New  York  Central, 
etc.  R.  Co.,  10  J.  &  S.  233  (1877),  the 
New  York  Supreme  Court  said: 
"When  various  companies  run  trains 
over  the  same  road  in  a  large  city 
intersected  by  the  crossings  of  streets, 
the  protection  of  citizens  in  the  use 
of  the  streets  should  not  depend  upon 
inquiries  to  be  made  of  the  signalling 
flagmen  of  the  road,  as  to  which  com- 
pany employs  them,  or  whether  they 
were  duly  authorized  to  signal  danger 
or  safety  as  this  or  that  train  passes. 
It  must  be  assumed  in  such  exigencies, 
that  when  a  company  chooses  to  run 
trains  over  a  road  guarded  by  flag- 
men that  it  elects  to  be  protected  by 
these  flagmen  properly  disohargiiig 
their  duties,  and  to  be  made  liable  in 


case  they  neglect  them.  .  .  .  The 
law  does  not  give  immunity  from 
liability  to  a  company  operating  iti* 
trains  negligently,  because  it  appears 
that  h  operates  them  upon  a  road  and 
with  a  signal  service  that  belongs  to 
another  corajiany.  As  far  as  the  per- 
son injured  in  passing  over  the  cros.s- 
ing  by  such  company's  train  is  con- 
cerned, it  is  immaterial  to  whom  tho 
road  or  its  signal  .service  or  its  other 
appurtenances  belong  that  are  in  uso 
at  the  crossing.  The  dut^^  primarily 
devolves  upon  the  company  running 
the  train,  that  there  shall  be  no 
negligence  in  respect  to  these  matter?* 
as  far  as  persons  crossing  are  af- 
fected." 

See  also  McGrath  v.  New  York  Cen- 
tral, etc.  R.  Co.,  63  N.  Y.  522  (1876) ; 
Chicago,  etc.  R.  Co.  r.  Posten,  59  Kan. 
449  (1898),  (53  Pac.  Rep.  465);  Wa- 
ba.sh,  etc.  R.  Co.  v.  Peyton,  106  111. 
534  (1883),  (46  Am.  Rep.  705) ;  Penn- 
sjivania  R.  Co.  i\  Greso,  79  III.  Ap]i. 
127  (1898). 

.\  railroad  company  using  flio 
tracks  of  another  company  is  liable 
for  the  negligence  of  its  employees, 
although  they  operate  the  train  under 
the  orders  of  the  other  company. 
Chicago,  etc.  R.  Co.  )'.  Martin,  59 
Kan.  437  (1898),  (53  Pac.  Rep.  401). 
See  also  Chicago,  etc.  R.  Co.  v.  Groves, 
50  Kan.  601  (1890),  (44  Pac.  Rep, 
62S). 

In  Patterson  v.  Waba.sh,  etc.  R.  Co., 
54  Mich.  91  (1884),  (19  N.  W.  Rep. 
761,  18  -\m.  &  Eng.  R.  Cas.  1.30),  a 
passenger  recovered  judgment  against 
the  corporation  with  which  he  had 
contractual  relations  for  injuries 
caused  by  the  negligence  of  a  corpora- 
tion using,  in  common  with  it,  tracks 
of  a  third  corporation. 

409 


§    263  INTERCORPORATE    RELATION^  [PAKT    lU 

The  rule  of  liability  is,  clearly,  that  a  railroad  company, 
operating  under  a  trackage  contract,  is  liable  to  a  passenger, 
or  person  lawfully  upon  the  tracks,  injured  by  its  trains,  to  the 
same  extent  as  if  it  owned  the  road. 

§  263.  Liability  to  Employees.  —  Where  one  railroad  com- 
pany has  the  right,  under  a  trackage  contract,  to  run  its  trains 
over  the  track  of  another  company,  the  latter  company  is  liable 
to  emplo3^ees  of  the  former  company  for  injuries  occasioned 
by  the  negligence  of  its  switchmen  and  employees  engaged 
»in  the  work  of  maintaining  and  protecting  the  tracks.^  The 
proprietary  company,  under  a  trackage  contract,  is  bound  to 
furnish  a  safe  track  for  the  trains  of  the  licensee  and  is  respon- 
sible to  employees  of  the  licensee  for  any  injuries  caused  by 
defects  in  the  tracks  or  roadbed.' 

The  licensee  company  is  liable  to  employees  of  the  proprie- 
tary company  for  injuries  caused  by  its  negligent  running  of 
trains.^  It  is  also,  of  course,  liable  to  its  own  employees  for 
any  failure  to  perform  its  duty  as  master.'* 

Where  several  railroad  companies  have  running  privileges 
over  the  tracks  of  another  company,  the  proprietaiy  company 
is  not  liable  to  employees  of  one  licensee  company  for  injuries 
received  through  the  negligence  of  employees  of  another  licen- 

1  Merrill  v.  Railroad  Co.,  54  Vt.  In  Wabash  R.  Co.  v.  Keeler,  127 
200  (1881);  Southern  Kansas  R.  Co.  III.  App.  265  (1906)  it  was  held  that 
V.  Sage  (Tex.  Civ.  App.  1904),  80  both  the  proprietary  company  and 
S.  W.  Rep.  1038.  the     licensee      company     are      liable 

2  Killian  v.  Augusta,  etc.  R.  Co.,  for  injuries  to  employees  of  the 
79    Ga.    234    (1867),    (4   S.    E.    Rep.  former. 

165).  *  Where  the  owners  of  a  private 
In  Clark  v.  Chicago,  etc.  R.  Co.,  92  railway  track  occasionally  used  by  a 
111.  43  (1879),  the  Court  held  that  an  railroad  company  for  a  special  purpose 
employee  of  a  proprietarj'  company,  negligently  suffered  it  to  remain  in  a 
injured  through  the  negligence  of  dangerous  condition  for  use,  it  was 
employees  of  a  licensee  conapany,  in  held  that  the  railroad  company  was 
violating  the  rules  of  the  proprietary  liable  for  an  injur3'  to  its  own  em- 
company,  could  not  recover  damages  ployee  caused  by  the  defective  condi- 
from  the  proprietarj'  company  — •  the  tion  of  the  roadbed  —  that  it  owed 
accident  arising  from  a  peril  of  the  a  duty  to  its  employees  to  inspect  the 
service  of  which  the  employee  had  tracks  before  they  were  used  and,  if 
knowledge,  and  not  from  any  neg-  in  a  defective  condition,  used  them  at 
ligence  of  the  proprietary  com-  its  peril, 
pany.  Stetler  v.   Chicago,  etc.  R.   Co.,  49 

3  Lockhart  v.  Little  Rock,  etc.  R.  Wis.  609  (ISSO),  (6  N.  W.  Rep. 
Co.,  40  Fed.  631  (1889).  303). 

470 


CHAP.  XXIV]  TRACKAGE  CONTRACTS  §  263 

see  company.     Redress  for  such   injuries   must  be  furnished 
by  the  corporation  whose  employees  are  at  fault.* 

'  Georgia  R.,   etc.   Co.   v.   Friddell,  severally  liable  for  any  injury  to  their 

79  Ga.  234  (1887),  (7  S.  E.  Rep.  214,  employees     cau.sed     by     a     defective 

11  Am.  St.  Rep.  410).  track    upon    the    road    so     used     by 

Where  several  railroad  companies  them, 

organize  an  association  and  share  the  Wisconsin  Central  R.  Co.  v.  Ross, 

expense   of  operating   a   line   of  rail-  142  111.  9  (1892),  (.31  X.  E.  Rep.  412, 

road    they  will  be  jointly  as  well  as  34  Am.  St.  Rep.  49). 


471 


INTERCORPORATE  RELATIONS  [PART  IV 


PART   IV 
CORPORATE  STOCKHOLDING  AND  CONTROL 


CHAPTER  XXV 

POWER    OF    CORPORATION     TO     HOLD    STOCK    IN    OTHER    CORPO- 
RATIONS 

I.    Rule  that  Statutory  Authority  is  essential 

§  264.  Necessity  for  Statutory  Authority  to  purchase  Stock.     Rule  in  United 

States. 

§  265.  Necessity  for  Statutory  Authority  to  purchase  Stock.     Rule  in  England. 

§  266.  Necessity  for  Statutory  Authority  to  subscribe  for  Stock. 

§  267.  Subscriptions  or  Purchases  through  Trustees  or  Agents. 

§  268.  Similar  Nature  of  Corporations  does  not  affect  Application  of  Rule. 

§  269.  Expediency  of  Purchase  of  Stock  Immaterial. 

§  270.  Assumption  of  Power  to  hold  Stock  in  Articles  of  Association. 

II.    Express  Power  to  acquire  Stock 

^  271.     Corporations  may  acquire  Stock  in  other  Corporations  when  authorized. 

Statutory  Pro\'isions. 
§  272.     Power  to  subscribe  for  Stock  in  Foreign  Corporations. 
§  273.     Construction  of  Statutes. 
§  274,     Construction  of  Constitutional  Prohibitions. 

III.    Incidental  Power  to  acquire  Stock 

§  275.     In  General. 

§  276.     Incidental  Power  to  make  Investments  in  Stocks. 

§  277.     Incidental  Power  to  take  Stock  in  Satisfaction  of  Debt. 

§  278.     Incidental  Power  to  take  Stock  as  Collateral. 

§  279.     Incidental  Power  to  acquire  Stock  in  Connection  with  Consolidation  or 

Purchase. 
§  280.     Incidental  Power  to  take  Stock  upon  Reorganization. 
§  281.     Incidental  power  to  take  Stock  in  Exchange  for  Corporate  Assets. 
§  282.     Miscellaneous  Instances  of  Incidental  Power  to  acquire  Stock. 
§  283.     Presumption  of  Power  to  hold  Stock. 
§  283  a.  An  Analogous  Power. 

472 


CHAP.    XXV]       POWER    OF   CORPORATION    TO    HOLD    STOCK 


§  204 


I.    Rule  that  Statutory  Authority  is  essential 

§  264.  Necessity  for  Statutory  Authority  to  purchase  Stock. 
Rule  in  United  States.  —  The  charter  of  a  corpoiatioti  is  the 
measure  of  its  powers.  It  can  exercise  only  such  powers  as 
are  conferred  upon  it,  either  in  express  terms  or  by  necessary 
implication,,  in  the  law  of  its  creation.* 

The  purchase  of  stock  in  another  corporation  involves  a 
participation  in  a  new  and  distinct  enterprise.  A  corporation 
can  make  such  a  purchase  only  when  expressly  authorized  to 
do  so  by  statute,  or  when  the  power  can  be  implied  as  incidental 
to  the  powers  specifically  granted.^ 


'  Chief  Justice  Marshall  in  the 
Dartmouth  College  Case  (Dartmouth 
College  V.  Woodward,  4  Wheat. 
(U.  S.)  636  (1819))  said:  "A  corpora- 
tion .  .  .  being  the  mere  creature  of 
law,  it  possesses  only  those  properties 
which  the  charter  of  its  creation 
confers  upon  it,  either  expressly 
or  as  incidental  to  its  very  existence." 

For  cases  stating  this  elementary 
principle  as  applicable  to  the  power 
to  purchase  shares,  .see  People  v. 
Chicago  Gas  Trust  Co.,  1.30  111.  268 
(1889),  (22  N.  E.  Rep.  798,  17  Am. 
St.  Rep.  319,  8  L.  R.  A.  497) ;  Frank- 
lin Co.  V.  Lewiston  Savings  Inst., 
68  Me.  43  (1877),  (28  Am.  Rep.  9). 

2  United  States:  De  la  Vergne  Co. 
V.  German  Savings  Inst.,  175  U.  S.  40 
(1899),  (20  Sup.  Ct.  Rep.  20) ;  Califor- 
nia Bank  v.  Kennedy,  167  U.  S.  362 
(1897),  (17  Sup.  Ct.  Rep.  831); 
Louisville,  etc.  R.  Co.  v.  Kentuckj', 
161  U.  S.  698  (1896),  (16  Sup.  Ct. 
Rep.  714);  First  Nat.  Bank  v.  Nat. 
Exch.  Bank,  92  U.  S.  122  (1875); 
Anglo-American  Land,  etc.  Co.  v. 
Lombard,  132  Fed.  721  (1904); 
Citizens  State  liank  v.  Hawkins, 
71  Fed.  369  (1806);  McCutcheon  v. 
Merz  Capsule  Co.,  71  Fed.  787  (1896); 
Easun  v.  Buckeye  Brewing  Co., 
51  Fed.  156  (1892);  Hamilton  v. 
Savannah,  etc.  R.  Co.,  49  Fed.  412 
(1892);      Mackinto.sh    v.     Flint,     etc. 


R.  Co.,  34  Fed.  582   (1888);   Sumner 
V.  Marcy,  3  Wood.  &  M.   105  (1847). 

Arka7isas :  Lester  v.  Bemis  Lumber 
Co.,  71  Ark.  379  (1903),  (74  S.  W. 
Rep.  518). 

California :  Knowles  v.  Sander- 
cock,  107  Cal.  629  (1895),  (40  Pac. 
Rep.   1047). 

Connecticut:  Byrne  v.  Schuyler 
Electric  Mfg.  Co.,  65  Conn.  336  (1895), 
(31  Atl.  Rep.  833). 

Georgia :  Central  R.  Co.  v.  Collins, 
40  Ga.  582  (1869);  Hazlehurst  v. 
Savannah,  etc.  R.  Co.,  43  Ga.  13 
(1871). 

Illinois :  People  v.  Pullman  Car 
Co.,  175  111.  125  (1898),  (51  N.  E. 
Rep.  664,  64  L.  R.  A.  366);  People 
V.  Chicago  Gas  Trust  Co.,  130  111.  268 
(1889),  (22  N.  E.  Rep.  798,  17  Am. 
St.  Rep.  319,  8  L.  R.  A.  497) ;  Martin 
V.  Ohio  Stove  Co.,  78  III.  App.  105 
(1898). 

Maine:  Franklin  Co.  v.  Lewiston 
Savings  Inst.,  68  Me.  43  (1877),  (28 
Am.  Rep.  9):  "In  the  United  States, 
corporations  cannot  purchase,  or  hold, 
or  deal  in  the  stocks  of  other  cor- 
porations, unless  expressly  author- 
ized to  do  so  by  law."  Quoting 
Green's  Brice's  Ultra  ^'i^es  (2d.  .\m. 
Ed.),  91  note. 

Minnesota :  Hunt  r.  Hauser  Malt- 
ing Co.,  90  Minn.  282  (1903),  (96 
N.  W.   Rep.  8.5). 

473 


§  264 


INTERCORPORATE    RELATIONS 


[part  IV 


That  which  is  beyond  the  power  of  a  corporation  to  do  in 
the  first  instance  cannot  be  made  effective  by  any  subsequent 
act  or  omission.  An  ultra  vires  contract  for  the  purchase  of  stock 
by  a  corporation  is  void  and  cannot  be  vaUdated  by  estoppel.^ 

Corporate  purchases  of  stock  have  been  declared  contrary 
to  pubhc  poHcy  as  well  as  ultra  vires}  But  where  the  corpora- 
tion laws  of  a  State  at  no  time  prohibited  such  purchases  by 
corporations  organized  thereunder,  it  was  held  by  a  federal 
court  that  the  enactment,  under  a  new  constitution,  of  laws 
authorizing  such  purchases  showed  that  prior  acquisitions  of 
stocks  by  corporations  were  not  against  the  public  policy  of 
the  State,  even  if  it  did  not  expressly  legalize  the  particu- 
lar transactions.^ 


Montana :  MacGinnis  v.  Boston, 
etc.  Mining  Co.,  29  Mont.  428  (1904), 
(75  Pac.  Rep.  89). 

New  Hampshire :  Pearson  v.  Con- 
cord R.  Corp.,  62  N.  H.  537  (1883), 
(13  Am.  St.  Rep.  590). 

New  Jersey:  Elkins  v.  Camden, 
etc.  R.  Co.,  36  N.  J.  Eq.  5  (1882). 

New  York :  Milbank  v.  New  York, 
etc.  R.  Co.,  64  How.  Pr.  20  (1862); 
Talmage  v.  Pell,  7  N.  Y.  328  (1852) ; 
Nassau  Bank  v.  Jones,  95  N.  Y.  115 
(1884),  (47  Am.  Rep.  14). 

Ohio :  Franklin  Bank  v.  Commer- 
cial Bank,  36  Ohio  St.  354  (1881), 
(38  Am.  Rep.  594) ;  Columbus,  etc. 
R.  Co.  V.  Burke,  19  Weekly  Law 
Bull.  27  (1887). 

Tennessee:  Marble  Co.  v.  Harvey, 
92  Tenn.  115  (1892),  (20  S.  W.  Rep. 
427,  36  Am.  St.  Rep.  71,  18  L.  R.  A. 
2.52). 

Washington :  Parsons  v.  Tacoma 
Smelting,  etc.  Co.,  25  Wash.  508 
(1901),  (65  Pac.  Rep.  765). 

The  rule  that  one  corporation, 
without  statutory  authority,  cannot 
purchase  the  stock  of  another  is 
manifestly  inapplicable  to  stock- 
holders in  corporations.  As  said  in 
State  V.  Butler,  86  Tenn.  627  (1888), 
(8  S.  W.  Rep.  586):  "We  know 
of  no  principle  of  law  that  would 
prevent  the  stockholders  in  an  insur- 

474 


ance  company  from  becoming,  at 
the  same  time,  stockholders  in 
bank,  even  where  the  same  stock- 
holders own  all  the  .stock  in  the  two 
corporations." 

'  Schofield  v.  Goodrich  Bros.  Bank- 
ing Co.,  98  Fed.  273  (1899). 

In  this  case  the  Circuit  Court  of 
Appeals  for  the  Eighth  Circuit  went 
somewhat  further  than  the  text  and 
said:  "The  purchase  of  the  stock 
of  another  corporation  as  an  invest- 
ment and  not  as  security  or  in  pay- 
ment of  a  debt,  by  a  corporation 
simply  empowered  to  do  a  banking 
business,  is  beyond  its  power  and 
void  and,  since  such  a  purchase  is 
^dtra  vires  and  void,  it  cannot  be  made 
good  or  validated  by  estoppel." 

2  In  Robotham  v.  Prudential  Ins. 
Co.,  53  Atl.  Rep.  851  (N.  J.  Ch.  1903) 
the  Court  said:  "There  is  also  author- 
ity for  the  proposition  that  corpora- 
tions cannot  acquire  and  hold  the 
stock  of  other  corporations  without 
express  authorization  under  a  statute, 
the  origin  of  the  prohibition,  whether 
in  the  doctrine  of  ultra  vires  or  in 
some  positive  rule  of  law  founded 
upon  public  policy,  being  left  in 
uncertainty."     (Citing    this    section.) 

3  Bancroft  &  Sons  Co.  r.  Bloede, 
106  Fed.  396  (1901). 

In     MacGinnis     v.      Boston,    etc. 


CHAP.  XXV]   POWER  OF  CORPORATION'  TO  HOLD  STOCK 


§  265 


§  265.  Necessity  for  Statutory  Authority  to  purchase  Stock, 
Rule  in  England.  —  The  rule  tluit  purchases  by  one  corpora- 
tion of  stock  ill  another,  without  legislative  authority,  are 
ultra  vires  has  not  been  adopted  to  its  fullest  extent  in  England. 
The  rule  there  seems  to  be  that  a  strictly  private  corporation 
^'  may  deal  in  the  shares  of  other  coiporations,  without  express 
power  so  to  do,  provided  the  nature  of  its  business  be  such  as 
to  render  such  transactions  conducive  to  its  prosperity."  ^ 

With  respect  to  railroad  companies  and  other  gwasi-public 
corporations,  however,  the  English  courts  strictly  apply  the 


Mining  Co.,  29  Mont.  428  (1904), 
(75  Pac.  Rep.  89)  it  was  held  that 
since  the  Montana  constitution  does 
not  prohibit  generally  the  consoli- 
dation of  corporations,  and  statutes 
of  the  State  expressly  authorize  the 
consolidation  of  mining  corporations 
and  empower  such  corporations  to 
exchange  their  property  for  stock 
of  other  corporations,  it  is  not  against 
tlie  public  policy  of  the  State  to 
permit  such  corporations  to  hold  and 
vote  stock  in  other  corporations  of 
similar  nature. 

'  Green's  Brice's  Ultra  Vires  (2d 
Am.  Ed.),  91. 

The  rule,  however,  seems  by  no 
means  well  settled,  and  is  based,  prin- 
cipally, upon  dicta  of  the  judges. 

In  re  Barnard's  Banking  Co.,  L.  R. 
3  Ch.  App.  105  (18(;7),  Lord  Cairns 
said:  "There  is  no  apparent  or  prima 
facie  objection  to  a  corporation  so 
joining  [by  purchase  of  shares]  with 
another  corporation  in  trade.  A 
trading  corporation,  as  we  well  know, 
may  enter  into  trade  or  partnership 
along  with  an  indivitlual.  There  is 
no  reason  at  common  law,  so  far  as 
I  know,  why  one  corporation  should 
not  become  a  member  of  another 
corporate  body."  The  real  question 
at  issue  was,  however,  whether  an 
express  power  to  purchase  shares  was 
contrary  to  the  statutes  governing 
trading  companies. 

In    Royal    Bank   of    India's   Case, 


L.  R.  4  Ch.  App.  257  (1869),  Lord 
Selwyn,  after  approving  the  judg- 
ment of  Lord  Cairns  in  the  above 
case,  said:  "Looking  at  the  question 
as  a  mere  abstract  (juestion,  in  my 
judgment  there  is  nothing  to  prevent 
a  corporation  from  being  a  share- 
holder in  another  trading  corpora- 
tion." 

Lord  Giffard  said  (p.  262):  "I 
quite  agree  that  the  Royal  Bank  of 
India  had  no  authority  to  speculate 
in  shares,  and  that  if  it  had  gone  upon 
the  Stock  Exchange  and  bought  shares 
as  a  speculation,  such  proceeding 
would  have  been  idtra  vires."  In  this 
case  the  transaction  was  a  pledge, 
and  the  bank,  under  the  American 
rule,  had  implied  power  to  buy  in 
the  stock. 

hi  re  Financial  Corporation,  28  W. 
R.  760  (1880),  it  was  held  that  a  cor- 
poration had  power  to  purchase 
shares  of  other  companies  when  it 
was  organized  for  the  purpose  of 
"undertaking,  assisting  and  par- 
ticipating, in  financial,  commercial 
and  industrial  operations  .  .  .  both 
singly,  and  in  connection  witli  other 
persons,  firms,  companies  and  cor- 
porations." 

See  also  Canada  Life  Assur.  Co. 
V.  Pell  Mfg.  Co.,  26  Grant's  Ch. 
(Canada)  486  (1879).  Compare  Joint 
Stock  Discount  Co.  v.  Brown,  L.  R. 
8  Eq.  391  (1869). 

475 


§  200 


INTERCORPORATE   RELATIONS 


[part  IV 


American  rule.  Such  corporations  cannot,  without  statutory- 
authority,  purchase,  take  or  deal  in  the  stock  of  other  cor- 
porations.* 

In  Maryland,  the  English  rule  concerning  private  corpora- 
tions has  been  adopted  and  applied  to  all  corporations.^ 

§  266.  Necessity  for  Statutory  Authority  to  subscribe  for 
Stock.  — Statutes  authorizing  "persons"  to  accept  a  charter, 
or  form  a  corporation  under  general  laws,  confer  the  privilege 
upon    individuals    and    not    upon    corporations.^     Upon    this 


'  In  Great  Eastern  R.  Co.  v.  Turner, 
L.  R.  8  Ch.  152  (1872),  Lord  Sel- 
borne  said:  "There  is  no  authority 
to  purchase  [shares  in  another  cor- 
poration] either  in  the  name  of  the 
company,  or  in  the  name  of  the  chair- 
man, or  in  any  other  name.  The 
company  is  a  mere  abstraction  of 
law.  All  that  it  does,  all  that  the 
law  imputes  to  it  as  its  act,  must  be 
that  which  can  legally  be  done  within 
the  powers  vested  in  it  by  law.  Con- 
sequently, a  thing  which  is  ultra  vires, 
and  unauthorized,  is  not  an  act  of 
the  company  in  such  a  sense  as  that 
the  consent  of  the  company  to  that 
act  can  be  pleaded." 

In  Great  Northern  R.  Co.  i\  East- 
ern Counties  R.  Co.,  21  L.  J.  (Ch.)  840 
(1851),  one  corporation  desired  to 
purchase  stock  in  another,  with  the 
object  of  controlling  the  corporation. 
The  Court  said  that  it  was  an  "at- 
tempt to  carry  into  effect,  without 
the  intervention  of  Parliament,  what 
cannot  lawfully  be  done  except  by 
Parliament,  in  the  exercise  of  its 
discretion  with  reference  to  the  in- 
terest of  the  public." 

See  also  Great  Western  R.  Co.  v. 
Metropolitan  R.  Co.,  32  L.  J.  Ch.  382 
(1863),  9  Jur.  (x.  s.)  562;  Maunsell 
V.  Midland  Great  Western  R.  Co., 
1  Hem.  &  M.  130  (1863). 

2  In  Booth  V.  Robinson,  55  Md.  419 
(1880),  it  was  held  that  one  steam 
packet  company  might  purchase  the 
shares  of  another  steam  packet  com- 
pany.    The  Court  said  (p.  433),  that, 

470 


"having  money  to  loan,  or  invest, 
there  would  appear  to  be  no  reason 
why  it  may  not  invest  in  stock  of 
other  corporations  as  well  as  in  other 
funds,  provided  it  be  done  bona  fide, 
and  with  no  sinister  or  unlawful 
purpose."  This  decision  is  based 
upon  the  dicta  in  the  English  cases, 
cited  in  a  preceding  note.  See  also 
Davis  V.  United  States  Electric  Power, 
etc.  Co.,  77  Md.  39  (1893),  (25  Atl. 
Rep.  982).  Also  Elysville  Mfg.  Co. 
V.  Okisko  Co.,  1  Md.  Ch.  Dec.  392 
(1849),   affirmed  5   Md.    152   (1853). 

In  MacGinnis  v.  Boston,  etc. 
Mining  Co.,  29  Mont.  459  (1903), 
(75  Pac.  Rep.  89)  the  Court  said: 
"The  general  rule  is  that  one  cor- 
poration cannot  hold  or  vote  stock 
in  another  unless  expressly  author- 
ized so  to  do  b}-  the  terms  of  its 
charter  or  by  a  statute.  This  was 
formerly  the  rule  in  England;  but 
it  has  been  much  relaxed  by  the  later 
decisions,  which  recognize  many 
exceptions.  The  general  rule  pre- 
vails in  the  State  and  federal  courts 
in  this  country'.  Iowa  and  Maryland 
are,    possibly,    the   only   exceptions." 

'  A  corporation  is  not  a  "person"' 
within  the  meaning  of  the  Louisiana 
statute  authorizing  the  formation  of  a 
corporation  by  any  number  of  "  per- 
sons" not  less  than  six.  Factors,  etc. 
Ins.  Co.  V.  New  Harbor  Protection 
Co.,  37  La.  Ann.  233  (1885). 

Lender  a  Washington  statute  pro- 
viding that  two  or  more  "persons" 
may  form  a  corporation,  it  has  been 


CHAP.    XXV]      POWER   OF    CORPORATION    TO    HOLD    STOCK 


i^  266 


principle,  and  upon  the  general  principle  that  the  powers  of  a 
corporation  are  measured  by  the  laws  under  which  it  is  organized, 
it  follows  that  a  corporation,  unless  authorized  by  statute, 
cannot  make  a  valid  subscription  to  the  capital  stock  of  another 
corporation.' 

Any  such  subscription  made  by  a  corporation,  without  statu- 
tory authority,  is  an  ultra  vires  executory  contract  and  is  wholly 
void.^     As  said  by  the  Supreme  Court  of  Ohio  in  Valley  R.  Co. 


held  that  although  another  statute 
provides  that  "person"  shall  be 
construed  to  include  a  corporation, 
a  corporation  cannot  become  a  sub- 
scriber to  shares  in  another  corpora- 
tion. Denny  Hotel  Co.  v.  Schrani, 
6  Wash.  134  (1893),  (32  Pac.  Rep. 
1002,  36  Am.  St.  Rep.  137).  See 
also  Parsons  v.  Tacoma  Smelting, 
etc.  Co.,  25  Wash.  508  (1901),  (G5 
Pac.  Rep.  765) ;  Valley  R.  Co.  v.  Lake 
Erie  Iron  Co.,  46  Ohio  St.  44  (1888), 
(18  N.  E.  Rep.  486,  1  L.  R.  A.  412, 
26  Am.  &  Eng.  Corp.  Cas.  56).  See 
also  Lagrone  v.  Zimmerman,  46  S. 
C.  372  (1895),   (24  S.  E.  Rep.  290). 

'  United  States :  Pauly  v.  Coronado 
Beach  Co.,  56  Fed.  428  (1893). 

Alabama :  Mc  Ali.ster  v.  Florence  Cot- 
ton, etc.  Co.,  128  Ala.  240  (1901),  (.30 
So.  Rep.  632) ;  Lanier  Lumber  Co.  v. 
Rees,  103  Ala.  622  (1893),  (16  So.  Rep. 
637,  49  Am.  -St.  Rep.  57);  Com- 
mercial Fire  Ins.  Co.  v.  Montgomery 
County,  99  Ala.  1  (1891),  (14  So. 
Rep.  490,  42  Am.  St.  Rep.  17). 

California :  Knowles  v.  Sander- 
cock,  107  Cal.  629  (1895),  (40  Pac. 
Rep.  1047). 

Connecticut :  Mechanics  Sav.  Bank 
7'.  Meriden  Agency  Co.,  24  Conn.  159 
(1855). 

Georgia:  Military  Interstate  A.ss'n 
V.  Savannah,  etc.  R.  Co.,  105  Ga.  420 
(1898),  (31  S.  E.  Rep.  200). 

Illinois:  Martin  v.  Ohio  Stove  Co., 
78  111.  App.  105  (1898);  Peslitigo 
Co.  V.  Great  Western  Tel.  Co.,  50  111. 
App.  624  (1893). 

Louisiana:      New     Orleans,     etc. 


Steamship  Co.  v.  Ocean  Dry  Dock  Co., 
28  La.  Ann.  173  (1876),  (26  Am. 
Rep.  90).  See  also  Factors,  etc. 
Ins.  Co.  V.  New  Harbor  Protection 
Co.,  37  La.  Ann.  233  (1885). 

Missotiri:  Newland  Hotel  Co.  v. 
Lowe  Furniture  Co.,  73  Mo.  App.  135 
(1898). 

Nebraska :  Nebraska  Shirt  Co.  v. 
Horton,  93  N.  W.  Rep.  225  (1903). 

New  Jersey:  Central  R.  Co.  v. 
Pennsylvania  R.  Co.,  31  N.  J.  Eq. 
475  (1879). 

New  York:  Berry  v.  Yates,  24 
Barb.  199  (1857). 

Ohio:  Valley  R.  Co.  v.  Lake  Erie 
Iron  Co.,  46  Ohio  St.  44  (1888),  (18  N. 
E.  Rep.  486,  1  L.  R.  A.  412,  26  Am. 
&  Eng.  Corp.  Cas.  56) ;  Smith  v.  New- 
ark, etc.  R.  Co.,  8  Ohio  Cir.  Ct.  Rep. 
583  (1894). 

Pennsylvania:  McMillan  v.  Carson 
Hill  Union  Min.  Co.,  12  Phila.  404 
(1878). 

Tennessee :  McCampbell  v.  Foun- 
tain Head  R.  Co.,  Ill  Tenn.  55  (1903). 
(77  S.  W.  Rep.  1072). 

Washington :  Denny  Hotel  Co.  v. 
Schram,  6  Wash.  134  (1893),  (32 
Pac.  Rep.  1002,  36  Am.  St.  Rep.  1.37). 

^  In  Lanier  Lumber  Co.  v.  Rees, 
103  Ala.  627  (1893),  (16  So.  Rep. 
637,  49  Am.  St.  Rep.  57),  the  Court 
said:  "It  is  equally  clear,  u]ion 
principle  and  authority,  that  all  such 
subscriptions,  or  contracts  of  sub- 
scription [for  stock  in  other  corpora- 
tions], are  not  voidable,  but  utterly 
void." 

See    also    McAlister    Mfg.    Co.    v. 

477 


§267 


INTERCORPORATE   RELATIONS 


[part  IV 


V.  Lake  Erie  Iron  Co.: '  "  We  think  it  is  well  settled,  as  a  result 
of  the  decisions  in  this  State,  as  well  as  elsewhere,  that  an  incor- 
porated company  cannot,  unless  authorized  by  statute,  make 
a  valid  subscription  to  the  capital  stock  of  another;  that  such 
subscription  is  ultra  vires,  and  void." 

§  267.  Subscriptions  or  Purchases  through  Trustees  or 
Agents.  —  The  rule  that  one  corporation  cannot,  without 
statutory  authority,  become  an  incorporator  or  stockholder  in 
another  cannot  be  evaded  by  subscriptions  or  purchases  made 
by  persons  in  their  own  names  but  in  behalf  of  a  corporation.^ 


Florence  Cotton,  etc.  Co.,  128  Ala. 
240  (1901),  (30  So.  Rep.  632);  Pesh- 
tigo  Co.  V.  Great  Western  Tel.  Co.,  50 
II!.  App.  624  (1893);  Valley  R.  Co. 
V.  Lake  Erie  Iron  Co.,  46  Ohio  St.  44 
(1888),  (18  N.  E.  Rep.  486,  1  L.  R.  A. 
412,  26  Am.  &  Eng.  Corp.  Cas.  56) ; 
New  Orleans,  etc.  Steamship  Co.  v. 
Ocean  Dry  Dock  Co.,  28  La.  Ann.  173 
(1876),  (26  Am.  Rep.  90);  Berry  v. 
Yates,  24  Barb.  (N.  Y.)  199  (1857). 

'  Valley  R.  Co.  r.  Lake  Erie  Iron 
Co.,  46  Ohio  St.  49  (1888),  (18  N.  E. 
Rep.  486,  1  L.  R.  A.  412,  26  Am.  & 
Eng.  Corp.  Cas.  56),  per  Minshall,  J. 

*  Lanier  Lumber  Co.  v.  Rees,  103 
Ala.  627  (1893),  (16  So.  Rep.  637, 
49  Am.  St.  Rep.  57):  "And  it  js 
too  well  settled  to  require  discus- 
sion, that  without  such  [statutorj'] 
authority  one  corporation  cannot 
subscribe  for,  or  invest  its  own  capital 
in  the  shares  of  other  corporations, 
either  directly,  as  by  becoming  in  its 
own  name  an  incorporator  of  a  new 
corporation,  or  indirectly,  by  sub- 
scriptions in  the  names  of  persons 
acting  as  agents  and  holding  as 
trustees." 

Martin  v.  Ohio  Stove  Co.,  78  111. 
App.  108  (1898):  "A  corporation 
cannot  become  a  stockholder  in 
another  corporation,  especially  when 
the  object  to  be  attained  is  the  con- 
trol of  the  latter.  In  the  absence 
of  express  statutorj'  authority,  it 
cannot  become  an  incorporator  by 
subscribing  for  shares  of  a  new  cor- 

478 


poration,  and  it  cannot  do  this  in- 
directly through  persons  acting  as 
its  agents  or  tools.  .  .  .  To  permit 
the  corporation,  by  its  directors,  to 
make  the  subscriptions  in  the  indi- 
vidual names  of  the  latter,  thereby 
giving  a  semblance  of  compliance 
with  the  statute  sufficient  to  secure 
the  issuance  of  a  certificate  of  incor- 
poration, as  was  done  in  this  case, 
and  then  by  proceedings  like  the 
present,  instituted  by  a  person  in 
pari  delicto,  compel  the  stockholders 
to  transfer  their  shares  to  the  corpo- 
ration itself,  would  be  to  permit  a 
person  to  take  ad\'antage  of  his  own 
wrong  to  perpetuate  a  fraud  upon 
the  law,  and  to  use  a  court  of  equity 
to  aid  in  evading  the  law  and  setting 
it  at  naught." 

And  in  Dunbar  v.  American  Tele- 
phone, etc.  Co.,  224  111.  25  (1906), 
(79  N.  E.  Rep.  427)  the  Supreme 
Court  of  Illinois  said:  "Nor  can  it 
be  seriously  contended  that  a  pur- 
chase by  the  company  in  the  name 
of  others,  as  agents  or  trustees,  will 
relieve  the  transaction  of  its  illegality. 
To  hold  otherwise  would  be  to  sus- 
tain a  transaction  illegal  in  its  char- 
acter, accomplished  by  indirection, 
when  it  could  not  be  done  if  the 
methods  were  direct." 

See  also  McCampbell  r.  Fountain 
Head  R.  Co.,  Ill  Tenn.  55  (1903), 
(77  S.  W.  Rep.  1070) ;  Central  R.  Co. 
V.  Pennsylvania  R.  Co.,  31  N.  J.  Eq. 
475   (1879);     Marble   Co.    r.   Harvey, 


CHAP.  XXV]   POWER  OF  CORPORATION  TO  HOLD  STOCK 


§  268 


A  corporation  cannot,  by  indirection,  transcend  its  chartered 
powers. 

In  Central  R.  Co.  v.  Pennsylvania  R.  Co.,  Chancellor  Runyon 
said:*  "  A  corporation  cannot  in  its  own  name  subscribe  for 
stock,  or  be  a  corporator  under  the  general  railroad  law;  nor 
can  it  do  so  by  a  simulated  compliance  with  the  requirements 
of  the  law  through  its  agents  as  pretended  corporators  and 
subscribers  for  stock." 

§  268.  Similar  Nature  of  Corporations  does  not  affect  Ap- 
plication of  Rule.  —  The  rule  that  corporations  in  the  absence 
of  statutoiy  authority  cannot  acquire  stock  in  other  corpora- 
tions, having  its  foundation  in  the  limitations  imposed  upon 
corporate  powers,  is  appUcable  both  to  corporations  of  a 
similar  and  a  dissimilar  nature.^     A  corporation  has  no  more 


92  Tenn.  118  (1892),  (20  S.  W.  Rep. 
427) ;  Nassau  Bank  v.  Jones,  95  N.  Y. 
115(1884),  (47  Am.  Rep.  14) ;  Logan 
V.  Courtown,  12  Beav.  22  (1850). 

'  Central  R.  Co.  v.  Pennsylvania 
R.  Co.,  31  N.  J.  Eq.  494  (1879). 

In  Tecumseh,  etc.  Bank  v.  Russell, 
50  Neb.  277  (1897),  (69  N.  W.  Rep. 
763),  it  was  held  that  where  the 
cashier  of  a  bank  uses  its  funds  to 
pay  for  stock  in  another  bank,  courts 
will  hold  that  such  stock  belongs  to 
the  former  bank,  except  as  against 
bona  fide  purchasers. 

2  I.    Corporations     of    Similar 
Nature 

A.  Railroad  Companies 

Central,  etc.  R.  Co.  v.  Collins,  40 
Ga.  636  (1869):  "A  railroad  com- 
pany, without  express  authority 
given  by  the  legislature  to  make  the 
purchase,  cannot  purcha.se  stock  in 
another  railroad  company."  See  also 
Hazlehurst  v.  Savannah,  etc.  R.  Co., 
43  Ga.  13  (1871),  holding  that  a 
railroad  company  cannot  buy  stock 
in  order  to  influence  its  manageniont. 
.\lso  Milbank  !•.  New  York,  etc.  R. 
Co.,  64  How.  Pr.  (N.  Y.)  20  (1882); 
Pearson  v.  Concord  R.  Corp.,  62  N.  H. 
537  (1883),  (13  Am.  St.  Rep.  590). 


B.    Gas  Companies 

In  People  i\  Chicago  Ga,s  Trust 
Co.,  130  111.  283  (1889),  (22  N.  E. 
Rep.  798,  17  Am.  St.  Rep.  319,  8 
L.  R.  A.  497),  Judge  Magruder  said: 
"Where  a  charter,  in  express  terms, 
confers  upon  a  corporation  the  power 
to  maintain  and  operate  works  for 
the  manufacture  and  sale  of  gas, 
it  is  not  a  necessary  implication  there- 
from that  the  power  to  purchase 
stock  in  other  gas  companies  should 
also  exist.  There  is  no  necessarj^ 
connection  between  manufacturing 
gas  and  buying  stocks.  If  the  pur- 
pose for  which  a  gas  company  has 
been  created  is  to  make  and  sell 
gas,  and  operate  ga-s  works,  the 
purchase  of  stock  in  other  gas  com- 
panies is  not  necessarj'  to  accom- 
plish svich  purpose.  The  right  of 
a  corporation  to  invest  in  shares 
of  another  company  cannot  be  im- 
plied because  both  companies  are 
engaged  in  a  similar  kind  of 
business."  (1  Morawetz  Priv.  Corp. 
§  -131). 

C.    Miiiintj  Companies 

A  corporation  having  the  right  to 
mine,  in  organizing  another  corpora- 
tion for  mining  purposes,  acts  without 
the   .scope   of   its   powers.     McMillan 

479 


§  268 


INTERCORPORATE    RELATIONS 


[part  IV 


power  to  purchase  the  stock  of  another  corporation  having  a 
similar  object  to  its  own  than  it  has  to  make  such  purchase 
in  the  case  of  a  corporation  formed  for  an  entirely  different 
purpose. 


V.    Carson    Hill    Union    Min.    Co.,    12 
Phila.  (Pa.)  404  (1878). 

D.    Manufacturiyuj  Companies 

The  purchase  by  a  foreign  manufac- 
turing corporation  of  the  stock  of  a 
domestic  corporation  for  the  purpose 
of  controlling  it,  is  ultra  vires,  though 
thej'  are  engaged  in  a  similar  business. 
Marble,  etc.  Co.  v.  Harvey,  92  Tenn. 
115  (1892),  (20  S.  W.  Rep.  427,  36 
Am.  St.  Rep.  71,  18  L.  R.  A.  252). 
See  also  Byrne  v.  Schuyler  Electric 
Mfg.  Co.,  65  Conn.  336  (1895),  (31 
Atl.  Rep.  833,  28  L.  R.  A.  304); 
McCutcheon  v.  Merz  Capsule  Co., 
71  Fed.  787  (1896),  (31  L.  R.  A.  415). 
Manufacturing  company  cannot  pur- 
chase stock  in  subsidiary  manufac- 
turing company.  People  v.  Pullman 
Car  Co.,  175  111.  125  (1898),  (51  N.  E. 
Rep.  664,  64  L.  R.  A.  366). 

E.    Insurance  Cotnpanies 

Berry  v.  Yates,  24  Barb.  (N.  Y.) 
199  (1857);  Pier.son  v.  McCurdj^, 
33  Hun  (N.  Y.),  520  (1884).  Ex 
parte  British  Nation,  etc.  Ass'n, 
L.  R.  8  Ch.  679  (1878). 

F.    Batiks 

A  national  bank  cannot  hold  stock 
in  a  savings  bank  not  taken  as  se- 
curity, or  acquired  in  due  course  of 
business.  California  Bank  v.  Ken- 
nedy, 167  U.  S.  362  (1897),  (17  Sup. 
Ct.  Rep.  831). 

II.    Corporations     of     Different 
Nature 

(a)  Bank  cannot  hold  stock  of  rail- 
road companj' :  Nassau  Bank  v.  Jones, 
95  N.Y.  115(1884),  (47  Am.  Rep.  14^ ; 
nor  of  insurance  company:  Bank  of 
Commerce  r.  Hart,  37  Neb.  197  (1893), 

480 


(55  N.  W.  Rep.  631,  40  Am.  St.  Rep. 
479,  20  L.  R.  A.  780) ;  nor  of  manu- 
facturing company:  Franklin  Co. 
V.  Lewiston  Sav.  Inst.,  68  Me.  43 
(1877),  (28  Am.  Rep.  9). 

(6)  Insurance  company  cannot 
hold  stock  in  bank.  Commercial 
Fire  Ins.  Co.  v.  Montgomery  County, 
99  Ala.  1  (1892),  (14  So.  Rep.  498, 
42  Am.  St.  Rep.  17);  State  v.  But- 
ler, 86  Tenn.  614  (1888),  (8  S.  W. 
Rep.  586). 

(c)  Manufacturing  company  can- 
not subscribe  for  or  purchase  stock  of 
bank:  Sumner  v.  Marcy,  3  Wood.  & 
M.  (U.  S.),  105  (1847);  Hunt  v.  Hau- 
ser  Malting  Co.,  90  Minn.  282  (1903), 
(96  N.  W.  Rep.  85);  nor  of  railroad 
company:  Valley  R.  Co.  v.  Lake  Erie 
Iron  Co.,  46  Ohio  St.  44  (1888),  (18 
N.  E.  Rep.  486,  1  L.  R.  A.  412,  26 
Am.  &  Eng.  Corp.  Cas.  56). 

(d)  Note-selling  company  cannot 
hold  stock  in  bank.  Joint  Stock  Dis- 
count Co.  V.  Brown,  L.  R.  8  Eq.  381 
(1869). 

(e)  Railroad  company  cannot  pur- 
chase stock  of  mining  company. 
Columbus,  etc.  R.  Co.  i>.  Burke,  19 
Ohio  Week.   Law   Bull.   27   (1887). 

(/)  Furniture  companj'  cannot 
subscribe  for  stock  in  hotel  company. 
Knowles  v.  Sandercock,  107  Cal.  629 
(1895),  (40  Pac.  Rep.  1047);  New- 
land  Hotel  Co.  V.  Lowe  Furniture 
Co.,  73  Mo.  App.  135  (1898). 

(g)  Dry  dock  company  cannot 
subscribe  for  stock  of  steamship 
company.  New  Orleans,  etc.  S.  Co. 
V.  Ocean  Dry  Dock  Co.,  28  La.  Ann. 
173  (1870),  (26  Am.  Rep.  90). 

(h)  Lumber  company  cannot  sub- 
scribe for  stock  of  telegraph  com- 
pany. Peshtigo  Co.  i\  Great  Western 
Tel.  Co.,  50  111.  App.  624  (1893). 

(i)    Land  company  has  no  author- 


CHAP.    XXV]      POWER   OF    CORPORATION   TO    HOLD    STOCK  §    269 

The  underlying  principle,  however,  is  not  precisely  the  same 
in  both  cases.  A  corporation  cannot  acquire  stock  in  another 
corporation  organized  for  similar  purposes,  because  it  must 
manage  its  funds  directly  through  its  own  officers,  and  not 
indirectly  by  becoming  a  stockholder  in  another  corporation. 
A  corporation  cannot  purchase  stock  in  another  corporation 
created  for  the  accomplishment  of  essentially  different  objects, 
not  only  for  the  reason  just  stated,  but,  primarily,  because 
it  cannot  invest  its  funds  and  engage  in  a  business  entirely 
foreign  to  the  purpose  for  which  it  was  created.  "  Were  this 
not  so,"  said  the  Supreme  Court  of  Ohio  in  Franklin  Bank  v. 
Commercial  Bank,^  "  one  corporation  by  buying  up  the  ma- 
jority of  the  shares  of  the  stock  of  another,  could  take  the  entire 
management  of  its  business,  however  foreign  such  business 
might  be  to  that  which  the  corporation  so  purchasing  said 
shares  was  created  to  carry  on.  A  banking  corporation  could 
become  the  operator  of  a  railroad,  or  cany  on  the  business  of 
manufacturing,  and  any  other  corporation  could  engage  in 
banking  by  obtaining  the  control  of  the  bank's  stock." 

§  269.  Expediency  of  Purchase  of  Stock  immaterial.  —  The 
operation  of  the  rule  that  a  corporation,  without  statutoiy 
authority,  cannot  subscribe  for  or  purchase  stock  in  another 
corporation  is  in  no  way  affected  by  the  fact  that  such  pur- 
chase or  subscription  may  be  of  benefit  to  it.  An  ultra  vires 
agreement  is  not  made  intra  vires  by  being  profitable.  The 
contract  of  association  cannot  be  enlarged  to  take  in  a  new- 
adventure  because  the  transaction  seems  expedient.^ 

In  Central,  etc.  R.  Co.  v.  Collins  ^  the  Supreme  Court  of 
Georgia  said:  "  We  do  not  think  the  profitableness  of  this 
contract,  to  the  stockholders  of  the  Central  and  Southwestern 
Railroad  has  anything  to  do  with  the  matter.  These  stock- 
holders have  a  rigid,  at  their  pleasure,  to  stand  on  their  con- 
tract.    If  the  charters  do  not  give  to   these  companies  the 

ity  to   subscribe  for  stock   of   manu-  Ga.    582    (1869) ;     Valley    R.    Co.    r. 

facturing  company.  Pauly   v.   Core-  Lake  Erie  Iron  Co.,   4G   Ohio  St.  44 

nado  Reach  Co.,  5G  Fed.  428  (1893).  (1888),  (18  N.   E.    Rep.   486,  1  L.  R. 

'  FrankHn     Bank    v.     Commercial  A.   412,   26   Am.    &   Eng.    Corp.   Cas. 

Bank,    .36   Ohio   St.  355   (1881),    (38  56). 
Am.  Rep.  594).                                                       »  ^pntral,  etc.  R.  Co.  v.  CoUins,  40 

2  Central,  etc.  R.  Co.  v.  Collins,  40  Ga.  617  (1869). 

481 


§270 


INTERCORPORATE   RELATIONS 


[part    IV 


right  to  go  into  this  new  enterprise  any  one  stockholder  has  a 
right  to  object.  He  is  not  to  be  forced  into  an  enterprise 
not  included  in  the  charter.  That  it  will  be  to  his  interest  is 
no  excuse;   that  is  for  him  to  judge." 

§  270.  Assumption  of  Power  to  hold  Stock  in  Articles  of 
Association.  —  A  stream  can  rise  no  higher  than  its  source. 
The  powers  of  corporations  organized  under  general  incor- 
poration acts  can  be  such  only  as  are  mentioned  in  those  acts. 
The  power  to  hold  stock  in  other  corporations  exists  only 
when  granted  by  legislative  authority.  Unless  such  power  is 
specifically  conferred  upon  corporations  formed  under  general 
laws,  incorporators  take  nothing  by  assuming  to  themselves 
the  power  in  their  articles  of  association.  Even  the  incidental 
powers  of  a  corporation  are  not  increased  by  such  an  assump- 
tion.* 

In  People  v.  Chicago  Gas  Trust  Co.,^  Judge  Magruder  said: 
"  To  hold  that  they  (the  incorporators)  could  confer  such 
power  by  writing  it  down  in  the  statement  would  be  to  hold 
that  the  general  assembly  could  clothe  them  with  a  part  of  its 
legislative  functions."  ' 


*  People  V.  Chicago  Gas  Trust  Co., 
130  111.  268  (1889),  (22  N.  E.  Rep. 
798,  17  Am.  St.  Rep.  319,  8  L.  R.  A. 
497).  Coin-pare  Market  St.  R.  Co.  v. 
Hellman,  109  Cal.  590  (1895),  (42 
Pae.  Rep.  225). 

In  Parsons  v.  Tacoma  Smelting, 
etc.  Co.,  25  Wash.  508  (1901),  (65 
Pac.  Rep.  765)  the  Supreme  Court 
of  Washington  said:  "It  was  deter- 
mined by  this  Court  in  Denny  Hotel 
Co.  V.  Schram,  6  Wash.  134  (1893), 
(32  Pac.  Rep.  1002,  36  Am.  St.  Rep. 
137),  that  a  corporation  could  not 
subscribe  for  the  capital  stock  of 
another.  Our  statutes  cannot  be 
said  to  authorize  such  ownership  of 
stock  any  more  than  the  authority 
to  subscribe  for  capital  stock.  The 
expression  of  such  power  in  the  ar- 
ticles   of    incorporation    of    the    new 


company,  as  has  been  observed, 
cannot  extend  the  corporate  powers 
beyond  those  expressed  in  the 
statutes." 

Articles  of  association  are  con- 
strued strictly  against  the  grantee 
and  in  favor  of  the  public,  and  any 
provisions  added  to  the  articles  not 
authorized  by  the  incorporation  act 
are  wholly  void. 

Oregon  R.,  etc.  Co.  v.  Oregonian  R. 
Co.,  130  U.  S.  1  (1889),  (9  Sup.  Ct. 
Rep.  409) ;  Medical  College  Case, 
3  Whart.  (Pa.)  445  (1838);  Eastern 
Plank  R.  Co.  v.  Vaughan,  14  N.  Y. 
546  (1856);  Heck  v.  McEven,  12  Lea 
(Tenn.),  97  (1883). 

2  People  V.  Chicago  Gas  Trust  Co., 
130  111.  287  (1889),  (22  N.  E.  Rep. 
798,  17  Am.  St.  Rep.  319,  8  L.  R.  A. 
497). 


482 


CHAP.  XXV]   POWER  OF  CORPORATION  TO  HOLD  STOCK 


§271 


II.    Express  Power  to  acquire  Stock 

§  271.  Corporations  may  acquire  Stock  in  other  Corpora- 
tions when  authorized.  Statutory  Provisions.  — The  statutes 
of  the  different  States  authorizing  corporations  to  acquire 
stock  in  other  corporations  are  collected  in  the  footnote.' 


1  Alabama.  Civil  Code  1907,  § 
3640:  "Any  corporation  ...  of  any 
other  State  or  Territory  of  the  United 
States,  or  any  foreign  country,  or 
territory,  ...  is  hereby  authorized 
...  to  acquire,  by  subscription  to 
the  capital  stock,  or  by  purchase, 
or  otherwise,  and  to  hold,  own  and 
vote  shares  of  the  capital  stock  of  any 
corporation  ...  of  the  State  of 
Alabama"  —  provided  that  such  for- 
eign corporation  has  power  under 
its  charter,  etc.,  to  acquire  stock 
in  other  corporations. 

lb.  §  3496  authorizes  railroad 
companies  to  subscribe  for  stock  in 
aid  of  construction  of  connecting 
roads. 

Arizona.  R.  S.  1901,  par.  864, 
p.  336:  "Any  railroad  company 
now  or  hereafter  existing  under  the 
laws  of  this  Territory  .  ■.  .  may 
buy  the  stock  and  bonds  ...  of 
any"  foreign  or  domestic  corporation. 

Arkansas.  Kirby's  Digest,  1904, 
§  6742:  "Any  railroad  company 
in  this  State  .  .  .  may  buy  .  .  . 
the  stock  ...  of  any  railroad  com- 
pany or  companies  incorijorated  or 
organized  within  or  without  this 
State  whenever  the  roads  of  such 
companies  sliall  form,  in  the  opera- 
tion tliercof,  a  continuous  line  or 
lines." 

lb.  §  6743:  "Any  railroad  com- 
pany ...  of  any  other  State  or 
Territory  may  .  .  .  buy  the  stock 
...  of  any  railroad  company  .  .  . 
of  this  State,  whenever  the  roads  of 
such  companies  shall  form  in  the 
operation  thereof  a  continuous  line 
or  lines."     See  also  ib.  §  6328. 

Colorado.    Mills'  .\nno.  Stat.    1905, 


§  612a:  "Any  railroad  company  .  .  . 
of  this  State  may  .  .  .  acquire  and 
may  hold  the  .  .  .  stock  of  other 
companies  owning  or  operating  any" 
railroad  which  shall  connect  with 
the  "line  of  road  which  such  com- 
pany is  .  .  .  authorized  to  purchase, 
or  which,  under  the  laws  of  this  State, 
it  is  authorized  to  lease,  or  .  .  . 
consolidate"  with. 

Connecticut.  Pub.  Laws.  1903,  ch. 
194,  §  11:  "Any  corporation  not 
prohibited  by  any  provision  in  its 
charter,  articles  of  association,  or 
certificate  of  incorporation  or  by 
any  general  law,  except  a  bank, 
trust  company,  or  life  insurance 
company,  may  acquire,  purchase, 
and  hold  the  stock  or  securities  of 
any  other  corporation." 

Delaware.  Laws  1903,  ch.  394, 
p.  822,  §  135:  "Any  corporation  .  .  . 
of  this  State  .  .  .  may  .  .  .  pur-' 
chase,  hold,  sell,  assign,  transfer, 
mortgage,  pledge  or  otherwise  dis- 
pose of,  the  shares  of  the  capital 
stock  of  .  .  .  any  other  corporation 
or  corporations  of  this  State,  or  any 
State,  country,  nation  or  govern- 
ment, and  while  owner  of  saitl  stock 
may  exercise  all  the  rights,  powers 
and  privileges  of  ownershi|>  including 
the  right  to  vote  thereon." 

Florida.  Gen.  Stat.  1906,  §  2812: 
"Any  railroad  or  canal  company  in 
this  State  shall  have  power  ...  to 
purcha.se  the  stock  ...  of  any  other 
company." 

Georgia.  For  Georgia  constitu- 
tional provision  against  corporate 
stockholding,  see  ante,  §  32,  note. 

Idaho.  R.  S.,  §  2686  (as  amended 
by  Sess.   Laws,   1899,   p.    11):    "Any 

483 


§271 


INTERCORPORATE    RELATIONS 


[part  IV 


The  effect  of  these  statutes  is  to  enlarge  the  powers  of  the 
corporations  to  which  they  apply.     There  is  nothing  in  the 


railroad  corporation,  whether  .  .  . 
■of  this  State  or  of  the  Territory  of 
Idaho,  or  of  the  United  States,  or 
of  any  other  State  or  Territory,  may 
take,  purchase,  hold,  sell,  and  dispose 
of  .  .  .  the  bonds  and  securities 
of  any  other  railroad  corporation 
whose  line  of  railroad  is  continuous 
of  or  otherwise  connected  with  its 
own." 

Illinois.  R.  S.  1906,  p.  542:  "Any 
corporation  ...  of  this  State  for 
mining  or  manufacturing  purposes 
...  is  hereby  authorized  to  own 
and  hold  shares  of  the  capital  stock 
...  of  any  railroad  company  or 
companies  when  such  railroad  or 
railroads  shall  connect  the  different 
plants  of  such  mining  and  manu- 
facturing companies  with  each  other, 
or  with  the  other  railroad  or  harbors. 
Provided,  that  said  mining  or  manu- 
facturing companies  shall  not  .  .  . 
hold  stock  in  more  than  one  railroad 
connecting  the  same  points." 

Indiana.  Horner's  Anno.  Stat. 
1901,  §  4013:  "Any  railroad  com- 
pany in  this  State  and  organized 
under  the  .  .  .  laws  of  this  State" 
may  "subscribe  and  take  stock  in 
any  railroad  bridge  company  on  the 
route  of  said  railroad  or  at  the  ter- 
minus of  said  railroad,  for  the  use 
and  benefit  of  said  road." 

For  Indiana  statutes  relating 
especially  to  gas  light  and  water 
works  companies,  see  Stat.  1894, 
§§  5059  and  5087. 

Iowa.  Code  1897,  §  2047:  "Any 
railway  corporation  ...  of  this 
State,  or  operating  a  road  therein, 
under  the  authority  of  the  laws 
thereof,  may  acquire,  own  and  hold 
either  the  whole  or  any  part  of  the 
stock  ...  of  any  other  railroad 
company  of  this  or  any  adjoining 
State." 

Kansas.     Gen.   Stat.   1905,  §6308: 

484 


"Any  railroad  company  ...  of  this 
State"  may  "purchase  and  hold  the 
stock  and  bonds,  or  either,  ...  of 
^y  other  railroad  company  or  com- 
panies, the  line  of  whose  railroad, 
constructed  or  being  constructed, 
connects  with  its  own." 

Kentucky.  Stat.  1903,  §  769, 
amending  Stat.  1899:  "Any  railroad 
company  .  .  .  may,  unless  prohibited 
by  law,  subscribe  to  the  capital  stock 
of  any  other  railroad  company  .  .  . 
of  this  or  any  other  State,  with  the 
assent  of  such  company  ;  and  any 
company  ...  of  this  or  any  other 
State  may,  unless  prohibited  by  law, 
subscribe  to  the  capital  stock  of  any 
company  ...  of  this  State  with  the 
assent  of  such  company." 

Maine.  Rev.  Stat.  1903,  p.  513, 
§  17:  "A  railroad  corporation,  wliich 
has  a  lease  of,  or  which  operates  the 
railroad  of  another  railroad  corpora- 
tion, may  purchase  and  hold  shares 
of  the  capital  stock  of  such  corpora- 
tion." 

Ih.  §18:  "  A  railroad  corporation, 
which  owns  a  majority  of  the  capital 
stock  of  another  railroad  corporation, 
may  purchase  and  hold  additional 
shares  of  the  capital  .stock  of  such 
corporation." 

Laws  1901,  ch.  229,  §  14 
("Business  corporations"):  "Any 
corporation  organized  under  chapter 
forty-eight  of  the,  revised  statutes 
may  purchase,  hold,  sell,  assign,  trans- 
fer, mortgage,  pledge  or  otherwise 
dispose  of  the  shares  of  the  capital 
stock  of,  or  any  bonds,  securities 
or  evidences  of  indebtedne.ss  created 
by  any  other  corporation  or  corpora- 
tions of  this  or  any  other  State,  ter- 
ritory or  country,  and  while  owner  of 
such  stock  may  exercise  all  the  rights, 
powers  and  privileges  of  ownership, 
including  the  right  to  vote  thereon." 

Maryland.     Pub.  Gen.  Laws,  vol. 


CHAP.    XXV]       POWER    OF   CORPORATION    TO    HOLD    STOCK 


§  271 


nature  of  a  corporation  which  renders  it  incapable  of  holding 
stock  in  other  corporations  and  questions  of  public  pol' 
determined  by  the  legislature  in  granting  the  power. 


)licv  are 


1,  p.  658,  §  282:  "Any  railroad  com- 
pany ...  of  this  State"  may  "ac- 
quire, own  and  hold,  pledge,  sell  or 
otherwise  dispose  of  .  .  .  stocks,  .  .  . 
of  other  railroad  companies  of  this 
or  any  other  State,  and  of  any  inland, 
coast  or  ocean  transportation  com- 
pany or  companies." 

Massachusetts.  Rev.  Laws  1902, 
ch.  Ill,  §  77:  "No  railroad  company 
unless  authorized  by  the  general 
court  or  by  the  provisions  of  the  fol- 
lowing five  section.s,  shall  .  .  .  sub- 
scribe for,  take,  or  hold  the  stock  or 
bonds  of  any  other  corporation." 

lb.  §  78,  authorizes  a  railroad  com- 
pany to  hold  stock  to  a  limited  amount 
in  a  telegraph  company  whose  line 
connects  two  or  more  places  on  its 
railroad. 

76. §  82,  authorizes  a  railroad  com- 
pany to  subscribe  for  a  limited  amount 
of  stock  to  aid  in  the  construction  of  a 
branch  or  connecting  railroad. 

76.  ch.  110,  §  79,  authorizes  manu- 
facturing companies,  under  certain 
conditions,  to  hold  stock  in  gas  com- 
panies. 

Michigan.  Comp.  Laws  1897,  § 
6253:  "Any  railroad  company  or- 
ganized under  this  act  may  .  .  .  sub- 
scribe to  the  capital  stock  of  any 
other  company  organized  under  this 
act  with  the  as.sent  of  such  other 
company;  and  a.ny  railroad  com- 
pany ...  of  this  State  may  sub- 
scribe to  the  capital  stock  of  any 
company  organized  under  this  act" 
not  having  the  same  terminal  points 
and  not  being  a  competing  line,  with 
the  assent  of  the  company  for  whose 
stock  such  subscription  is  made. 

lb.  §  6327,  authorizes  a  railroad 
company  to  aid  in  the  construction 
of  another  railroad 'by  subscribing  for 
stock. 

lb.    §   6691    (as  amended  by  laws 


1899,  pp.  18-19),  authorizes  tele- 
phone and  messenger  service  corpora- 
tions to  purcha,se  stock  in  certain 
other  corporations. 

76.  §  6474,  authorizes  the  pur- 
chase of  stock  in  stage  companies. 

lb.  §  7011,  as  amended  by  laws 
1905,  p.  153,  §  21,  authorizes  mining 
companies  to  subscribe  for  or  purchase 
stock  in  companies  furnishing  trans- 
portation facilities  to  their  mines,  or 
power  or  light  to  be  used  in  their 
works. 

lb.  §  7012,  authorizes  mining  com- 
panies conducting  their  business  out- 
side of  Michigan  to  subscribe  for  and 
own  .stock  in  similar  corporations, 
likewise  doing  business  outside  the 
State. 

lb.  §  8516,  authorizes  the  holding 
of  stock  in  water  companies. 

Minnesota.  Rev.  Laws  1905,  § 
3071:  "Every  such  [mining]  corpora- 
tion may  acquire  and  hold  stock  in 
any  other  corporation,  if  a  majority 
of  the  stockholders  agree   thereto." 

76.  §  2900,  authorizes  a  domestic 
railroad  company  to  aid  any  other 
railroad  corporation  in  the  construc- 
tion of  its  road,  by  subscription  to 
its  capital  stock  or  otherwise,  for 
the  purpose  of  forming  a  connection, 
or  it  may  lease  or  purchase  any  part 
or  all  of  such  connecting  road,  not 
parallel,  or  two  such  roads  may 
enter  into  arrangement  for  their 
■common  benefit;  consistent  with 
and  calculated  to  promote  the  objects 
of  their  organization. 

Mississippi.  Code  1906,  §  5004: 
"  No  corporation  shall,  directly  or 
indirectly,  purchase,  or  own  the  cap- 
ital stock,  or  any  part  thereof,  of 
any  other  corporation." 

Missouri.  Anno.  Stat.  1900,  § 
1061:  "Any  railroad  company  .  .  . 
organized    under    the    laws    of    tiiin 

485 


§271 


INTERCORPORATE    RELATIONS 


[part  IV 


It   will  be  observed  that  the  greater  number  of   statutes 
apply  only  to  railroad  companies,  and  that  these  are  limited 


State  .  .  .  may  acquire  any  line  of 
railroad,  within  or  without  this  State, 
which  shall  form  a  continuous  line 
with  the  road  operated  by  such  com- 
pany .  .  .  and  naay  acquire  and  may 
hold  the  obligations  and  stock  of 
other  companies  owning  or  operating 
any  such  lines  of  road." 

Ih.  §  1060,  authorizes  subscriptions 
in  aid  of  the  construction  of  connect- 
ing lines. 

lb.  §  1181,  authorizes  bridge  com- 
panies to  acquire  stock  in  certain 
street  railway  companies. 

Montana.  Code  1895,  §  912:  "Any 
railroad  corporation  whose  line  is 
wholly  or  partly  within  this  State, 
or  reaches  the  boundary  line  thereof, 
...  of  Montana  or  of  the  United 
States,  or  of  any  other  State  or 
Territory,  may  take,  purchase,  hold, 
sell  and  dispose  of,  or  guaranty  the 
capital  stock  ...  of  any  other  rail- 
road corporation  whose  line  of  rail- 
road within  this  State  is  continuous 
of  or  connects  with  its  own  line." 

Ih.  §  923,  authorizes  subscriptions 
and  purchases  of  stock  in  aid  of  the 
construction  of  other  railroads. 

Gen.  Laws  1905,  ch.  103,  p.  226, 
prescribe  a  method  for  authorizing, 
by  a  vote  of  two-thirds  of  the  stock 
of  the  vendor  corporation,  the  sale 
of  corporate  assets  for  stock  in  an- 
other corporation. 

Nebraska.  Comp.  Stat.  1907,  § 
2028,  autliorizes  a  railroad  company 
to  aid  in  tlie  construction  of  a  con-« 
necting  road  by  a  subscription  to  its 
stock. 

Nevada.  Stats.  1905,  ch.  51,  § 
110:  "Any  corporation  organized 
under  tlie  laws  of  this  State  .  .  . 
may  guaranty,  purchase,  hold,  sell, 
assign,  transfer,  mortgage,  pledge 
or  otherwise  dispose  of  the  shares 
of  the  capital  stock  of,  or  any  bonds, 
securities  or  evidence  of  indebtedness 

486 


created  by,  any  other  corporation  or 
corporations  of  this  State,  or  any 
other  State,  country,  nation  or  gov- 
ernment, and  which  owner  of  said 
stock  may  exercise  all  the  rights, 
powers  and  privileges  of  ownership 
including  tiie  right  to  vote  thereon." 
New  Jersey.  General  Corporation 
Act  of  1896,  §  50:  "Corporations 
having  for  their  object  the  building, 
constructing  or  repairing  of  railroads, 
water,  gas  or  electric  works,  tunnels, 
bridges,  viaducts,  canals,  hotels, 
wharves,  piers  or  any  like  works  of 
internal  imiirovement  or  public  use 
or  utility,  may  subscribe  for,  take, 
pay  for,  hold,  use  and  dispose  of 
stock  or  bonds  in  any  corporation 
formed  for  the  purpose  of  construct- 
ing, maintaining  and  operating  any 
such  public  works;  and  the  directors 
of  any  such  corporation  formed  for 
the  purpose  of  constructing,  main- 
taining and  operating  any  public 
work  of  the  description  aforesaid  may 
accept  in  payment  of  any  such  sub- 
scription, or  purchase,  real  or  personal 
property,  necessary  for  the  purposes 
of  such  corporation,  or  work,  labor 
and  services  performed  or  materials 
furnished  to  or  for  such  corporation 
to  the  amount  of  the  value  thereof, 
and  from  time  to  time  issue  upon 
any  such  subscription  or  purchase, 
in  such  instalments  or  proportions 
as  such  directors  may  agree  upon, 
full-paid  stock  in  full  or  partial  per- 
formance of  the  whole  or  any  part 
of  such  subscription  or  purchase,  and 
the  stock  so  issued  shall  be  full-paid 
stock  and  not  liable  to  any  further 
call,  neither  shall  the  holder  thereof 
be  liable  for  any  further  payments, 
and  in  all  statements  and  reports 
of  the  corporation  to  be  published  or 
filed  this  stock  shall  not  be  stated  or 
reported  as  being  issued  for  cash 
paid    to    the    corporation,    but    shall 


CHAP.  XXV]   POWER  OF  CORPORATION  TO  HOLD  STOCK 


§271 


in   their  application  to   companies   owTiing   connecting   lines. 
These  railroad  statutes,  like  similar  statutes  authorizing  the 


be  reported  in  this  respect  according 
to  the  fact." 

lb.  §  51:  "Any  corporation  may 
purchase,  hold,  sell,  assign,  transfer, 
mortgage,  pledge  or  otherwise  dis- 
pose of  the  shares  of  the  capital  stock 
of,  or  any  bonds,  securities  or  evi- 
dence of  indebtedness  created  by 
any  other  corporation  or  corporations 
of  this  or  any  other  State,  and  while 
owner  of  such  stock  may  exercise  all 
the  rights,  powers  and  privileges  of 
ownership,  including  the  right  to 
vote  thereon." 

A^ew  Mexico.  Comp.  Laws  1897, 
§  3891,  authorizes  railroad  companies 
to  subscribe  for  stock  in  aid  of  the 
construction  of  connecting  roads. 

New  York.  Laws  1902,  ch.  GOl 
(as  amended  to  1907),  Art.  3,  §  40 
(Stock  Corporation  Law) :  "... 
Any  stock  corporation,  domestic  or 
foreign,  may  purchase,  acquire,  hold 
and  dispose  of  the  stocks,  ...  of 
any  corporation,  domestic  or  foreign, 
and  issue  in  exchange  therefor  its 
stock  ...  if  authorized  so  to  do 
by  a  provision  in  the  certificate  of 
incorporation  of  such  stock  corpora- 
tion, or  any  certificate  amendatory 
thereof  or  supplementary  thereto, 
filed  in  pursuance  of  law,  or  if  the 
corporation  whose  stock  is  so  pur- 
chased, acquired,  held  or  disposed  of, 
is  engaged  in  a  business  similar  to 
that  of  such  stock  corporation,  or 
engaged  in  the  manufacture,  use  or 
sale  of  the  property,  or  in  the  con- 
struction or  operation  of  works 
necessary  or  useful  in  the  business 
of  such  stock  corporation,  or  in  which 
or  in  connection  with  which,  the 
manufactured  articles,  product  or 
property  of  such  stock  corporation 
are  or  may  be  used,  or  is  a  corporation 
with  which  such  stock  corporation  is 
or  may  be  authorized  to  consolidate. 
When  any  such  corporation  shall  be 


a  stockholder  in  any  other  corpora- 
tion as  herein  provided,  its  president 
or  other  officers  shall  be  eligible  to 
the  office  of  director  of  such  corpora- 
tion, the  same  as  if  they  were  indi- 
vidually stockliolders  therein,  and 
the  corporation  holding  such  stock 
shall  possess  and  exercise  in  i-espect 
thereof,  all  the  rights,  powers  and 
privileges  of  individual  owners  or 
holders  of  such  stock." 

Railroad  Law,  §  79  (Birdseye's, 
1901):  "Any  railroad  corporation 
...  of  this  State  .  .  .  being  the 
lessee  of  the  road  of  any  other  rail- 
road corporation,  may  take  a  sur- 
render or  transfer  of  the  capital  stock 
of  the  stockholders,  or  any  of  them, 
in  the  corporation  whose  road  is 
held  under  lease,  and  issue  in  ex- 
change therefor  the  like  additional 
amount  of  its  own  capital  stock  at 
par;  and  whenever  the  greater  part 
of  the  capital  stock  of  any  such  cor- 
poration shall  have  been  so  sur- 
rendered or  transferred,  the  directors 
of  the  corporation  taking  such  sur- 
render or  transfer  .  .  .  become  cx- 
officio  tlie  directors  of  the  corporation 
whose  road  is  held  under  lease,  and 
shall  manage  and  conduct  the  affairs 
thereof  .  .  .  and  when  the  whole 
of  such  capital  stock  has  been  so  sur- 
rendered or  transferred,  and  a  cer- 
tificate thereof  filed  in  the  office  of  the 
Secretary  of  State  .  .  .  the  estate 
.  .  .  and  franchises  of  the  corpora- 
tion wliose  stock  shall  have  been 
so  surrendered  or  transferred  shall 
.  .  .  vest  in  .  .  .  the  corporation  to 
whom  such  surrender  or  transfer  is 
made.  .  .  .  Where  stock  shall  have 
been  so  surrendered  or  transferred, 
the  existing  liabilities  of  the  corpora- 
tion, and  the  rights  of  the  creditors 
and  of  any  stockholder  not  surrender- 
ing or  transferring  liis  stock,  shall  not 
be  affected  thereby." 

487 


§271 


INTERCORPORATE    RELATIONS 


[part    IV 


consolidation  of  companies  owning,  and  the  purchase  and  lease 
of,  continuous  lines  of  railroad,  are  all  indicative  of  the  policy 


North  Carolina.  Rev.  Laws  1905, 
ch.  61,  §  2567:  "Any  railroad  or 
other  transportation  company  may 
acquire  and  hold,  or  guaranty  or 
indorse  the  bonds  or  stocks  of  .  .  . 
any  railroad  or  branch  railroad,  or 
other  transportation  line  in  this  or 
an  adjoining  State  connecting  with 
it  directly  or  indirectly." 

Pub.  Laws  1901,  ch.  2,  §  55,  p.  28 
(same  as  New  Jersey  Corp.  Act  1896, 
§  51,  supra). 

Ohio.  Bates'  Anno.  Stat.  (1787- 
1906),  §  3300,  authorizes  railroad  com- 
panies to  subscribe  for  stock  in  aid  of 
a  connecting,  but  not  competing, 
road.  lb.  §  3546,  authorizes  railroad 
companies  to  subscribe  for  the  stock 
of  certain  bridge  companies.  lb. 
§  §  3631-8,  authorizes  certain  stock 
subscriptions  by  benevolent  com- 
panies ;  ib.  §  3842,  by  elevator  com- 
panies;  ib.  §  3863,  by  "mineral  and 
vegetable  mining  and  boring  com- 
panies." 

Pennsylvania.  Gen.  Laws.  1894, 
§  132  :  "Any  and  all  companies  incor- 
porated or  organized  under  the  laws 
of  this  Commonwealth,  .  .  .  and  .  .  . 
the  directors,  managers,  or  trustees 
thereof,  with  the  approval  of  the 
stockholders,"  may  "invest  the  sur- 
plus or  other  funds  or  earnings  of 
such  companies  in  ... ;  good  stock 
or  securities  and"  may  "sell  and 
transfer  the  same,  and"  may  "rein- 
vest the  proceeds  of  such  sales  in 
.  .  .  stocks  of  like  kind  and"  may 
"prescribe,  by  resolution  of  the  di- 
rectors, or  the  by-laws  of  the  company, 
or  otherwise,  the  mode  of  making  such 
investments,  purchases  and  sales,  with 
the  approval  of  the  stockholders. " 
Laws  1901,  p.  62,  Act  No.  28: 
"Any  railroad  or  other  transporta- 
tion corporation,  of  this  Common- 
wealth, "  may  "  from  time  to  time  .  .  . 
acquire,    own   and   hold,    pledge,   sell 

488 


or  otherwise  dispose  of,  the  stock  .  .  . 
and  guaranty  the  stock  ...  of  any 
other  corporation  of  this  Common- 
wealth or  elsewhere,  engaged  in  the 
business  of  transportation,  either 
on  land  or  water,  and  also  of  any 
other  warehouse,  storage  elevator 
or  terminal  company,  whose  busine.ss 
is  incidental  to  the  business?  of  trans- 
portation in  which  the  purchasing 
or  guarantying  corporation  shall  be 
authorized  to  engage." 

For  other  Pennsylvania  statutes 
authorizing  the  purchase  of  stock  by 
railroad  companies  see  Bright.  Purd. 
Dig.  1894,  §§  156,  167,  168  and  182. 
For  pro\dsions  relating  to  the  pur- 
chase of  stock  by  manufacturing  or 
water  companies,  see  Gen.  Laws  1894, 
ch.  5,  §  44.  For  pro\'ision.s  author- 
izing corporate  purchase  of  stock 
of  iron  and  steel  companies,  see  ib. 
title  "Iron  and  Steel  Companies," 
§  7.  See  also  ib.  ch.  15,  §  129, 
for  provisions  as  to  stock  of  a  particu- 
lar steamship  company. 

South  Carolina.  Code  of  Laws 
1902,  §  2061:  "No  corporation  .  .  . 
owning  or .  operating  .  .  .  any  rail- 
road Ij'ing,  in  whole  or  in  part,  within 
this  State,  or  owning  ...  a  majority 
of  the  stock  of  the  corporation  owning 
or  controlling  .  .  .  any  such  railroad, 
shall  own  or  be  interested  in  the  stock 
of  any  corporation  chartered  by  this 
State  which  owns  or  leases  .  .  .  any 
railroad  which  competes  .  .  .  with" 
such  other  railroad. 

Ib.  §  2060:  "Railroad  companies 
...  of  this  State  may  .  .  .  pur- 
chase and  hold  the  stock  ...  of 
other  railroad  companies  chartered 
by  or  whose  roads  are  authorized 
to  extend  into  this  State.  .  .  .  And 
any  railroad  corporation  ...  of  this 
State  maj'  guaranty  the  stocks  and 
bonds  ...  of  any  other  railroad  cor- 
poration, whenever  the  roads  of  such 


CHAP.  XXV]   POWER  OF  CORPORATION  TO  HOLD  STOCK 


§271 


of  affording  facilities  for  the  uniting  of  short  connecting  roads 
into  the  through  line. 


corporations  shall  connect  with  each 
other,  or  sliall  form  a  continuous  Hne, 
directly  or  by  means  of  any  connect- 
ing railroad,  or  by  steamboat  line 
.  .  .  upon  such  terms  and  conditions 
as  may  be  agreed  upon  by  the  stock- 
holders. " 

South  Dakota.  Rev.  Code  1903, 
§  494,  p.  649,  authorizes  a  railroad 
company  to  .subscribe  for  stock  in  aid 
of  the  construction  of  another  railroad. 

Texas.  Sayles'Qvil  Stat.,  ch.  16a, 
§  744b  :  "  Railway  companies  existing 
under  the  laws  of  this  State  .  .  .  and 
railway  companies  ...  of  the  United 
States,  are  authorized  ...  to  sub- 
scribe to  the  stock  and  purchase  and 
own  stock  ...  of  any  depot  com- 
pany formed  under  authority  of  this 
chapter." 

Utah.  Laws  1907,  ch.  93,  sub.  8, 
p.  107:  "Any  railroad  corporation 
...  of  this  State  .  .  .  shall  have 
power  ...  to  acquire,  own,  main- 
tain, operate  and  navigate  steam- 
ships, sailing-vessels  and  boats  of 
every  description,  and  generally  to 
carry  on  the  business  of  a  common 
carrier  by  water,  and  to  purchase, 
own,  hold,  pledge  or  otherwise  dis- 
pose of  the  capital  stock,  bonds  or 
other  obligations  of  any  corporation 
owning  or  operating  any  such  ships, 
vessels  or  boats ;  Provided,  that  this 
section  shall  not  be  construed  to 
permit  any  railroad  company  to 
purchase,  own,  hold,  pledge,  or  other- 
wise dispose  of  the  capital  stock, 
bonds  or  other  obligations  of  any 
corporation  owning  or  operating  such 
ships,  ves.sels,  or  boats  where  such 
corporation  may  be  a  competing 
line  with  such  railroad  company,  or 
with  any  other  corporation  in  which 
said  railroad  company  may  own  any 
of  the  capital  stock,  bonds  or  other 
obligations  thereof." 

Vermont.    Pub.  Stat.  1906,  §  4344  : 


"No  railroad  company  shall  subscribe 
for,  take,  or  hold,  directly  or  in- 
directly, stock  ...  of  a  railroad 
corporation  organized  under  this 
chapter,  unless  specially  authorized 
by  the  general  assembly."  ' 

Virginia.  Code  1904,  §  llOoe:  (1) 
"  Every  corporation  of  this  State  shall 
have  power :  ...  If  authorized  so 
to  do  in  its  charter,  certificate  of  in- 
corporation, or  articles  of  associa- 
tion, or  in  any  amendment  thereof, 
to  subscribe  to,  purcha.se,  or  other- 
wise acquire,  or  to  guaranty  or  to 
become  surety  in  respect  to  the  stock, 
bonds,  or  other  securities  and  obliga- 
tions of  other  companies." 

Washington.  Laws  1905,  p.  51, 
ch.  27:  "Any  corporation  ...  of 
this  ...  or  any  other  State  .  .  . 
doing  business  in  this  State  shall  have 
power  ...  to  subscribe  for,  acquire 
by  purchase  or  otherwise,  and  to 
own,  hold,  sell,  as.sign  and  transfer 
shares  of  the  capital  stock  of  any 
other  corporation  .  .  .  and  to  vote 
such  shares  at  .   .   .  meetings." 

West  Virginia.  Code  1899,  ch.  52, 
p.  538  (Gen.  Corp.  Law),  §  3:  "No 
corporation  shall  .  .  .  subscribe  for 
or  purchase  the  stocks  ...  of  any 
joint  stock  company." 

76.  §  4 :  "  Any  manufacturing 
company  may  with  the  assent  of  the 
holders  of  two-thirds  of  its  stock, 
.  .  .  subscribe  for  or  purchase  the 
stock  ...  of  any  corporation  formed 
for  the  purpose  of  manufacturing 
.  .  .  any  articles  or  materials  manu- 
factured .  .  .  by  such  joint  stock 
company,  or  constructing  a  rail- 
road .  .  .  through  or  into  the  county 
in  which  the  principal  place  of  busi- 
ness of  such  joint  stock  companymay 
be,  or  operating  a  railroad  or  other 
work  of  internal  improvement."  Any 
corporation  may  take  stocks  in  pay- 
ment of  a  debt  owing  it,  etc. 

489 


§   271  INTERCORPORATE    RELATIONS  [PART   IV 

The  policy  of  the  States,  in  general,  as  indicated,  positively, 
in  their  legislative  enactments,  and  negatively,  in  their  failure 
to  grant  authority  at  all,  has  always  been  opposed  to  unlimited 
corporate  stockholding.  New  Jersey  and  Delaware,  however, 
have  been  the  conspicuous  exceptions  to  the  rule.  In  these 
States,  the  broadest  possible  power  is  conferred  upon  domestic 
corporations  to  "  purchase,  hold,  sell,  assign,  transfer,  mort- 
gage, pledge  01-  otherwise  dispose  of"  the  shares  of  foreign  and 
domestic  corporations  and  "to  exercise  all  rights,  powers 
and  privileges  of  ownership,  including  the  right  to  vote 
thereon." 

At  the  present  time  the  tendency  seems  to  be  toward  an 
extension  of  the  power  of  corporations  to  hold  shares  in  other 
corporations.  Broad  statutes  along  the  lines  of  those  of  New 
Jersey  and  Delaware  have  been  enacted  in  several  States. 
In  other  States,  statutes  authorizing  limited  corporate  stock- 
holding have  been  widened  in  their  scope.  This  tendency  is 
in  the  right  direction.  Holding  stocks  to  prevent  competition 
is  against  public  policy.  But  with  this  and  other  appropriate 
limitations,  the  general  powers  of  the  modern  business  instru- 
ment—  the  corporation — should  approximate  those  of  the 
individual.  The  occasions  for  corporate  stockholding  have 
increased  with  the  increase  of  corporations.     Statutes  granting 

lb.  ch.  53,  §  3,  p.  544  (stock  com-  and    take    the   stock   of   other   street 

pany  law),  is  the  same  as  §  4,  ch.  52,  railway     or      any      electrical      com- 

supra.  panies. 

Wisconsin.     R.    S.    1889,    ch.    36,  Wyoming.     R.     S.    1899,     §     3040 

§   1775,  authorizes  certain  classes  of  (Gen.   Corp.   Law)  :    "It  shall  not  be 

corporations    to    purchase    and    hold  lawful  for  such  company  to  use  any 

stock    in    other    corporations    of    the  of  its  funds  in  the  purchase  of  any 

same    or    similar    nature    "upon    the  stock    in    any    other    company  .   .    .; 

assent  of  the  holders  of  three-fourths  pro^^ded,     however,     such    company 

of  the  capital  stock  of  both  the  cor-  niay,  in  its  discretion,  purchase,  hold 

poration  proposing  to  take  such  stock  and    own    any    stock,    and    to    any 

and    the   corporation   in   which   it   is  amount,  in  any  other  company  that 

proposed  to  be  taken."     Laws  1899,  is  or  may  be  subsidiary  or  tributary 

ch.     191,     amending     §     1833,     Stat.  to,  and  that  does  contribute  to  the 

1898,    authorizes    the    purchase,    by  objects  and  purposes  of  the  first  coni- 

railroad  companies,  of  stock  in  con-  pany  in  this  pro\aso  mentioned." 
necting  roads  or  in  companies  to  which  lb.    §§    3205   and   3206,    authorize 

they  have  furnished  aid  for  the  con-  railroad   companies   to   subscribe   for 

struction  of  their  roads.  stock   in   aid   of   the   construction   of 

Stat.    1898,    §     1862a,     authorizes  other  roads, 
street  railway  companies  to  purchase 

490 


CHAP.    XXV]      POWER   OF    CORPORATION    TO    HOLD   STOCK  §   272 

and  defining  the  power  to  hold  stock  cannot  but  be  regarded 
as  desirable. 

§  272.  Power  to  subscribe  for  Stock  in  Foreign  Corporations. 
—  The  principle  has  been  laid  down  that,  conceding  that  cor- 
porations may  subscribe  for  stock  in  other  corporations  of 
the  same  nature  governed  by  the  same  laws,  such  power  can- 
not be  exercised  where  the  two  corporations  exist  under  dif- 
ferent laws  of  different  States,  and  where  the  law  governing 
the  corporation  in  which  stock  is  taken  fails  to  impose  liabil- 
ities and  create  obligations  imposed  upon  the  subscribing  cor- 
poration.* 

The  distinction,  however,  cannot  stand  the  test  of  analysis. 
There  is  no  incidental  power  to  subscribe  for  stock.  If  such 
an  express  power  exists,  the  question  whether  it  is  broad  enough 
to  permit  a  subscription  for  stock  in  a  foreign  corporation  is 
entirely  a  question  of  the  construction  of  the  particular  statute. 
The  argument  that  a  subscription  for  stock  in  a  foreign  corpora- 
tion is  ultra  vires  because  the  subscribing  corporation  thereby 
incurs  less  liabilities  than  in  the  case  of  a  subscription  to  a 
domestic  corporation  is  not  convincing. 

A  manufacturing  corporation  authorized  to  hold  stock  has 
power,  as  incidental  to  its  business,  to  organize  subsidiary 
companies  in  different  States  for  the  handling  and  distribution 
of  its  products,  of  which  it  holds  all  the  shares.  The  exercise 
of  such  power  is,  however,  subject  to  the  limitation  that  it 


'  Merz  Capsule  Co.  v.  U.  S.  Cap-  and   subject   to   the  same   laws   and 

sule  Co.,  G7  P'ed.  417  (1895),  {affirmed  dominion    as    the    one    taking    such 

sub    nom.  McCutcheon  v.  Merz    Cap-  stock,   or  where,   if  the  corporations 

sule  Co.,  71   Fed.  787  (1896))  :    "The  are    organized     in     difTerent     States, 

general  rule  may  be  stated  to  be  that  they  are  subject  to  regulations  of  a 

it  is  incompetent  for  a  corporation  to  substantially  identical  character,  my 

subscribe  for  stock  in  another  corpora-  opinion  is  that  where,  as  in  this  case, 

tion.     It  must  be  acknowledged  that  the  law  of  the  corporation  in  which 

there    are    exceptions    to    this    rule,  the  stock  is  taken  is  of  a  substantially 

founded    upon   a   variety   of   peculiar  different  character,   and   fails   to   im- 

circimistances,  which  it  is  not  neces-  pose    the    liabilities    and    create    the 

sary  here  to  enumerate.     I  am  unable  obligations  imposed  by  the  law  of  the 

to  discover  any  ground   upon  which  corporation  subscribing  for  the  stock, 

this  case  can  be  held  within  any  of  such   subscriptions  are   ultra  vires  of 

such  exemptions.      Hut,  however  this  the  latter  corporation,  and  are  illegal 

may  be,  if  the  corporation  in  which  and  void." 
the  stock  is  taken  is  a  domestic  one, 

491 


§273 


INTERCORPORATE    RELATIONS 


[part  IV 


cannot  organize  such  companies  in  States,  the  laws  or  policy 
of  which  are  opposed  to  corporate  stockholding.^ 

§  273.  Construction  of  Statutes.  —  Statutes  authorizing  cor- 
porations to  acquire  and  hold  the  shares  of  other  corporations 
constitute  grants  of  power  and  require  a  reasonably  strict 
construction. 

A  statute  authorizing  a  corporation  to  "  purchase "  the 
shares  of  other  corporations  does  not  confer  power  to  subscribe 
for  the  stock  of  such  corporations.^  Similarly,  power  con- 
ferred upon  a  corporation  to  "  invest  "  its  money  in  stocks 


>  Dittman  v.  Distilling  Co.,  64  N.  J. 
Eq.  537  (1903),  (54  Atl.  Rep.  576) :  "  No 
question  is  or  can  be  raised  as  to  the 
power  of  purchasing  stocks  of  existing 
companies  for  the  purpose  of  accom- 
plishing the  distribution  of  the  prod- 
uct ;  and,  in  my  judgment,  the  organ- 
ization of  subsidiary  companies  for 
the  same  purpose  and  with  the  same 
object  may  be  fairly  and  reasonably 
regarded  as  incidental  to  or  conse- 
quential upon  the  business  which  is 
expressly  authorized,  and  convenient 
for  the  attainment  of  its  objects  and 
should  not  by  a  judicial  construction 
be  held  to  be  ultra  vires.  As  to  com- 
panies in  which  New  Jersey  com- 
panies may  hold  stock  and  the  States 
in  which  subsidiary  companies  may 
be  organized  it  may  be  that  the  late 
decision  in  Coler  v.  Tacoma  R.  Co., 
65  N.  J.  Eq.  347  (1903),  (54  Atl.  Rep. 
413)  limits  the  power  of  New  Jersey 
companies  to  hold  stock  of  corpora- 
tions of  other  States  to  the  holding 
of  stock  in  companies  organized  in 
States  whose  laws  authorize  their 
own  domestic  corporations  to  hold 
stock  in,  and  control,  their  own 
domestic  companies. " 

See  also  post,  §  286:  "Rights  of 
Foreign  Corporation  holding  Stock." 

2  Robotham  v.  Prudential  Ins.  Co., 
64  N.  J.  Eq.  673  (1903),  (53  Atl.  Rep. 
847):  "In  my  opinion  the  word  'pur- 
chase' is  not  used  in  the  broad  sense 
of  the  word  '  acquire '  but  in  the  more 
usual  and  proper  .sense  which  makes 

492 


it  the  correlative  of  the  word  '  sell.' 
.  .  .  Subscribing  for  new  stock  is 
a  very  different  thing  from  buying 
or  purchasing  stock  which  has  al- 
ready been  issued,  and  is  held  against 
the  corporation  which  issued  it. 
Subscribing  for  an  original  issue  of 
stock  at  the  formation  of  a  corpo- 
ration, or  for  a  new  issue  made  bj' 
an  existing  corporation,  is  an  act  in 
the  nature  of  a  loan.  It  is  a  direct 
contribution  of  capital  to  a  corpora- 
tion. The  distinction  between  sub- 
scribing for  or  taking  new  stock  from 
a  corporation  and  purchasing  out- 
standing stock,  is  analogous  to  one 
so  often  drawn  by  the  law  between  ' 
a  loan  of  money  to  a  party  who  gives 
a  promissory  note  with  an  indorser 
as  security  and  the  purchase  of  ex- 
actly the  same  note  after  it  has  once 
been  lawfully  and  honestly  issued. 
Neither  by  the  purchase  of  outstand- 
ing stock  nor  by  the  purchase  of 
outstanding  promissorj''  notes  is  the 
party  obligor  who  issued  the  stock 
or  notes  directly  affected." 

See  also  Martin  v.  Stove  Co., 
78  111.  App.  105  (1898). 

A  manufacturing  corporation  hav- 
ing power  to  purchase  the  stocks  of 
other  corporations  may  organize 
corporations  in  different  States  for 
the  distribution  of  its  products  and 
may  hold  the  shares  of  such  corpora- 
tions. 

Dittman  v.  Distilling  Co.,  64  N.  J. 
Eq.  537  (1903),  (54  Atl.  Rep.  570). 


CHAP.  XXV]   POWER  OF  CORPORATION  TO  HOLD  STOCK 


§273 


does  not  authorize  it  to  subscribe  for  stock  in  a  projected 
corporation;  '  and,  conversely,  authorit}"  to  subscribe  does 
not  confer  power  to  purchase.^  So,  a  statute  ^  authorizing  a 
railroad  company  to  aid  another  in  the  construction  of  its 
road,  by  subscribing  for  its  stock,  does  not  authorize  the 
purchase  of  the  stock  of  a  completed  road.^ 

A  statute  authorizing  a  trust  company  "  to  buy  and  sell  all 
kinds  of  government,  State,  municipal  and  other  bonds,  and 
all  kinds  of  negotiable  and  non-negotiable  paper,  stocks  and 


'  In  Commercial  Fire  Ins.  Co.  v. 
Montgomery  County,  99  Ala.  1  (1891), 
(14  So.  Rep.  490,  42  Am.  St.  Rep.  17), 
it  was  held  that  the  provision  of  the 
Alabama  Code  (Code  1886,  §  1535), 
authorizing  incorporated  insurance 
companies  to  "invest  their  money  in 
real  and  personal  property,  .stocks,  or 
choses  in  action,"  did  not  authorize 
such  a  company  to  subscribe  for  stock 
in  a  corporation  in  process  of  forma- 
tion. See  also  McAlister  Mfg.  Co.  v. 
Florence  Cotton,  etc.  Co.,  128  Ala. 
240  (1901),  (30  So.  Rep.  G32). 

Where  a  corporation  was  organized 
for  manufacturing  purposes,  with 
power  to  invest  in  the  shares  of  other 
corporations,  it  was  held  that  such 
authorization  did  not  confer  power 
to  change  another  corporation,  having 
a  small  capital  in  which  it  hold  the 
majority  of  the  stock,  into  a  holding 
corporation  with  a  capital  a  lumdrcd 
times  its  original  capital,  for  the 
purpose  of  acquiring  stocks  in  other 
corporations. 

Robin.son  v.  Holbrook,  148  Fed.  107 
(1906).  In  thi.s  case  the  Court  said  (j). 
Ill):  "The  power  to  invest  in  shares 
of  other  corporations  must,  however, 
be  regarded  as  incidental  to  the 
charter  purposes  of  the  Gorham 
Company;  i.e.  'manufacturing  goods 
made  of  gold,  .silver,  or  other  metallic 
substance,  and  for  the  transaction 
of  other  business  connected  therewith.' 
The  incidental  power  to  invest 
granted  by  amendments  to  the 
charter  is  to  be  narrowly    construed, 


being  in  derogation  to  the  ordinary 
rule  that  one  corporation  cannot 
invest  in  shares  of  stock  of  another. 
It  would  involve  great  practical 
difficulties  were  we  to  hold  that  the 
power  to  invest  in  shares  of  other 
corporations  can  be  construed  as 
an  unlimited  power  to  initiate  or  to 
promote  new  enterprises  different  in 
character  and  scope,  perhaps  exceed- 
ing in  magnitude,  that  for  which 
original  charter  powers  were  granted. 
It  seems  probable  that  the  power  of 
holding  shares  is  a  subordinate  power, 
not  to  be  so  exercised  as  to  enlarge 
the  general  scope  of  the  business  of 
the  corporation  by  promoting  other 
distinct  corporate  enterprises,  whether 
in  a  different  field  or  in  the  same  field. 
It  is  very  doubtful  whether,  by  giving 
the  Gorham  Company  power  to  invest 
in  the  shares  of  other  corporations, 
the  Legislature  intended  to  confer 
the  power  to  set  up  and  practically 
create  a  new  corporation  in  the  same 
line  of  business  which  should  control 
its  creator." 

-  A  ])urcha.se  by  one  railroad  cor- 
poration of  shares  in  another  com- 
pany is  not  authorized  by  a  charter 
provision  conferring  power  to  sub- 
scribe for  and  hold  shares  in  such 
company.  Whitman  v.  Watkin  (Ch.), 
78  Law  T.  Rep.  188  (1897.) 

3  Ohio  Rev.  St.  §  3300. 

*  Columbus,  etc.  R.  Co.  v.  Burke 
(Com.  PL),  19  Weekly  Law  Bull.  27 
(1887).  Compare  Baltimore  v.  Balti- 
more, etc.  R.  Co.,  21  Md.  50  (1863). 

493 


§273 


INTERCORPORATE    RELATIONS 


[part  IV 


other  investment  securities,"  does  not  confer  power  upon  such 
a  company  to  purchase  all  the  stock  of  another  corporation 
for  the  purpose  of  controlling  its  management.^ 

A  statute  ^  authorizing  a  railroad  company  to  purchase  the 
stock  of  another  railroad  corporation,  of  which  it  is  lessee, 
does  not  restrict  the  application  of  a  general  statute  ^  author- 
izing corporations,  including  railroad  companies,  to  purchase 
and  hold  stock  in  other  corporations  engaged  in  a  similar 
business.^ 

Authority  to  organize  corporations  "  for  any  la^\^ul  pur- 
pose," contained  in  a  general  incorporation  act,  has  been  held 
not  to  authorize  the  formation  of  a  corporation  for  the  express 
purpose  of  acquiring  and  holding  stock  in  other  corporations.^ 


^  Anglo-American  Land,  etc.  Co. 
V.  Lombard,  132  Fed.  721  (1904). 
In  this  case  the  Court  said  (p.  736) : 
"The  only  authority  of  the  Missouri 
Company  to  purchase  stock  in  another 
corporation  is  found  in  subdivision  9, 
§  2839,  Rev.  St.  Mo.  1889,  which 
reads:  'To  buy  and  sell  all  kinds  of 
government,  State,  municipal  and 
other  bonds,  and  all  kinds  of  nego- 
tiable and  non-negotiable  paper, 
stocks  and  other  investment  secur- 
ities.' The  context  shows  very 
clearly  that  the  purpose  was  not  to 
authorize  the  purchase  of  all  of  the 
stock  of  another  company  for  the 
purpose  of  controlling  its  manage- 
ment, but  to  authorize  the  buj'ing 
and  selling  of  stocks  as  investment 
securities,  in  like  manner  as  govern- 
ment bonds  and  the  other  securities 
named  are  bought  and  sold.  Con- 
trolling the  management  of  a  corpora- 
tion of  another  State  through  the 
ownership  of  its  entire  stock  is  not 
buying  or  selling  investment  securi- 
ties, nor  is  it  fairly  incidental  thereto. 
The  hazards  of  such  a  venture  are 
altogether  repugnant  to  the  purposes 
for  which  the  Missouri  Company  was 
formed,  which  included  the  handling 
and  investing  of  the  money  of  others, 
executing    trusts    under    deeds    and 

494 


wills,  acting  as  guardian  of  infants 
and  insane  persons,  and  guaranteeing 
the  fidelity  of  persons  holding  places 
of  public  or  private  trust ;  all  re- 
quiring the  maintenance  of  a  high 
standard  of  credit  and  stability  on 
the  part  of  that  company." 

For  construction  of  early  statute 
regarding  investments  by  insurance 
companies  in  stocks  of  other  cor- 
porations see  Verplank  v.  Mercantile 
Ins.  Co.,  1  Edw.  ch.  84  (1831). 

The  section  of  the  New  Jersey 
Corporation  Act  of  1896,  authorizing 
corporations  to  purchase  the  shares 
of  other  corporations  does  not  repeal 
the  limitations  upon  the  powers 
of  an  insurance  company  prescribed 
by  the  laws  of  that  State  with  respect 
to  the  investment  of  its  funds;  nor 
does  it  authorize  such  a  company 
to  subscribe  for  the  stock  of  another 
corporation. 

Robotham  v.  Prudential  Ins.  Co., 
64  N.  J.  Eq.  673  (1903),  (53  Atl.  Rep. 
842). 

^Neiv  York:  Laws  1890,  ch.  565. 

^  New  York:  Laws  1890,  ch.  564, 
Art.  3,  §  40. 

*  Oelbermann  v.  New  York,  etc. 
R.  Co.,  77  Him  (N.  Y.),  332  (1894), 
(29  N.  Y.  Supp.  545). 

°  People  V.  Chicago  Gas  Trust  Co., 


CHAP.  XXV]   POWER  OF  CORPORATION  TO  HOLD  STOCK 


§273 


On  the  other  hand,  a  provision  in  the  California  Civil  Code  ' 
authorizing  the  organization  of  private  corporations  "  for  any 
purpose  for  which  individuals  may  lawfully  associate  themselves" 
has  been  held  to  permit  the  formation  of  a  corporation  for  the 
specific  purpose  of  purchasing,  holding  and  selling  stock  in  other 
companies.^ 

A  statute  authorizing  one  corporation  to  subscribe  for  or 
purchase  stock  in  another  corporation  may  be  so  construed  as 
to  make  good  a  prior  unauthorized  acquisition.' 

Authority  in  the  charter  of  a  banking  corporation  "  to  pur- 
such  ownership  and  control,  either 
alone  or  in  conjunction  with  other 
objects  is  unquestionably  a  lawful 
object  or  purpose  of  an  association 
of  individuals.  The  only  theory 
upon  which  the  formation  of  corpora- 
tions for  the  purpose  of  holding  stock 
of  other  corporations  could  be  held 
not  to  be  a  "lawful  purpose"  within 
the  meaning  of  the  act,  is  that  an 
authority  to  own  the  stock  and  con- 
trol the  management  of  other  cor- 
porations must  be  given  expressly 
and  in  terms  in  the  section  authoriz- 
ing the  formation  of  corporations, 
in  order  to  be  lawful.  This  power 
to  own  and  control  stock  of  other 
corporations  is  expressly  given  by  a 
subsequent  section  to  all  corporations, 
when  organized,  and  to  the  same 
extent  as  individuals.  Such  owner- 
ship of  stock  is,  therefore,  a  lawful 
act.  This  legislative  declaration  as 
to  the  lawfulness  of  the  ownership 
of  stock  by  corporations  preclutles 
the  courts,  as  it  seems  to  me,  from 
declaring  that  such  ownership  can- 
not be  included  within  the  lawful 
purpo.ses  for  which  a  corporation  may 
be  formed,  merely  for  the  reason 
that  it  is  not  expressly  and  specially 
authorized  in  the  section  of  the  act 
defining  the  purposes  of  incorpora- 
tion." 

3  In  re  Buffalo,  etc.  R.  Co.,  74  N.  Y. 
St.  Rep.  345  (1896),  37  N.  Y.  Supp. 
(1048). 


130  111.  268  (1889),  (22  N.  E.  Rep. 
798,  17  Am.  St.  Rep.  319,  8  L.  R.  A. 
497). 

•  California  Ci\-il  Code,  §  286. 

-  Market  St.  R.  Co.  v.  Hellman, 
109  Cal.  571  (1895),  (42  Pac.  Rep. 
225).  In  this  case  the  Court  said 
(p.  590)  :  "It  is  beyond  controversy 
that  indi\-iduals  may  lawfully  as- 
sociate themselves  for  the  purpose 
of  purchasing,  selling,  and  deaUng 
in  all  kinds  of  public  and  private 
stocks,  bonds,  and  securities.  The 
Pacific  Improvement  Company,  hav- 
ing been  organized  for  exactly  that 
purpo.se,  it  is  intra  vires  to  purchase, 
hold  and  sell  stock  in  other  corpora- 
tions." 

Under  the  earlier  New  Jersey 
statute  providing  that  corporations 
may  be  organized  for  "any  lawful 
business  or  purpose"  and  the  Cor- 
poration Act  of  1896  authorizing 
corporations  organized  thereunder 
to  hold  the  shares  of  other  corpora- 
tions, it  is  held  that  a  corporation 
may  be  organized  for  the  express 
purpose  of  holding  stock  in,  and  con- 
trolling, other  corporations. 

Dittman  v.  Distilling  Co.,  64  N.  J. 
Eq.  537   (1903),  (54  Atl.  Rep.  570). 

In  this  ca.se  the  Court  said  (p. 
572)  :  "The  ownership  of  stock,  and 
control  of  corporations  by  means  of 
such  ownership,  by  either  an  indi- 
vidual or  a  partnership  is  in  general 
a  lawful  act ;  and  the  organization 
of  a  partnership   for  the  purpose  of 


495 


§273 


INTERCORPORATE   RELATIONS 


[part  IV 


chase  securities  of  any  kind  "  does  not  authorize  the  purchase 
of  shares  of  other  corporations.' 

A  statute  authorizing  a  manufacturing  corporation  to  acquire 
stock  in  other  corporations  with  which  it  transacts  business, 
does  not  authorize  the  purchase  of  the  shares  of  an  insolvent 
rival  corporation  which  has  ceased  to  transact  business,  for  the 
purpose  of  obtaining  its  patronage.^ 


'  Bank  of  Commerce  v.  Hart,  37 
Neb.  201  (1893),  (55  N.  W.  Rep.  631, 
40  Am.  St.  Rep.  479,  20  L.  R.  A. 
780)  :  "  But  there  is  no  provision 
in  the  bank's  charter  which,  by  any 
reasonable  construction,  can  be  con- 
strued into  an  authority  to  purchase 
and  hold  stocks  of  any  other  cor- 
poration. True,  it  says  'to  purchase 
securities  of  any  kind,'  but  certificates 
of  stock  are  not  securities  within  the 
meaning  of  this  pro\ision,  nor  such 
as  the  word  imports  in  commercial 
or  banking  phraseology.  'Securities,' 
as  here  used,  mean  notes,  bills  of 
exchange^  and  bonds ;  in  other  words 
evidences  of  debt,  promises  to  pay 
money." 

Compare  Latimer  v.  Citizens  State 
Bank,  102  Iowa,  162  (1897), -(71  N.  W. 
Rep.  225). 

2  De  la  Vergne  Refrigerating  Mach. 
Co.  V.  German  Sav.  Inst.,  175  U.  S. 
40    (1899),    (20    Sup.    Ct.    Rep.    20). 

Where  a  corporation  has  power 
to  acquire  and  deal  in  the  stocks 
of  other  corporations,  it  may  promote 
a  new  corporation  to  conduct  a  similar 
business,  of  which  it  is  to  hold  a 
large  part  of  the  stock,  with  a  view 
of  increasing  its  business  and  profits, 
and  it  is  immaterial  whether  the 
stock  so  received  be  issued  as  fully 
paid  or  not. 

Rubino  v.  Pressed  Steel  Car  Co., 
53  Atl.  Rep.  1050  (N.  J.  Ch.  1903). 

Where  a  corporation,  ha\dng 
power  to  purchase  the  shares  of 
another  corporation,  made  such  pur- 
chase, pajnng  for  the  stock  acquired 
with  its  own  stock  upon  an  agreed 
basis,  and  agreed  to  pay  in  addition 

496 


a  certain  sum  in  cash  in  ten  semi- 
annual payments,  it  was  held  that 
such  purchase  was  not  rendered  ultra 
vires  by  the  fact  that  the  method 
adopted  for  making  such  payments 
amounted,  to  a  guaranty  of  dividends 
upon  such  stock. 

Strickland  v.  National  Salt  Co., 
64  Atl.  Rep.  982  (N.  J.  Ch.  1906). 

Under  the  West  Virginia  statutes 
a  corporation  by  the  vote  of  sixty 
per  cent  of  its  stockholders  may 
sell  in  good  faith  all  of  its  property 
and  accept  in  payment  the  stocks 
of  other  corporations. 

Germer  v.  Triple  State  Natural 
Gas,  etc.  Co.,  54  S.  E.  Rep.  509 
(W.  Va.  1906). 

For  examination  of  New  Jersey 
statutes  and  decisions  concerning 
right  of  corporations  to  acquire  and 
hold  stocks  of  other  corporations, 
see  Dittman  v.  Distilling  Co.,  64  N.  J. 
Eq.  537  (1903),  (54  Atl.  Rep.  570). 

Partnership  associations  organ- 
ized under  the  laws  of  Pennsylvania 
may  own  stock  in  corporations. 
Layng  v.  French  Spring  Co.,  149  Pa. 
St.  308  (1892),  (24  Atl.  Rep.  215); 
Carter  v.  Producers,  etc.  Oil  Co. 
(Com.  PL),  24  Pittsb.  Leg.  J.  (n.  s.) 
380  (1894). 

For  construction  of  Kansas  statutes 
relating  to  the  purchase  of  stock  by 
railroad  companies  see  Atchison,  etc. 
R.  Co.  V.  Fletcher,  35  Kan.  236  (1886), 
(10  Pac.  Rep.  596) ;  Atchison,  etc.  R. 
Co.  V.  Cochran,  43  Kan.  225  (1890), 
(23  Pac.  Rep.  151,  19  Am.  St.  Rep. 
134,  7  L.  R.  A.  414)  ;  Atchison, 
etc.  R.  Co.  V.  Da\-is,  34  Kan.  209 
(1885),  (8  Pac.  Rep.  530).     See  also 


CHAP.    XXV]      POWER    OF    CORPORATION    TO    HOLD    STOCK  §   274 

A  statute  prohibiting  the  taking  of  stocks  by  a  corporation 
except  in  payment  of,  or  as  security  for,  a  debt  appUes  only  to 
corporations  actually  engaged  in  cariying  on  the  business  for 
which  they  were  organized  and  is  inapplicable  to  a  corporation 
which  is  winding  up  its  affairs.' 

§  274.  Construction  of  Constitutional  Prohibitions.  —  The 
holding  of  stock  in  other  corporations  is  beyond  the  powers 
of  a  corporation,  in  the  absence  of  statutory  authority.  The 
holding  of  stock  in  other  companies,  in  order  to  prevent  compe- 
tition, is  opposed  to  public  policy.  Constitutional  prohibitions 
of  purchases  for  such  a  purpose  are,  therefore,  unnecessary, 
except  as  imposing  limitations  upon  the  power  of  the  legis- 
lature to  grant  authority.  Such  provisions  have,  however, 
been  adopted  in  several  States  and  have  been  construed  by 
the  courts. 

The  provision  in  the  Pennsylvania  constitution  ^  that  "  no 
railroad,  canal  or  other  corporation  .  .  .  shall  ...  in  any 
way  control  any  other  railroad  or  canal  corporation  owning, 
or  having  under  its  control,  any  parallel  or  competing  line  " 
is  violated  by  an  arrangement  made  by  a  railroad  company  to 
buy  the  stock  of  a  competing  line.  Ownership  of  a  majority 
of  its  stock  constitutes  the  "control"  of  a  corporation,  within 
the  meaning  of  the  provision.^ 

The  prohibition  in  the  Georgia  constitution  *  against  the  grant 

Kimball  v.  Atchison,  etc.  R.  Co.,  46  wealth  (Pa.  1886),  (7  Atl.  Rep.  371). 
Fed.  888  (1891).  In  this  case  the  purchasing  corpora- 
'  Metcalf  V.  American  School  Fur-  tion  claimed  that  an  arrangement 
niture  Co.,  122  Fed.  115  (1903).  to  buy  stock  did  not  violate  this  con- 
In  this  case  it  was  also  held  that  stitutional  provision,  relying  upon  the 
when  a  corporation  was  authorized  remark  of  Chief  Justice  Waite  in 
by  its  charter  to  dispose  of  its  prop-  Pullman  Palace  Car  Co.  v.  Missouri 
erty  and  di*;ontinue  its  existence,  Pacific  R.  Co.,  115  U.  S.  597  (1885), 
it  had  power  to  accept  stock  in  another  (6  Sup.  Ct.  Rep.  199),  in  speaking  of 
corporation  in  payment  for  its  prop-  a  stockholding  road:  "Practically 
erty.  it  may  control  the  company,  but  the 
For  construction  of  Afissifisippi  company  alone  controls  the  road." 
statute  (see  a«<c,  §  271.  no<e)  prohibit-  The  Pennsylvania  court,  however, 
ing  corporate  stockholding  see  Wood-  said  that  this  remark  was  merely 
berry  V.  McClurg,  78  Miss.  831  (1901),  a  different  way  of  stating  the  truism 
(29  So.    Rep.   514).              •  that   a   corporation   is    controlled    by 

*  Pennsylvania  Const.   Art.    XVII.  its  stockholders. 
§  4.     See  ante,  §  32,  note.  *  Georgia  ConM .  .\rt.  IV.  §  2,  jjar.  4. 

'  Pennsylvania  R.  Co.  v.  Common-  See  ante,  §  32,  note. 

497 


§274 


INTERCORPORATE    RELATIONS 


[part  IV 


of  power  to  one  corporation  to  purchase  the  stock  of  any 
other  corporation  tending  to  defeat  or  lessen  competition  or  en- 
courage monopoly,  cannot  be  evaded  by  indirection;  and  the 
fact  that  stock  in  a  competing  corporation  is  obtained  in 
the  name  of  its  managers,  but  for  the  use  of  a  corporation, 
will  not  prevent  the  application  of  the  constitutional  provi- 
sion.^ 

The  holding,  by  a  railroad  corporation,  of  a  controlling 
interest  in  the  stock  of  a  coal  mining  company  is  not  in 
contravention  of  another  provision  of  the  Pennsylvania 
constitution  ^  that  common  carriers  shall  not  engage  in  min- 
ing, or  in  manufacturing  articles  for  transportation  over  their 
lines.^ 

A  California  constitutional  provision  forbids  a  corporation 
to  engage  in  any  business  other  than  that  expressly  authorized 
by  its  charter  or  the  law  under  which  it  is  organized.^  It  is 
held  that  a  corporation,  by  acquiring  stock  in  another  corpo- 
ration, becomes  engaged  in  the  business  of  that  corporation 
within  the  meaning  of  the  prohibition.^ 


*  Langdon  v.  Branch,  37  Fed.  449 
(1888),  (2  L.  R.  A.  120). 

In  Trust  Co.  v.  State,  109  Ga.  736 
(1899),  (35  S.  E.  Rep.  323,  48  L.  R.  A. 
520)  it  was  held  that  this  Georgia 
constitutional  provision  denying  the 
General  Assembly  "power  to  author- 
ize any  corporation  to  buy  shares 
of  stock  in  any  other  corporation" 
was  not  an  absolute  denial  of  power 
and  did  not  prevent  the  General 
Assembly  from  authorizing  such  pur- 
chases where  competition  was  in 
no  way  affected.  The  Court  said 
(p.  752)  :  "  It  is  further  contended 
that  under  tlie  constitution  the  pro- 
vision in  relation  to  corporations 
buying  shares  of  stock  in  any  other 
corporation  has  no  reference  what- 
ever to  the  effect  of  such  purchases 
upon  competition  or  monopoly,  and 
that  they  are  absolutely  void, 
although  they  have  no  tendency 
to  defeat  or  lessen  competition,  or  to 


encourage  monopoly.  We  think  this 
is  an  entire  misconception  of  tliis 
provision  in  the  constitution.  The 
prohibition  against  the  legislative 
grant  to  corporations  of  power  to 
buy  shares  of  stock  in  another  cor- 
poration is  clearly  qualified  by  that 
portion  of  the  section  cited  which 
restricts  such  purchases  only  when 
they  have  the  effect,  or  are  intended 
to  have  the  effect,  to  defeat  or  lessen 
competition  in  their  respective  busi- 
nesses,   or  to   encourage   monopoly." 

See  also  State  v.  Cy^tral  R.,  etc. 
Co.,  109  Ga.  716  (1899),  (35  S.  E. 
Rep.  37). 

^Pennsylvania  Const.   Art.   XVII. 

§5. 

*  Hartwell  v.  Buffalo,  etc.  R.  Co., 
19  Pa.  Co.  Ct.  231  (1897). 

*  California      Const.      Art.       XII. 

§  9- 

^  Knowles  v.  Sandercock,  107  Cal. 

629  (1895),  (40  Pac.  Rep.  1047). 


498 


CHAP.    XXV]      POWER    OF   CORPORATION    TO    HOLD    STOCK 


275 


III.    Incidental  Power  to  acquire  Stock 

§  275.  In  General.  —  An  incidental  power  is  one  that  is 
directly  and  immediately  appropriate  to  the  execution  of  a 
specific  power  granted,  and  not  one  that  has  a  slight  or  remote 
relation  to  it.^  When  the  purchase  of  stock  in  another  corpora- 
tion is  reasonably  necessary  to  the  full  and  complete  exercise 
of  the  express  powers  of  a  corporation,  power  to  make  such 
purchase  will  be  implied.^  Whether  such  power  exists  in  a 
particular  case  will  depend  upon  the  nature  of  the  corporation 
and  the  objects  for  which  the  stock  is  to  be  acquired. 

Corporations  like  insurance  companies,  which  find  it  neces- 
sary to  keep  large  amounts  of  funds  on  hand,  may,  perhaps, 
without  express  authority,  invest  their  surplus  funds  in  the 


*  Hood  V.  New  York,  etc.  R.  Co.,  22 
Conn.  16  (1852);  Franklin  Co.  v. 
Lewiston  Sav.  Inst.,  68  Me.  43  (1877), 
(28  Am.  Rep.  9) ;  People  v.  Chicago 
Gas  Trust  Co.,  130  111.  268  (1889), 
(22  N.  E.  Rep.  798,  17  Am.  St.  Rep. 
319,  8  L.  R.  A.  497). 

^  Marbury  v.  Kentucky  Union 
Land  Co.,  62  Fed.  335  (1894),  affirm- 
ing s.  c.  sub  nom.  Tod  v.  Kentucky 
Union  Land  Co.,  57  Fed.  47  (1893). 
In  the  latter  decision  the  Court  refers 
at  length  to  Louisville,  etc.  R.  Co.  v. 
Literary  Society  of  St.  Rose,  91  Ky. 
395  (1891),  (15  S.  W.  Rep.  1065), 
in  regard  to  the  implied  powers  of  a 
corporation.  In  that  ca.se  two  edu- 
cational corporations,  having  power 
to  contract  and  to  buy  and  sell  real 
and  personal  property  for  the  purpose 
of  carrying  on  their  institutions  of 
learning,  owned  and  operated  large 
farms  of  considerable  value.  Each 
of  these  corporations  sub.scribed  a 
sum  of  money  payable  to  a  railroad 
company  to  induce  it  to  extend  its 
line  near  their  property  which  would 
enchance  its  value.  Regarding  the 
defence  of  ultra  vires  to  an  action  upon 
the  subscriptions  the  Court  said : 
"The  building  of  the  road  was  cal- 
culated, however,  to  be  highly  bene- 


ficial to  them,  both  as  furnishing 
convenient  acce.ss  to  them  for  persons 
coming  and  going,  and  also  in  fur- 
nishing them  a  means  of  obtaining 
their  supplies,  and  sending  their 
product  to  market.  It  was  calcu- 
lated to,  and  undoubtedly  did,  add 
greatly  to  the  value  of  their  properties, 
and  the  large  industries  which  their 
charters  had  authorized  them  to 
create.  It  conferred  a  direct  benefit. 
The  power  existed,  b}''  fair  implication, 
to  do  anything  reasonably  calculated 
to  add  to  this  value.  How  far  this 
power  extended,  we  need  not  decide. 
Certainly,  however,  if,  during  a  por- 
tion of  the  3'ear,  these  institutions 
had  been  almost  inaccessible,  for 
the  lack  of  a  turnpike  or  a  bridge,  a 
subscription  by  them  to  build  either 
would  have  been  valid ;  and,  while 
not  authorized  to  enter  into  any 
manner  of  speculations,  yet,  in  our 
opinion,  a  subscription  by  them  to  aid 
the  building  of  this  road  was  not, 
under  all  the  circumstances,  ultra 
vires,  and,  therefore,  voitl." 

For  a  very  broad  A-iew  of  incidental 
powers  in  reference  to  the  purcha.se 
of  stocks  see  Hill  v.  Nisbet,  100  Ind. 
349  (1884). 

499 


§276 


INTERCORPORATE    RELATIONS 


[part  IV 


shares  of  dividend-paying  corporations,  while  such  a  povi^er 
would  be  denied  a  manufacturing  company,  in  whose  nature 
there  is  nothing  which  renders  it  proper  to  accumulate  funds 
for  outside  investments.^  But  a  manufacturing  corporation, 
while  without  power  to  purchase  shares  in  another  corpora- 
tion, might  take  them  in  payment  of  a  debt.^ 

While  an  incidental  power  to  invest  funds  in  stocks  may  be 
implied  in  the  case  of  a  certain  class  of  corporations,  and  a 
like  power  may  be  implied  in  the  case  of  other  corporations 
to  take  stocks  in  regular  course  of  business,  no  such  power 
can  ever  be  implied  to  subscribe  for  shares  in  a  new  corporation 
and  aid  in  the  creation  of  a  new  enterprise.^ 

§  276.  Incidental  Power  to  make  Investments  in  Stocks.  — 
Corporations  whose  objects  require  the  investment  of  their 
capital  and  surplus  funds  for  the  purpose  of  deriving  an  in- 
come may,  it  is  held,  for  that  purpose,  without  express  statu- 
tory authority,  invest  in  the  shares  of  other  dividend-paying 
corporations.*      Thus,    in     Hodges    v.     New    England    Screw 


*  People  V.  Chicago  Gas  Trust  Co., 
130  111.  268  (1889),  (22  N.  E.  Rep.  798, 
17  Am.  St.  Rep.  319,  8  L.  R.  A.  497). 
See  post,  §  276:  "Incidental  Power 
to  make  Investments  in  Stocks." 

2  Post,  §  277  :  "  Incidental  Power  to 
take  Stock  in  Satisfaction  of  Debt." 

3  Smith  V.  Newark,  etc.  R.  Co., 
8  Ohio  Cir.  Ct.  Rep.  583  (1894). 

*  Hodges  V.  New  England  Screw 
Co.,  1  R.  I.  312  (1850),  (53  Am.  Dec. 
624) ;  s.  c.  3  R.  I.  9  (1853) ;  Talmage 
V.  Pell,  7  N.  Y.  343  (1852) ;  Pearson  v. 
Concord  R.  Corp.,  62  N.  H.  537 
(1883),  (13  Am.  St.  Rep.  590).  In  the 
last  case  the  Supreme  Court  of  New 
Hampshire  (per  Smith,  J.)  said 
(p.  549)  :  "Certain  classes  of  corpora- 
tions, such  as  religious  and  charitable 
corporations,  and  corporations  for 
literary  purposes,  rnay  rightfully 
invest  their  moneys  in  the  stocks  of 
other  corporations.  Tlie  power,  if 
not  expressly  mentioned  in  their 
charters,  is  necessarily  implied,  for 
the  preservation  of  the  funds  with 
which  such  institutions  are  endowed, 

500 


and  to  render  their  funds  productive. 
So,  an  insurance  company  or  savings 
bank  may  righfully  invest  its  capital 
or  deposits  in  the  stocks  of  railroad 
companies,  banks,  manufacturing 
companies,  and  similar  corporations. 
The  power  is  necessary  to  enable  them 
to  engage  in  the  business  for  which 
they  are  organized,  and  hence  is 
implied,  if  not  expressly  granted,  in 
their  charters.  Such  investments  are 
in  the  line  of  their  business.  On  the 
other  hand,  a  manufacturing  or  rail- 
road corporation  is  incorporated  to 
do  the  business  of  manufacturing, 
or  transporting  passengers  and  mer- 
chandise. Investing  their  funds  in 
that  of  other  corporations  is  not  in 
the  line  of  their  bu.siness.  Under 
extraordinary  circumstances,  it  may 
become  necessary  for  a  national  bank, 
or  a  manufacturing  corporation,  or 
a  railroad  corporation,  to  acquire 
stock  in  another  corporation,  as  in 
satisfaction  of  a  valid  debt,  or  by 
way  of  security,  but  with  a  v-iew  to 
its  subsequent  sale  or  conversion  into 


CHAP.    XXV]      POWER    OF   CORPORATION    TO    HOLD    STOCK  §    277 

Co}  the  Supreme  Court  of  Rhode  Island  said:  "  There  are  large 
classes  of  corporations  in  Rhode  Island,  and  the  other  States, 
which  may  and  do  rightfully  invest  their  capital  in  the  stock 
of  other  corporations;  such,  for  instance,  as  religious  and  chari- 
table corporations,  and  corporations  for  literary  and  scientific 
purposes.  So,  insurance  companies  may  rightfully  invest  their 
capital  in  the  stock  of  other  corporations,  such  as  banks  and 
railroads,  and  the  like." 

No  such  incidental  power,  however,  exists  in  corporations 
generally,^  and  it  is  difficult,  upon  principle,  to  justify  its  ex- 
istence in  the  class  of  corporations  referred  to.'  Although 
such  corporations  have,  as  immediately  appropriate  to  the 
exercise  of  their  chartered  powers,  the  right  to  invest  their 
funds  for  the  purpose  of  deriving  an  income,  the  field  for  invest- 
ment is  so  large  that  it  may  well  be  denied  that  it  is  reasonably 
necessary  to  invest  in  the  shares  of  other  corporations  and 
assume  the  responsibilities  of  stockholders  therein. 

The  importance  of  this  question  is,  however,  minimized  by 
the  fact  that,  at  the  present  time,  the  investments  of  savings 
banks,  insurance  companies  and  other  corporations  of  a  simi- 
lar nature  are  generalh^  regulated  by  statute. 

§  277.  Incidental  Power  to  take  Stock  in  Satisfaction  of 
Debt.  — As  an  incident  to  the  power  to  transact  business, 

money  so  as  to  make  good  or  redeem  Minn.  282  (1903),  (96  N.  W.  Rep.  85). 
an  anticipated  loss."  The  deci.sion  in  Smith  v.  Newark, 

>  Hodges   V.    New    England    Screw  etc.  R.  Co.,  8  Ohio  Cir.  Ct.  Rep.  583 

Co.,  1  R.  I.  347  (1850),  (53   Am.  Dec.  (1894),     that    a    railroad    company, 

624);   s.c.  3  R.  I.  9  (1853).  unless  prohibited,  may  invest  in  the 

^  People  V.  Chicago  Gas  Trust  Co.,  di\'idend-pa>'ing  stocks  of   other  cor- 

130  111.  268  (1889),  (22  N.  E.  Rep.  798,  porations,  has  no  foundation  in  prin- 

17  Am.  St.  Rep.  319,  8  L.  R.  A.  497) ;  ciple  or  authority. 
McCutcheon    v.     Merz    Capsule    Co.,  ^  In   People  v.  Chicago  Gas  Trust 

71  Fed.  787  (1896),  (31  L.  R.  A.  415);  Co.,    130   111.   283    (1889),    (22   N.   E. 

Pearson  v.  Concord  R.  Corp.,  62  N.  H.  Rep.  798,    17  Am.   St.     Rep.    319,   8 

537   (1883),  (13   Am.   St.   Rep.   590).  L.  R.  A.  497),  the  Court  said  :  "Some 

See  also  cases  cited  in  note  to  ante,  corporations,     like     insurance     com- 

§  264:     "Necessity  for  Statutory  An-  panics,  may  find  it  necessary  to  keep 

thority  to  purchase     Stock.     Rule     in  fimds   in    hand    for   the    payment    of 

United  States."  losses  by   death   or   fire,   or   to   meet 

Where  a  malting  company  witliout  other   necessary   demands,    but   it   is 

express     authority     purchases     bank  questionable  whether  even  these  can 

stock  for  investment  its  act  is  ultra  invest  their  surplus  funds  in  the  stocks 

vires.  of  other  corporations  without  special 

Hunt   V.    Hauser   Malting   Co.,    90  legislative  authority." 

501 


277 


INTERCORPORATE    RELATIONS 


[part  IV 


enter  into  contracts  and  become  a  creditor,  a  corporation  has 
the  power  to  do  what  is  necessary  in  order  to  collect  debts 
due  it,  and  may  take  title  to  all  kinds  of  property,  including 
the  stock  of  other  corporations,  in  payment  or  compromise 
of  a  debt.^  The  acquisition  of  stock  for  such  purposes  is  di- 
rectly appropriate  to  the  execution  of  the  specific  powers  con- 
ferred upon  every  banking,  manufacturing  and  mercantile 
corporation. 

Shares  of  stock  may  be  so  taken  in  satisfaction  of  a  debt 
with  a  view  to  sell  them  again,  although  the  corporation  is 
without  authority  to  purchase  or  invest  its  funds  in  such 
shares.  In  Charlotte  First  National  Bank  v.  National  Exchange 
Bank"^  Mr.  Chief  Justice  Waite  said:  "Dealing  in  stocks  is 
not  expressly  prohibited;  but  such  a  prohibition  is  imphed 
from  the  failure  to  grant  the  power.  In  the  honest  exercise 
of  the  power  to  compromise  a  doubtful  debt  owing  to  a  bank, 
it  can  hardly  be  doubted  that  stocks  may  be  accepted  in  pay- 
ment and  satisfaction,  with  a  view  to  their  subsequent  sale 
or  conversion  into  money  so  as  to  make  good  or  reduce  an 


*  Charlotte  First  Nat.  Bank.  v. 
National  Exch.  Bank,  92  U.  S.  122 
(1875) ;  Citizens  State  Bank  v.  Haw- 
kins, 71  Fed.  369  (1896) ;  Holmes,  etc. 
Mfg.  Co.  V.  Holmes,  etc.  Metal  Co., 
127  N.  Y.  252  (1891),  (27  N.  E.  Rep. 
831,  24  Am.  St.  Rep.  448) ;  Talmage 
V.  Pell,  7  N.  Y.  328  (1852) ;  People  v. 
Chicago  Gas  Trust  Co.,  130  111.  268 
(1889),  (22  N.  E.  Rep.  798,  17  Am. 
St.  Rep.  319,  8  L.  R.  A.  497) ;  Hodges 
V.  New  England  Screw  Co.,  1  R.  I. 
312  (1850),  (53  Am.  Dec.  6241)  s.  c. 
3  R.  I.  9  (1853);  Howe  v.  Boston 
Carpet  Co.,  16  Gray  (Mass.),  493 
(18601;  Tourtelot  t>.  Wliithed,  9N.  D. 
407  (1900),  (84  N.  W.  Rep.  8). 

In  Holmes,  etc.  Mfg.  Co.  v.  Holmes, 
etc.  Metal  Co.,  supra,  the  statute 
under  which  the  corporation  was 
organized  (N.  Y.  Laws  1848,  ch.  40, 
§  8)  pro\'ided  that  "it  shall  not  be 
lawful  for  such  company  to  use  any 
of  their  funds  in  the  purchase  of  any 
stock    in     any     other     corporation," 

502 


but  it  was  held  that  the  "funds" 
referred  to  meant  the  money  of  the 
corporation,  and  that  the  statute 
was  not  intended  to  limit  the  power 
of  the  corporation  to  take  stock  in 
payment  of  a  debt. 

Where  the  officers  of  an  insurance 
company,  without  prevnous  authori- 
zation, accepted  bank  stock  in  part 
payment  of  an  indebtedness  due  it 
and  the  directors  without  knowledge 
of  the  arrangement  subsequently 
treated  the  stock  as  part  of  the  com- 
pany's assets  it  was  held  that  the  act 
of  the  officer^  was  ratified.  It  was 
also  held  that  the  taking  of  the  stock 
was  within  the  powers  of  an  insurance 
companj^  although  outside  the  gen- 
eral scope  of  its  business. 

Fidelity  Ins.  Co.  v.  German  Sav. 
Bank,  127  Iowa,  591  (1905),  (103 
N.  W.  Rep.  958). 

2  Charlotte  First  Nat.  Bank  v. 
National  Exch.  Bank,  92  U.  S.  128 
(1875). 


CHAP.    XXV]      POWER    OF   CORPORATION   TO    HOLD    STOCK 


§  277 


anticipated  loss.  Such  a  transaction  would  not  amount  to 
a  dealing  in  stocks." 

The  stock  must,  however,  be  taken,  in  good  faith,  in  satis- 
faction of  an  existing  debt,  and  such  incidental  power  cannot 
be  exercised  as  a  mere  device  to  cover  an  unauthorized  trans- 
action. Thus,  a  corporation  cannot,  without  statutory  author- 
ity, sell  goods  to  another  corporation  and  create  a  debt,  \nth 
an  express  understanding  that  it  is  to  be  satisfied  by  the  de- 
livery of  stock  of  the  purchasing  corporation.^ 

Upon  principles  similar  to  those  just  stated,  a  corporation, 
in  compromising  a  contested  claim  against  it,  may  pay  a  larger 
sum  than  would  have  been  exacted  in  satisfaction  of  the  claim, 
in  order  to  obtain  a  transfer  of  stocks  in  other  corporations 
in  the  bona  fide  belief  that,  by  turning  them  into  money  under 
more  favorable  circumstances,  it  may  diminish  its  loss.^ 

A  corporation  may  levy  upon  shares  of  stock  in  other  cor- 
porations held  by  its  debtor,  may  sell  the  same  upon  execution 
and,  if  necessary,  may  buy  them  in,  whenever  such  levy  and 
sale  would  be  permitted  in  the  case  of  a  natural  person.^ 


'  Valley  R.  Co.  v.  Lake  Erie  Iron 
Co.,  46  Ohio  St.  44  (1888),  (18  N.  E. 
Rep.  486,  26  Am.  &  Eng.  Corp.  Cas. 
55).  See  also  Charlotte  First  Nat. 
Bank  v.  National  Exch.  Bank,  92  U.  S. 
122  (1875).  Compare  Howe  v.  Boston 
Carpet  Co.,  16  Gray  (Mass.),  493 
(1860) ;  Treadwell  v.  Sali.sbury  Mfg. 
Co.,  7  Gray  (Mass.),  393  (1856), 
(66  Am.  Dec.  490). 

In  White  v.  Marquadt  (Iowa, 
1897),  70  N.  W.  Rep.  193,  the  Supreme 
Court  of  Iowa  held  that  while  a  cor- 
poration might  not  buy  shares  in 
another  corporation  it  could  take 
them  in  exchange  for  goods.  The 
Court  said  :  "  If  it  had  purchased  the 
stock  outright,  as  a  purely  business 
venture,  it  may  be  that  the  defence 
here  interposed  would  prevail.  But 
this  it  did  not  do.  It  received  the 
stock  while  carrying  on  business  in 
the  usual  manner,  in  exchange  for 
property  which  it  was  authorized 
to  sell.  These  shares  were  tangible 
property,  and  as  no  limitations  were 


imposed  by  its  articles  of  incorpora- 
tion as  to  the  kind  of  property  it 
should  take  in  paj-ment  for  the  mer- 
chandise it  was  authorized  to  sell,  we 
think  it  had  power  to  accept  the 
shares  of  stock  in  payment." 

The  distinction  is,  obvioush',  with- 
out foundation.  It  is  impossible  to 
distinguish  in  principle  between  buy- 
ing with  money  and  mone^-'s  worth. 
2  Charlotte  First  Nat.  Bank  v. 
National  Exch.  Bank,  92  U.  S.  122 
(1875). 

Where  a  national  bank  acquired 
an  interest  in  a  mine  through  an 
assignment  of  a  mining  company  for 
the  benefit  of  its  creditors,  it  was 
held  that  it  had  a  right  to  exchange 
such  interest  for  stock  in  a  new  com- 
pany organized  to  take  over  the 
mining  property. 

Morgan  v.  King,  27  Colo.  539 
(1900),  (63  Pac.  Rep.  416). 

'  Citizens  State  Bank  v.  Hawkins, 
71  Fed.  369  (1896). 

503 


278 


INTERCORPORATE    RELATIONS 


[part  IV 


§  278.    Incidental   Power  to  take   Stock  as  Collateral.  —  For 

the  same  reason  that  corporations  possess  the  incidental  power 
to  take  the  stock  of  other  corporations  in  satisfaction  of  a  debt, 
they  have  the  power  to  accept  such  stock  as  security  for  an 
existing  indebtedness.^ 

Upon  similar  principles,  a  corporation,  having  the  power  to 
loan  money,  may,  as  incidental  to  the  exercise  of  that  power, 
and  in  the  usual  course  of  business,  accept  the  stock  of  an- 
other corporation  as  collateral  security  for  a  present  loan, 
although  the  purchase  of  such  stock  for  investment  purposes 
or  otherwise  may  be  wholly  ultra  vires.  Taking  stock  as 
security  does  not  constitute  dealing  in  stocks.^  The  pre- 
sumption is  against  any  intention  on  the  part  of  the  lend- 


1  California  Bank  v.  Kennedy,  167 
U.  S.  362  (1897),  (17  Sup.  Ct.'  Rep. 
831),  reversing  Kennedy  v.  California 
Savings  Bank,  101  Cal.  495  (1894), 
(35  Pac.  Rep.  1039,  40  Am.  St.  Rep. 
169).  See  also  cases  cited  in  notes  to 
last  section. 

^  United  States :  In  California  Bank 
V.  Kennedy,  167  U.  S.  366  (1897),  (17 
Sup.  Ct.  Rep.  831),  Justice  White 
said:  "It  is  well  settled  that  the 
United  States  statutes  relative  to 
national  banks  constitute  the  meas- 
ure of  the  authority  of  such  corpora- 
tions, and  that  they  cannot  rightfully 
exercise  any  powers  except  those 
expressly  granted,  or  which  are 
incidental  to  carrjdng  on  the  business 
for  which  they  are  established. 
Logan  County  Bank  v.  Townsend, 
139  U.  S.  73  (1891),  (11  Sup.  Ct.  Rep. 
496).  No  express  power  to  acquire 
the  stock  of  another  corporation  is 
conferred  upon  a  national  bank, 
but  it  has  been  held  that,  as  incidental 
to  the  power  to  loan  money  on  per- 
sonal security,  a  bank  may,  in  the 
usual  course  of  doing  such  business, 
accept  stock  of  another  corporation 
as  collateral,  and,  by  the  enforcement 
of  its  rights  as  pledgee,  it  may  become 
the  owner  of  the  collateral  and  be 
subject  to  liability  as  other  stock- 
holders.    National     Bank     v.     Case, 

504 


99  U.  S.  628  (1878).  So,  also,  a 
national  bank  may  be  conceded  to 
possess  the  incidental  power  of 
accepting  in  good  faith  stock  of 
another  corporation  as  security  for 
a  pre\'ious  indebtedness.  It  is  clear, 
however,  that  a  national  bank  does 
not  possess  the  power  to  deal  in 
stocks.  The  prohibition  is  implied 
from  the  failure  to  grant  the  power. 
Charlotte  First  Nat.  Bank  v.  National 
Exch.  Bank,  92  U.  S.  128  (1875)." 

See  also  Citizens  State  Bank  v. 
Hawkins,  71  Fed.  369  (1896) ;  County 
Court  V.  Baltimore,  etc.  R.  Co.,  35 
Fed.  161  (1888);  Shoemaker  v. 
National  Mech.  Bank,  1  Hughes,  101 
(1869),  (21  Fed.  Cas.  1331). 

Iowa:  Calumet  Paper  Co.  v.  Stotts 
Invest.  Co.,  96  Iowa,  147  (1895),  (64 
N.  W.  Rep.  782,  59  Am.  St.  Rep. 
362). 

Miymesota:  Baldwin  v.  Canfield, 
26  Minn.  43  (1879),  (1  N.  W.  Rep. 
261). 

New  York :  Tahnage  v.  Pell,  7 
N.  Y.  328  (1852);  Milbank  v.  New 
York,  etc.  R.  Co.,  64  How.  Pr.  20 
(1882). 

Ohio :  Contra,  Franklin  Bank  v. 
Commercial  Bank,  36  Ohio  St.  350 
(1881),  (38  Am.  Rep.  594). 

England:  Royal  Bank  of  India's 
Case,  L.  R.  4  Ch.  App.  252  (1869). 


CHAP.  XXV]   POWER  OF  CORPORATION  TO  HOLD  STOCK 


§279 


ing  corporation  to  become  the  owner  of  the  stock  pledged  as 
collateral.^ 

Corporations  acquiring  stock  as  collateral  have  all  the  rights 
of  natural  persons  to  make  the  security  available,  and,  in 
enforcing  their  rights  as  pledgees,  may  become  the  owners  of 
the  collateral.^ 

§  279.  Incidental  Power  to  acquire  Stock  in  Connection  with 
Consolidation  or  Purchase.  —  A  corporation  having  power  to 
consolidate  with  anotlier,  may,  for  the  purpose  of  effecting 
consolidation,  purchase  the  stock  of  such  other  corporation 
whenever  such  purchase  is  reasonably  necessary  as  a  means 
to  that  end.  Power  to  make  such  purchase  will  be  implied 
from  the  broader  power  to  consolidate.^  In  Louisville  Trust 
Co.  V.  Louisville,  etc.  R.  Co.*  Judge  Taft  said:  "  It  is  true 
that,    ordinarily,    one   corporation   has   no   power   to   acquire 


'  Robinson  v.  Soutliern  Nat.  Bank, 
180  U.  S.  309  (1900),  (21  Sup.  Ct. 
Rep.  383). 

^  California  Bank  v.  Kennedy,  167 
U.  S.  366  (1897),  (17  Sup.  Ct.  Rep. 
831) ;  National  Bank  v.  Case,  99  U.  S. 
628  (1878) ;  Latimer  v.  Citizens  State 
Bank,  102  Iowa,  162  (1897),  (71  N.  W. 
Rep.  225) ;  Tahnage  v.  Pell,  7  N.  Y. 
728  (1852).  In  the  Royal  Bank  of 
India's  Case,  L.  R.  4  Ch.  App.  252 
(1869),  it  was  said  that  the  bank 
having  advanced  money  upon  the 
security  of  certain  shares,  the  directors 
were  justified  in  doing  "anything 
which  was  a  prudent  and  proper  act 
for  them  to  do  with  a  view  to  obtain- 
ing the  benefit  of  such  security. " 

3  Louisville  Trust  Co.  v.  Louisville, 
etc.  R.  Co.,  75  Fed.  433  (1896)  ;  Hill  v. 
Nisbet,  100  Ind.  341  (1885) ;  Ryan  v. 
Leavenworth,  etc.  R.  Co.,  21  Kan.  365 
(1879),  Wall  V.  London,  etc.  Assets 
Corp.,  2  Ch.  469  (1898),  (67  L.  .1.  CIi. 
596,  79  L.  T.  (n.  s.)  249,  47  W.  R. 
219). 

A  land  company  empowered  to 
form  a  "temporary  or  permanent 
consolidation"  with  any  railway 
company,  in  furtherance  of  its  gen- 
eral   powers    may    purchase    all    the 


stock  of  a  railway  company,  and 
thereby  control  the  same,  if  such 
control  is  a  furtherance  of  the  general 
powers  of  the  land  company.  Tod 
V.  Kentucky  Union  Land  Co.,  57 
-Fed.  47  (1893),  affirmed  sm6  nom. 
Marbury  v.  Kentucky  Union  Land 
Co.,  62  Fed.  335  (1894),  where,  in 
deciding  the  appeal.  Judge  Taft  said  : 
"The  cases  last  cited  are  all  of  them 
stronger  cases  than  the  one  at  bar, 
for  in  all  of  them  the  courts  were 
obliged  by  construction  to  go  outside 
and  permit  the  investment  of  the 
property  of  the  company  in  a  business 
not  expressly  authorized  by  the 
charter.  Here  we  keep  within  the 
letter  of  the  charter,  for  here  the 
company  has  the  right  to  embark 
its  entire  capital  and  risk  it  all  by 
consoUdation  with  a  railway  com- 
pany in  the  business  of  building  and 
ruiming  a  railroad,  and  we  only  hold 
that,  having  such  power,  it  has  the 
right  to  do  less  than  that,  and  risk 
only  a  part  of  its  fimds  by  lending  its 
credit  to  such  a  railway  company, 
and  retaining  control  of  it  by  owning 
its  entire  stock." 

*  Louisville  Trust  Co.  v.  Louisville, 
etc.  R.  Co.,  75  Fed.  445  (1896). 

505 


§   279  INTERCORPORATE    RELATIONS  [PART    IV 

stock  ill  another,  because  it  involves  the  investment  of  the 
corporate  funds  in  an  enterprise  over  which  the  corporate 
officers  have  no  control,  and  risks  them  in  a  business  which 
is  foreign  to  that  for  which  the  stockholders  advanced  their 
money.  But  it  has  been  decided  that  a  power  to  acquire 
stock  in  another  company  may  be  implied  from  the  power  to 
consolidate  with  such  company,  as  a  proper  step  towards  con- 
solidation, or  as  necessarily  included  in  the  grant  of  so  large 
a  power." 

It  is  clear  that  for  the  purpose  of  consolidating,  —  real  and 
not  assumed,  —  power  to  purchase  stock  maybe  implied  from 
power  to  consolidate,  but  it  cannot  be  true  that  the  one  is 
"  necessarily  included  in  the  grant  of  "  the  other,  so  that  a 
corporation,  having  power  to  consolidate,  may  purchase  stock 
merely  for  the  purpose  of  obtaining  control.  As  said  l)y  the 
Supreme  Court  of  New  Jersey  in  Elkins  v.  Camden,  etc.  R. 
Co.:^  "Union  and  consolidation  of  two  railroad  companies 
are  one  thing,  and  the  purchase  by  one  company  of  the  prop- 
erty and  franchises  of  the  other,  is  another.  What  the  de- 
fendant proposes  to  do  is,  not  to  unite  and  consolidate  with 
the  other  company,  but  to  purchase  the  means  of  controlling 
the  property  and  franchises  of  that  company.  .  .  ,  The  trans- 
action under  consideration  must  be  regarded  as  an  agreement 
to  buy  stock  and  bonds.  ...  As  such,  irrespective  of  the 
assumed  ulterior  object  in  the  purchase,  it  is  not  even  sug- 
gested that  it  is  legitimate." 

Upon  similar  principles,  a  corporation  having  express  power 
to  purchase  the  property  and  franchises  of  another  corporation 
has,  as  an  incident  thereto,  power  to  purchase  the  stock  of  such 
corporation  for  the  purpose  of  thereby  acquiring  the  property 
and  franchises,  but  not  for  the  purpose  of  merely  obtaining  an 
interest  in  the  corporation  or  of  controlling  it.^ 

'  Elkins  V.  Camden,  etc.  R.  Co.,  36  stock  of  another  corporation  to  enable 

N.  J.  Eq.  12  (1882).  it  to  control  it,  and  exercise  practical 

*  It  has,  however,  been  held  that,  ownership     over     it.     Wehrhane     v. 

under  a  Tennessee  statute  authorizing  Nashville,  etc.  R.  Co.,  4  N.  Y.  St.  Rep. 

a  corporation  to  acquire,  by  purchase  541  (1886). 

or  other  lawful  contract,  and  to  hold  See  also  Dewey  v.  Toledo,  etc.  R. 

the   property   of  another   corporation  Co.,  91   Mich.  351   (1892),  (51  N.  W. 

of  a  similar  kind,  such  a  corporation  Rep.  1063). 
might   purchase   the  majority  of  the  That  power  to  lease  another  com- 

506 


CHAP.  XXV]   POWER  OF  CORPORATION  TO  HOLD  STOCK 


§281 


§  280.  Incidental  Power  to  take  Stock  upon  Reorganiza- 
tion. —  While  it  may  be  beyond  tlie  implied  powers  of  a  corpo- 
ration to  invest  its  funds  in  the  stock  of  another  corporation, 
yet  when  it  becomes  the  owner  of  bonds  of  another  company, 
which  undergoes  a  process  of  reorganization  involving  the 
issue  of  stock  in  a  new  company  in  place  of  the  bonds  of  the 
old,  the  former  corporation  has  implied  power  to  exchange 
its  bonds  for  stock.*  This  power  is  merely  a  variation  of  the 
incidental  power  to  take  stock  in  payment  or  compromise  of 
a  debt. 

§  281.  Incidental  Power  to  take  Stock  in  Exchange  for  Cor- 
porate Assets.  —  Upon  principles  already  consitlered  at  length, 
a  corporation  has  no  implied  power  to  transfer  its  entire  prop- 
erty to  another  corporation  in  exchange  for  its  shares.  The 
acquisition  of  stock,  in  such  a  manner,  is  ultra  vires  and  an 
infringement  upon  the  rights  of  dissenting  stockholders.^ 


pany's  railroad  may  include  power  to 
buy  its  shares  was  held  in  Atchison, 
etc.  R.  Co.  V.  Fletcher,  35  Kan.  247 
(1886),  (10  Pac.  Rep.  596). 

'  In  Deposit  Bank  v.  Barrett,  11 
Ky.  Law  Rep.  910  (1890),  (13  S.  W. 
Rep.  337),  the  Court  said  :  "A  bank, 
it  is  true,  has  no  power  to  invest 
its  means  in  railroads,  as  coming 
within  the  scope  of  its  powers  as  a 
corporation.  It  may  accept  mort- 
gages, stock,  or  even  purchase 
the  road  itself,  to  secure  its  debts, 
and  we  perceive  no  reason  why 
the  bank  could  not  have  accepted 
stock  in  the  new  company  in  pay- 
ment of  what  was  owing  by  the  old 
company." 

See  also  Morgan  v.  King,  27  Colo. 
539  (1900),  (63  Pac.  Rep.  416). 

-See  ante,  ch.  XI.,  subdiv.  II.: 
"  Exchange  of  Property  of  One  Corpora- 
tion for  Stock  of  Another,"  §§  118- 
122. 

In  the  preceding  part  of  this 
treatise  this  subject  is  considered  with 
especial  reference  to  the  rights  of 
dissentient  stockholders.  The  fol- 
lowing cases  are  upon  the  point  that 


a  transfer  of  corporate  assets  for  stock 
is  ultra  vires. 

In  Easun  v.  Buckeye  Brewing  Co., 
51  Fed.  156  (1892),  an  Ohio  corpo- 
ration—  a  solvent  concern  —  con- 
tracted to  sell  all  its  plant  and  assets 
and  take  in  payment  stock  and  bonds 
of  another  corporation  to  be  reor- 
ganized to  carr3'  on  the  business.  It 
was  held  that  the  contract  was  ultra 
vires  —  that  one  corporation  could 
not  become  the  owner  of  stock  of 
another  unless  expressly  authorized. 
The  Court  stated,  however,  that  an 
insolvent  corporation  might  make 
such  transfer  under  certain  circum- 
stances. In  Byrne  v.  Schuyler  Elec- 
tric Mfg.  Co.,  65  Conn.  336  (1895), 
(31  Atl.  Rep.  833,  28  L.  R.  A.  304), 
an  insolvent  manufacturing  com- 
pany, without  express  authority, 
transferred  all  its  property  to  another 
corporation,  receiving  in  return  shares 
of  the  latter  company.  This  was 
done,  not  for  the  purpose  of  winding 
up  tlie  company's  affairs  and  ilividing 
the  stock  or  its  avails  among  the 
stockholders,  but  to  keep  the  insol- 
vent corporation   alive   and   transact 

507 


282 


INTERCORPORATE    RELATIONS 


[part  IV 


■§  282.  Miscellaneous  Instances  of  Incidental  Power  to  ac- 
quire Stock.  —  It  has  been  held  that  a  corporation,  in  order 
to  borrow  money  for  use  in  its  business,  may  subscribe  for 
stock  in  a  building  and  loan  association.^  The  authorities, 
however,  are  not  uniform  as  to  the  existence  of  such  an  inci- 


business  through  the  agency  of  an- 
other corporation.  Held,  that  the 
transfer  was  ultra  vires  and  void. 

See  also  McCutcheon  v.  Merz  Cap- 
sule Co.,  71  Fed.  787  (1896),  (31 
L.  R.  A.  415);  Mackintosh  v.  Flint, 
etc.  R.  Co.,  34  Fed.  583  (1888); 
Taylor  v.  Earle,  8  Hun  (N.  Y.), 
1  (1876) ;  Boston,  etc.  R.  Co.  v.  New 
York,  etc.  R.  Co.,  13  R.  I.  260 
(1881). 

In  Holmes,  etc.  Mfg.  Co.  v.  Holmes, 
etc.  Metal  Co.,  127  N.  Y.  252  (1891), 
(27  N.  E.  Rep.  831,  24  Am.  St.  Rep. 
448) ,  the  New  York  Court  of  Appeals, 
although  deciding  the  case  upon  other 
grounds,  said  that,  all  the  stock- 
holders agreeing,  the  question  whether 
the  acquisition  of  stock  for  corporate 
property  was  ultra  vires  depended 
rather  upon  whether  it  was  necessary 
to  take  the  stock  in  the  exercise  of 
the  corporate  franchises  and  trans- 
action of  the  corporate  business  than 
upon  the  question  whether  there  was 
an  intention  to  immediately  sell  it 
and  wind  up  the  company's  affairs. 
See  also  Howe  v.  Boston  Carpet  Co., 
16  Gray  (Mass.),  493  (1860). 

In  Taylor  v.  North  Star  Gold 
Mining  Co.,  79  Cal.  285  (1889),  (21 
Pac.  Rep.  753),  where  a  mining  cor- 
poration transferred  its  mine  for 
stock  in  another  corporation,  it  was 
held  that  the  transaction  could  not 
be  collaterally  attacked  as  idtra  vires. 
See  also  Wagner  v.  Marple,  10  Tex. 
Civ.  App.  505  (1895),  (31  S.  W. 
Rep.  691). 

It  has  been  held  that  the  transfer 
of  corporate  assets  for  stock,  without 
specific  authority,  is  not  idtra  vires 
when  the  stock  is  "taken  with  a  view 
to  sell  it  again  and  not  permanently 

508 


to  hold  it."  Hodges  v.  New  England 
Screw  Co.,  1  R.  I.  347  (1850),  (53  Am. 
Dec.  624).  See  also  Byrne  v.  Schuyler 
Electric  Mfg.  Co.,  65  Conn.  336  (1895), 
(31  Atl.  Rep.  833,  28  L.  R.  A.  304) ; 
Easun  v.  Buckej-e  Brewing  Co.,  51 
Fed.  156  (1892) ;  Buford  v.  Keokuk, 
etc.  R.  Co.,  3  Mo.  App.  159  (1876); 
Miners'  Ditch  Co.  v.  Zellerbach,  37 
Cal.  543  (1869),  (90  Am.  Dec.  300). 
But  this  does  not  mean,  necessarily, 
that  such  a  transfer,  although  intra 
vires,  is  effective  against  dissenting 
stockholders.  The  conclusion  that  a 
corporation  has  power  does  not  imply 
that  a  majority  may  always  exercise 
it.  As  pointed  out  in  the  sections 
referred  to,  minority  stockholders 
have  the  right  to  insist  that  corporate 
assets  shall  be  sold,  not  exchanged, 
when  the  exigencies  of  the  corpora- 
tion require  their  disposition. 

^  Union,  etc.  Ass'n  v.  Masonic  Hall 
Ass'n,  29  N.  J.  Eq.  389  (1878) ;  State 
V.  Rohlffs  (N.  J.  1890),  19  Atl.  Rep. 
1099 ;  Norwalk  Savings  Bank  Co.  v. 
Norwalk  Metal  Spinning,  etc.  Co.,  14 
Ohio  Cir.  Ct.  Rep.  1  (1897).  Com- 
pare Wilson's  Case,  L.  R.  12  Eq.  516 
(1871);  Kadish  v.  Garden  City,  etc. 
Ass'n,  151  111.  531  (1894),  (38  N.  E. 
Rep.  536,  42  Am.  St.  Rep.  256). 

It  has  been  held  that  a  corporation 
which  becomes  a  stockholder  of,  and  a 
borrower  from,  a  building  and  loan 
association,  although  acting  bej'ond 
its  powers,  is  estopped  from  pleading 
ultra  vires  to  a  suit  to  enforce  the 
security  given.  Bowman  r.  Foster, 
etc.  Co.,  94  Fed.  592  (1899);  Blue 
Rapids  Opera  House  Co.  v.  Mercantile 
Building,  etc.  Ass'n  (Kan.  1898), 
53  Pac.  Rep.  761. 


CHAP.  XXV]   POWER  OF  CORPORATION  TO  HOLD  STOCK 


282 


dental  power.^  The  primary  object  of  a  building  association 
\i  to  enable  its  members  to  own  their  homes,  and  a  subscrip- 
tion by  a  corporation  to  such  an  association  would  seem,  upon 
principle,  to  be  ultra  vires  both  of  the  corporation  and  the 
association. 

A  manufacturing  corporation,  as  a  means  of  insuring  its 
property,  may  become  a  member  of  a  mutual  fire  insurance 
company.^  A  land  and  development  company,  having  power 
to  build  a  short  railroad  in  connection  with  the  development 
of  its  wild  lands,  may,  it  has  been  held,  subscribe  for  stock 
in  a  railroad  furnishing  access  to  such  lands.^ 

A  subscription  by  a  hotel  company  to  a  corporation  pro- 
jected for  the  purpose  of  holding  an  international  military 
encampment,  which  might  bring  large  numbers  of  strangers 
to  the  city  in  which  the  hotel  of  the  subscribing  company 
was  located  and  increase  its  business,  was  said,  by  the  Supreme 
Court  of  Illinois,  not  to  be  so  foreign  to  the  business  of  keep- 
ing a  hotel  as  to  call  for  the  application  of  the  doctrine  of 
ultra  vires.* 


'  In  Mechanics,  etc.  Bank  v.  Meri- 
den  Agency  Co.,  24  Conn.  159  (18.55), 
a  joint  stock  corporation  organized 
"to  do  a  general  insurance  agency, 
commission  and  brokerage  business" 
was  held  to  have  no  power  to  sub- 
scribe for  tiie  stock  of  a  building  and 
loan  association,  and  the  loan  was 
treated  as  if  made  to  a  stranger. 

In  German  American,  etc.  Ass'n  v. 
Droge,  14  Ind.  App.  691  (1895),  (43 
N.  E.  Rep.  475),  it  was  hekl  that  one 
buikiing  and  loan  a.ssociation  had  no 
power  to  accept  stock  of  another  such 
association  in  payment  for  its  own 
stock. 

^  St.  Paul  Trust  Co.  v.  Wampach 
Mfg.  Co.,  50  Minn.  93  (1892),  (52 
N.  W.  Rep.  274). 

» Watt's  Appeal,  78  Pa.  St.  370 
(1875). 

Compare  cases  referred  to  in  the 
text  with  the  decision  of  tlic  Supreme 
Court  of  Illinois  in  People  v.  Pullman 
Car  Co.,  175  111.  125  (1898),  (51  N.  E. 
Rep.  G64,  64  L.    R.    A.  366),  where 


it  was  held  that,  in  the  absence  of 
express  statutory  authority,  one  cor- 
poration could  not  hold  stock  in 
another,  although  the  latter,  while 
existing  as  an  independent  company, 
was  in  fact  a  mere  department  or 
agency  of  the  former. 

*  Richelieu  Hotel  Co.  v.  Interna- 
tional, etc.  Co.,  140  111.  248  (1892), 
(29  N.  E.  Rep.  1044,  33  Am.  St. 
Rep.  234).  This  decision  can  be 
justified,  if  at  all,  only  upon  the 
ground  that  the  subscription  was 
really  a  donation  which  the  corpora- 
tion might  have  made  in  the  expec- 
tation of  reaping  a  benefit  in  return. 
It  should  be  compared  with  that  of 
the  Supreme  Court  of  Georgia  in 
Military  Interstate  Ass'n  v.  Savannah, 
etc.  R.  Co.,  105  Ga.  421  (1898),  (31 
S.  E.  Rep.  200):  "We  agree  with 
the  trial  judge  in  holding  that,  under 
the  facts  alleged,  the  attempted 
subscription  of  the  defendant  to  the 
capital  stock  of  the  plaintiff  associa- 
tion was  an  act  ultra  vires  and,  there- 

509 


§  283a 


INTERCORPORATE    RELATIONS 


[part  IV 


§  283.  Presumption  of  Power  to  hold  Stock.  —  Omnia  acta 
rite  esse  praesumuntur.  The  law  presumes  that  a  corporation 
acts  within  the  scope  of  its  powers.  Corporations  are  author- 
ized to  acquire  the  stock  of  other  corporations  for  certain 
purposes,  and  under  certain  conditions.  When,  therefore, 
a  corporation  takes  stock,  it  will  be  presumed  that  it  acquires 
it  for  an  authorized  purpose.  The  burden  of  proof  is  upon  the 
person  alleging  that  the  corporation  has  exceeded  its  powers.^ 

§  283a.  An  Analogous  Power.  —  Only  the  power  of  one  cor- 
poration to  hold  stock  in  another  corporation  involves  inter- 
corporate relations.  A  full  consideration  of  corporate  stock- 
holding, however,  requires  an  examination  of  the  power  of  a 
corporation  to  acquire  and  hold  its  own  stock.  That  subject, 
therefore,  is  treated  in  the  subjoined  note.^ 

fore,    void,    although    it    is    conceiv-       corporation,  and  that  its  subscription 

was  essential  to  make  up  the  required 
amount  to  be  paid  before  condemning, 
it  was  held  that,  in  the  absence  of 
any  proof,  it  would  not  be  presumed 
against  the  act  of  the  corporation  and 
its  payment  of  the  percentage,  that  it 
acted  beyond  its  powers.  As  to 
whether  the  land  owners  could  raise 
or  try  the  question,  quaere.  Matter 
of  Rochester,  etc.  R.  Co.,  110  N.  Y. 
119  (1888),  (17  N.  E.  Rep.  678). 

Compare,  however.  Parsons  v. 
Tacoma  Smelting,  etc.  Co.  25  Wash. 
508  (1901),  (65  Pac.  Rep.  770),  where 
the  Court  said:  "As  has  been  ob- 
served, the  new  company  holds  a 
majority  of  the  stock  of  the  old  com- 
pany. Some  confusion  arises  upon 
the  investigation  into  the  right  of 
one  corporation  to  hold  stock  in  an- 
other, or  become  a  member  thereof, 
when  the  inquiry  is  made  into  pro- 
hibitions upon  the  powers  of  a  cor- 
poration, rather  than  directed  to 
the  enumeration  of  powers  conferred 
upon  it.  It  has  always  been  true 
that  corporations  have  only  such 
powers  as  are  granted  to  them  by 
the  State,  and,  when  a  corporate  act 
is  questioned,  the  affirmative  is  upon 
the  corporation  to  show  its  authority. " 

-  POWER        OF         CORPORATION        TO 


able  that,  because  of  the  'competitive 
drills,  rifle  contests,  shot-gun  tourna- 
ments, .  .  .  the  business  of  the  rail- 
way company  might  be  incidentally 
increased,  if  it  affirmatively  appeared 
that  its  line  ran  to  the  grounds  upon 
which  these  fascinating  and  diverting 
performances  were  to  take  place." 

1  Evans  v.  Bailey,  66  Cal.  112 
(1884),  (4  Pac.  Rep.  1089).  And  see 
Ryan  v.  Leavenworth,  etc.  R.  Co., 
21  Kan.  365  (1879). 

In  Burden  v.  Burden,  159  N.  Y. 
305  (1899),  (54  N.  E.  Rep.  17),  the 
New  York  Court  of  Appeals  said : 
"As  to  the  stocks  of  outside  companies 
held  by  the  corporation  there  are 
various  statutory  pro\'isions  that 
permit  this  holding  under  certain 
limitations.  The  appellant  urges  that 
there  is  no  e\idence  and  no  finding 
that  the  Burden  Iron  Company  held 
those  stocks  lawfully.  The  burden 
of  proof  was  upon  the  plaintiff  to 
show  that  the  stocks  were  illegally 
held,  and,  in  the  absence  of  such 
proof,  the  court  will  assume  that  the 
action  of  the  corporation  is  legal." 

Where,  in  proceedings  to  condemn 
land  for  railroad  purposes,  it  appeared 
that  one  of  the  subscribers  to  the 
capital  stock  of  the  petitioner  was  a 

510 


/^yi^^e^^.,^^^      •'    MtUJj^^     9^oJ^~    (a-G        ^  l(o     e^J^,     ^  /O 


CHAP.    XXV]      POWER    OF    CORPORATION    TO    HOLD    STOCK 


§  283a 


ACQUIRE  AXD         HOLD         ITS         OWN 

STOCK. 

I.    English  doctrine. 

As  alreadj'  shown,  the  English 
courts  generally  hold  that  a  private 
corporation  has  power  to  acquire  and 
hold  the  stocks  of  other  corporations 
without  express  statutory  authority, 
while  the  weight  of  American  au- 
thority supports  the  contrary  \-iew. 
(Ante,  §§  264,  265.)  On  the  other 
hand,  rather  curiously,  the  English 
courts  deny  that  a  corporation, 
without  express  authority,  has  power 
to  take  and  hold  its  own  stock,  while 
the  prevailing  American  view  is  that 
such  implied  power  exists. 

The  leading  English  case  holding 
that  corporations,  regardless  of  their 
nature,  cannot  purchase,  hold  or  deal 
in  their  own  shares  is  Trevor  v. 
Whitworth,  12  App.  Cas.  409  (1887). 
The  power  was  denied  in  this  case 
upon  these  grounds  : 

(a)  If  tJie  company  is  to  sell  the 
shares  again  the  purchase  is  a  traffick- 
ing in  shares  antl  ultra  vires. 

(6)  If  the  company  is  to  retain 
the  shares  such  a  purchase  is  an 
indirect  method  of  reducing  the 
capital  of  a  company  in  contravention 
of  Acts  specifically  prescribing  how 
capital  may  be  reduced. 

(c)  The  protection  of  creditors 
requires  that  the  capital  of  a  corpora- 
tion should  not  be,  directly  or  in- 
directly, returned  to  its  shareholders. 

Another  ground  for  denying  such 
an  implied  power  is  urged  in  Brice's 
Ultra  Vires  (2d  ed.),  134:  "There 
are  also  considerations  of  public 
policy  —  dealings  by  a  coinpany  in  its 
own  .shares  tend  indirectly  to  breaches 
of  duty  on  the  part  of  the  directors 
and  to  fraud  and  rigging  the  market 
on  the  part  both  of  tlie  corporation 
itself  and  of  its  officials." 

Other  Engli.sh  cases  stating  the 
doctrine  there  adhered  to  are  Bellerby 
V.  Rowland,  etc.  S.  S.  Co.,  2  Cli.  14 
(1902);  Hope  v.  International  Finan- 
cial Soc,  L.  R.  4  Ch.  Div.  327  (187G) ; 


Re  London,  etc.  Bank,  L.  R.  5  Ch. 
App.  444  (1870).  Compare  Re  Dron- 
field  Silkstone  Coal  Co.  L.  R.  17  Ch. 
Div.  76  (1880). 

II.  American  decisions  adopting 
English  doctrine. 

The  view  that  a  corporation,  except 
to  save  itself  from  loss,  has  no  implied 
power  to  acquire  and  hold  its  own 
shares  is  supported  by  the  following 
American  decisions : 

United  States:  Hamor  v.  Taylor- 
Rice  Engineering  Co.,  84  Fed.  392 
(1897). 

California:  Bank  of  San  Luis 
Obispo  V.  Wickersham,  99  Cal.  65.5 
(1893),  (34  Pac.  Rep.  444). 

Connecticut:  Crandall  v.  Lincoln, 
52  Conn.  73  (1884),  (52  Am.  Rep.  560). 
In  this  ca,se,  however,  such  an  implied 
power  was  recognized  to  a  limited 
extent. 

Kansas:  Abeles  v.  Cochrane,  22 
Kan.  405  (1879),  (31  Am.  Rep.  194). 

Louisiana :  Bartlett  v.  Fourton, 
115  La.  Ann.  26  (1905),  (38  So.  Rep. 
882). 

Maryland :  Maryland  Trust  Co.  v. 
National  Mechanics  Bank,  102  Md. 
608  (1906),  (63  Atl.  Rep.  70). 

Missouri:  St.  Louis  Carriage  Mfg. 
Co.  V.  Ililbert,  24  Mo.  App.  3.38  (1887). 

Neiv  Ham.pshire :  Currier  v.  Leb- 
anon Slate  Co.,  .56  N.  H.  262  (1875). 

Ohio:  Cojjpin  v.  Greenlecs,  etc. 
Co.,  38  Ohio  St.  275  (1882),  (43  Am. 
Rep.  425)  ;  State  v.  Oberlin  Building 
Ass'n,  35  Ohio  St.  258  (1879). 

Tennessee:  Cartwright  v.  Dickin- 
son, 88  Tenn.  476  (1890),  (12  S.  W. 
Rep.  1030,  17  Am.  St.  Rep.  910, 
7  L.  R.  A.  706) ;  Herring  v.  Ruskin 
Coop.  A.ss'n,  52  S.  W.  Rep.  327 
(1899). 

The  most  recent  .statement  of  the 
grounds  for  denying  the  implied 
power  of  corporations  to  acijuire 
their  own  shares  is  contained  in  Mary- 
land Trust  Co.  V.  National  Mechanics 
Bank,  102  Md.  608  (1906),  (63  Atl. 
Rep.  70):  "In  several  States  the 
power  of  a  corporation   to   purcha,se 

511 


//6  h^^ 


§  283a 


INTERCORPORATE    RELATIONS 


[part  IV 


its  own  shares  has  been  denied  and 
it  has  been  held  that,  in  the  absence 
of  express  authority,  a  corporation, 
the  amount  of  whose  capital  stock  is 
fixed  in  its  charter,  has  no  power  to 
purchase  its  own  shares,  either  for 
the  purpose  of  holding  or  selling  them, 
or  for  the  purpose  of  cancelling  and  re- 
tiring them.  The  reasons  given  for  the 
doctrine,  apart  from  any  express  or 
implied  statutory  prohibition,  are  that 
the  purchase  of  its  own  stock  by  a 
corporation  is  not  only  a  fraud  upon 
the  creditors  who  deal  with  the  cor- 
poration on  the  faith  that  the  capital 
is  paid  up,  and  a  fraud  upon  and  \dola- 
tion  of  the  contract  with  stockholders 
who  do  not  consent,  but  is  also  a  vio- 
lation of  the  charter." 

The  last  objection  noted  by  the 
Maryland  court  —  ultra  vires  —  is  the 
strongest.  If  there  were  no  creditors 
and  all  the  stockholders  agreed,  the 
objection  of  fraud  would  not  be  well 
taken.  And  if  the  shares  were  pur- 
chased and  reissued,  the  objection 
noted  in  the  English  case  and  stated 
in  several  American  decisions  that 
such  purchase  amounts  to  a  reduction 
of  the  capital,  would  be  unfounded. 

When  the  purchase  of  its  shares  is 
beyond  the  powers  of  a  corporation 
the  result  cannot  be  accomplished 
by  taking  them  in  the  name  of  a 
trustee  or  agent.  Crandall  v.  Lincoln, 
52  Conn.  73  (1884),  (52  Am.  Rep. 
560) ;  Trevor  v.  Whitworth,  12  App. 
Cas.  409  (1887). 

III.  Exceptions  to  strict  rule. 
Power  of  corporation  to  take  its  ovni 
stock  in  payment  of  debt. 

Even  the  courts  which  most 
strongly  deny  any  broad  implied 
power  in  a  corporation  to  acquire  its 
own  shares,  hold  that  it  has  such 
power  when  necessary  to  save  itself 
from  loss,  and  may  take  its  shares  as 
security  for,  or  in  payment  of  existing 
indebtedness.  As  said  in  Maryland 
Trust  Co.  V.  National  Mechanics  Bank, 
supra:  "It  is  true,  however,  that  in 
most  jurisdictions  where  the  right  of 

512 


the  corporation  to  traffic  in  its  own 
shares  is  denied,  an  exception  to  the 
rule  has  been  admitted  to  exist, 
whereby  a  corporation  has  been  al- 
lowed to  take  its  own  stock  in  satis- 
faction of  a  debt  due  it.  This  right 
is  supposed  to  rest  on  a  necessity 
which  ari.ses  in  order  to  avoid  loss." 

See  also :  Crandall  v.  Lincoln, 
52  Conn.  73  (1884),  (52  Am.  Rep.  560) ; 
Coppin  V.  Greenlees,  etc.  R.  Co.,  38 
Ohio  St.  275  (1882),  (43  Am.  Rep. 
425) ;  State  v.  Oberlin  Building,  etc. 
Ass'n,  35  Ohio  St.  258  (1879);  Barto 
V.  Nix,  15  Wash.  563  (1896)  (46  Pac. 
Rep.  1033) ;  Sa\'ings  Bank  v.  Wulfe- 
kuhler,  19  Kan.  65  (1877) ;  Barton  v. 
Port  Jackson,  etc.  Road  Co.,  17  Barb. 
397  (1854). 

For  consideration  of  pro\'isions 
of  National  Banking  Act  prohibiting 
national  banks  from  taking  their  own 
shares  except  when  necessary  to 
prevent  loss  upon  an  existing  indebt- 
edness see  post,  §  VI.  of  this  note. 

IV.    Prevailing  American  doctrine. 

Upon  principle,  it  is  difficult  to  see 
how  the  power  to  take  and  hold  its 
own  stock  —  a  power  necessarily 
producing  extraordinary  complica- 
tions —  can  be  among  the  implied 
powers  of  a  corporation.  Still,  the 
prevailing  doctrine  of  the  American 
courts  is  that  such  power  exists. 
In  fact  with  respect  to  the  weight  of 
authority  the  Supreme  Court  of 
Montana  is  not  without  justification 
in  sa\4ng  (Porter  v.  Plymouth  Gold 
Mining  Co.,  29  Mont.  357  (1903), 
(74  Pac.  Rep.  938))  :  "We  believe 
the  rule  to  be  well  .settled  in  the  United 
States  by  the  overwhelming  weight  of 
authority  and  reason  that  a  private 
corporation  may  purchase  its  own 
stock  if  the  transaction  is  fair  and  in 
good  faith ;  if  free  from  fraud,  actual 
or  constructive ;  if  the  corporation 
is  not  insolvent,  or  in  process  of  dis- 
solution ;  and  if  the  rights  of  the 
creditors  are  in  no  way  affected 
thereby." 

It  may  be  stated,  therefore,  as  the 


CHAP.  XXV]   POWER  OF  CORPORATION  TO  HOLD  STOCK 


§  283a 


American  rule,  that,  in  the  absence  of 
statutory  prohibition,  a  corporation 
has  power  to  purchase  and  hold  its 
own  stock  provided  (1)  that  it  acts 
in  good  faith  and  (2)  that  the  rights 
of  creditors  and  stockholders  are 
not  prejudiced.  And,  stated  recip- 
rocally, it  cannot  make  such  pur- 
chase to  carry  out  a  fraudulent  pur- 
pose or  when  it  will  operate  to  the 
injury  of  creditors  or  any  part  of  the 
stockliolders. 

United  States:  Burnes  v.  Burnes, 
137  Fed.  789  (1905) ;  In  re  Castle 
Braid  Co.,  145  Fed.  232  (1906)  ;  In  re 
Smith  Lumber  Co.,  132  Fed.  619 
(1904) ;  Lowe  v.  Pioneer  Threshing 
Co.,  70  Fed.  646  (1895) ;  First  National 
Bank  v.  Salem  Capital  Flour  Mills 
Co.,  39  Fed.  89  (1889).  See  also 
Johnson  County  v.  Thayer,  94  U.  S. 
631  (1876). 

Illinois:  Commercial  Nat.  Bank  v. 
Burch,  141  111.519(1892),  (33  Am.  St. 
Rep.  331);  Chicago  St.  R.  Co.  v. 
Marseilles,  84  111.  145  (1876);  Clapp 
V.  Peterson,  104  111.  26  (1882). 

Iowa:  State  v.  Higby  Co.,  130 
Iowa,  69  (1906),  (106  N.  W.  Rep.  382) ; 
Rollins  V.  Shaver  Co.,  80  Iowa,  380 
(1890),  (45  N.  W.  Rep.  1037,  20  Am. 
St.  Rep.  427) ;  Iowa  Lumber  Co.  v. 
Foster,  49  Iowa,  25  (1878),  (31  Am. 
Rep.  140). 

Massachusetts :  New  England  Trust 
Co.  V.  Abbott,  162  Mass.  148  (1894), 
(38  N.  E.  Rep.  432),  (27  L.  R.  A.  271) ; 
Dupec  V.  Boston  Water  Power  Co., 
114  Mass.  37  (1873). 

Nebraska:  Fremont  Carriage  Mfg. 
Co.  V.  Thomsen,  65  Neb.  370  (1902), 
(91  N.  W.  Rep.  376). 

New  York:  City  Bank  v.  Bruce, 
17  N.  Y.  507  (1858).  In  this  case, 
however,  the  stock  was  taken  to 
secure  a  debt.  See  also  .Joseph  v. 
Raff,  82  App.  Div.  47  (1903),  (81 
N.  Y.  Supp.  546),  affirmed  176  N.  Y. 
611  (1903),  (68  N.  E.  Rep.  1118). 

North  Carolina:  Blalock  v.  Kern- 
ers\illc  Mfg.  Co.,  110  N.  C.  99  (1892), 
<14  S.  E.  Rep.  501). 


Pennsylvania :  Dock  v.  Schlichter 
Jute  Cordage  Co.,  167  Pa.  St.  370 
(1895),  (31  Atl.  Rep.  656). 

Texas:  Howe  Grain,  etc.  Co.  v. 
Jones,  21  Tex.  Civ.  App.  198  (1899), 
(51  S.  W.  Rep.  24). 

Vermont:  State  v.  Smith,  48  Vt. 
266  (1876);  Farmers,  etc.  Bank  v. 
Champlain  Trans.  Co.,  18  Vt.  131 
(1846). 

Wisconsin :  Marvin  v.  Anderson, 
111  Wis.  387  (1901),  (87  N.  W.  Rep. 
226). 

V.  Statutory  authority  for  corpora- 
tion to  acquire  its  own  stock. 

In  several  States  general  corpora- 
tion acts  expressly  authorize  corpora- 
tions organized  thereunder  to  take 
and  hold,  under  varjing  conditions, 
their  own  stock. 

In  other  States  the  power  is  held 
to  be  included  by  implication  in  the 
grant  of  corporate  powers.  Thus 
with  respect  to  the  Corporation  Act 
of  New  Jersey  the  New  Jersey  Su- 
preme Court  in  Chapman  v.  Ironclad 
Rheostat  Co.,62  N.  J.  Law,  498  (1898), 
(41  Atl.  Rep.  690)  said:  "The  pro- 
\'isions  of  our  Corporation  Act  by 
which  (§  20)  the  shares  of  stock  in 
every  corporation  are  declared  to 
be  personal  projicrty  and  (§  1)  every 
corporation  is  vested  with  power  to 
purchase  such  personal  estate  as  the 
purposes  of  the  corporation  shall 
require,  except  (§  3)  certain  desig- 
nated sorts  of  personal  property 
which  do  not  embrace  shares  of  its 
own  capital  .stock,  coupled  with  those 
provisions  which  recognize  the  power 
of  corporations  to  own  shares  of  their 
own  capital  stock  (§§  29,  38)  plainly 
imply  a  legislative  grant  of  the 
necessary  power  in  all  cases  where  the 
purposes  of  the  corporation  require 
it."  See  also  Berger  i'.  U.  S.  Steel 
Corp'n,  63  N.  J.  Eq.  809  (1902), 
(53  .'X.tl.  Rep.  68) ;  Oliver  v.  Rahway 
Ice  Co.,  54  Atl.  Rop.  460  (N.  J.  Ch. 
1903). 

Statutory      jjower      to      purchase 
"property"  has  been  held  to  author- 

513 


§  283a 


INTERCORPORATE    RELATIONS 


[part  IV 


ize  a  corporation  to  purchase  its  own 
stock.  Iowa  Lumber  Co.  v.  Foster, 
49  Iowa,  25  (1878),  (31  Am.  Rep.  140). 
And  a  similar  conclusion  was  reached 
with  respect  to  a  charter  provision 
authorizing  a  corporation  to  purchase 
and  sell  every  kind  of  "goods, 
chattels  and  effects."  Robison  v. 
Beall,  26  Ga.  17  (1858).  Compare, 
however,  Barton  v.  Port  Jackson,  etc. 
R.  Co.,  17  Barb.  397  (1854);  Re 
London  Bank,  L.  R.  5  Ch.  App.  444 
(1870) ;  Re  Dronfield  Silkstone  Coal 
Co.,  L.  R.  17  Ch.  Div.  76  (1880). 

For  provision  in  articles  of  asso- 
ciation giving  corporation  power  to 
acquire  its  own  shares  see  Re  Sover- 
eign Life  Ass.  Co.,  3  Ch.  279  (1892). 

A  provision  in  the  charter  of  a  cor- 
poration giving  it  a  preference  in  the 
purchase  of  its  stock,  if  valid,  is  for 
the  benefit  of  the  corporation  alone 
and  not  for  the  benefit  of  the  indi- 
\idual  stockholders. 

Bartlett  v.  Fourton,  115  La.  26 
(1905),  (38  So.  Rep.  882). 

VI.  Statutory  prohibitions  against 
corporation  acquiring  its  own  stock. 

Statutes  sometimes  expressly  for- 
bid corporations  purchasing  or  hold- 
ing tlieir  own  sliares.  Thus  a  Colo- 
rado statute  (Mills'  Anno.  Stat.  §  485) 
prohibits  the  use  by  corporations  of 
any  of  their  funds  "for  the  purchase 
of  stock  in  tlieir  own  company  or 
corporation,  except  such  as  may 
be  forfeited  for  tlae  non-payment  of 
assessments  thereon."  For  construc- 
tion of  tliis  statute  see  Ophir  Consol. 
Mines  Co.  v.  Bryntesen,  143  Fed. 
829  (1906) ;  Kassler  v.  Kyle,  28  Colo. 
374  (1901),  (65   Pac.    Rep.  34). 

The  National  Banking  Act  (U.  S. 
Rev.  Stat.  §  5201)  declares  that 
"no  association  shall  make  any  loan 
or  discount  on  the  security  of  its  own 
capital  stock,  nor  be  the  purchaser 
or  holder  of  any  such  shares,  unless 
such  security  or  purchase  shall  be 
necessary  to  prevent  loss  upon  a 
debt  previously  contracted  in  good 
faith ;     and    the   stock   so    purchased 

514 


or  acquired  shall,  within  .six  months 
from  the  time  of  its  purchase,  be  sold 
or  disposed  of."  For  construction 
of  this  statute  see  National  Bank  of 
Xenia  v.  Stewart,  107  U.  S.  676 
(1882);  Bank  v.  Lanier,  11  Wall. 
(U.  S.)  369  (1870). 

The  provisions  of  the  stock  cor- 
poration law  of  New  York  tliat  a 
corporation  shall  only  pay  dividends 
from  surplus  profit  and  shall  not 
"divide,  withdraw  or  in  any  way 
pay  the  stockholders,  or  any  of  them, 
any  part  of  its  capital  stock"  does  not 
operate  as  a  prohibition  again.st  the 
purchase  by  a  corporation  of  its  own 
stock.  In  re  Castle  Braid  Co.,  145 
Fed.  224  (1906). 

VII.  Status  of  corporation  as  holder 
of  its  own  stock. 

In  the  absence  of  appropriate 
action,  the  mere  acquisition  by  a 
corporation  of  its  own  sliares  does  not 
reduce  its  capital  stock.  The  pre- 
sumption is  that  the  corporation 
intends  to  enjoy  them  as  property 
and  reissue  them. 

Vail  V.  Hamilton,  85  N.  Y.  453 
(1881) ;  Commonwealth  v.  Boston, 
etc.  R.  Co.,  142  Mass.  146  (1886); 
American  Railway-Frog  Co.  v.  Haven, 
101  Mass.  398  (1869),  (3  Am.  Rep. 
377);  State  v.  Smith,  48  Vt.  266 
(1876). 

A  corporation,  however,  having 
power  to  reduce  its  capital  stock 
may  undoubtedly  make  such  reduc- 
tion by  duly  canceUing  shares  wliich 
it  has  purchased. 

A  corporation  holding  its  own 
stock  has  no  right  to  vote  it,  and 
it  is  immaterial  whether  the  stock 
stands  in  the  name  of  the  corpora- 
tion or  of  a  trustee  in  its  behalf.  / 

American     Railway-Frog     Co.     v.    \' 
Haven,  101  Mass.  398  (1869),  (3  Am. 
Rep.     377) ;      Brewster     v.     Hartley,     ^ 
37  Cal.  15  (1869),  (99  Am.  Dec.  237) ; 
Monsseaux  v.  Urquhart,  19  La.  Ann. 
482  (1867).     In  Farwell  v.  Houghton 
Copper    Works,    8    Fed.    66    (1881),     * 
however,  it  was  said  that  such  stock 


CHAP.  XXV]   POWER  OF  CORPORATION  TO  HOLD  STOCK 


§  283a 


might  be  voted  when  all  of  the  stock 
of  the  corporation  was  represented 
at  the  meeting  and  all  consented 
that  the  treasurer  vote  it. 

VIII.  Rights  and  remedies  of 
creditors. 

As  already  shown,  even  the  courts 
which  hold  that  corporations  have 
implied  power  to  take  and  hold  their 
own  shares  attach  the  limitation 
that  the  rights  of  creditors  must  not 
be  prejudiced.  And  this  limitation 
—  upon  the  ground  that  the  capital 
stock  of  a  corporation  is  a  trust  fund 
for  its  creditors  —  has  been  applied 
in  favor  of  a  creditor  who  became 
such  subsequent  to  the  agreement 
by  the  corporation  to  purchase  its 
shares  but  before  it  was  it  sought  to 
be  carried  into  effect.  Olmstead  v. 
Vance  etc.  Co.,  196  111.  236  (1902), 
(63  N.  E.  634).  See  also  Clapp  v. 
Peterson,  104  111.  26  (1882).  But 
it  is  held  that  persons  who  did  not 


become  creditors  imtil  after  the 
actual  employment  of  the  funds  of 
the  corporation  to  purchase  its 
shares  cannot  complain.  Marvin  v. 
Anderson,  111  Wis.  387  (1901),  (87 
N.  W.  Rep.  226)  ;  Shoemaker  v. 
Washburn  Lumber  Co.,  97  Wis.  585 
(1897),  (73  N.  W.  Rep.  333). 

Where  the  funds  of  a  corporation 
have  been  wrongfully  apphed  in  the 
purchase  of  its  shares,  it  is  held  that 
a  receiver  of  the  corporation,  in  behalf 
of  creditors,  may  recover  them  back. 
Tait  V.  Pigott,  32  Wash.  344  (1903), 
(73  Pac.  Rep.  364);  Crandall  v. 
Lincoln,  52  Conn.  73  (1884),  (52  .\m. 
Rep.  560)  ;  Commercial  Nat.  Bank 
V.  Burch,  141  111.  519  (1892),  (31  N.  E. 
Rep.  420,  33  Am.  St.  Rep.  331). 
And  it  has  also  been  held  that  a 
judgment  cretlitor  may  follow  in 
ctiuity  property  transferred  in  pay- 
ment for  such  stock.  Clapp  v. 
Peterson,  104  lU.  26  (1882). 


*V-t-<_     <2.^<SULC^      <S-c^  c^     ^- —        ^t'VM/i 


^' 


515 


§   284  INTERCORPORATE   RELATIONS  [PART  IV 

CHAPTER    XXVI 

EIGHTS    AND    OBLIGATIONS    OF    CORPORATION    AS    STOCKHOLDER 

I.  Intra  Vires  Holdings 

§  284.     Status  of  Corporation  holding  Stock. 

§  285.     Nature  of  "Holding  Corporations." 

§  286.     Rights  of  Foreign  Corporation  holding  Stock. 

§  287.     Incidents  of  Ownership  attach  to  Intra  Vires  Holdings. 

§  287a.  Collateral  Trust  Bonds. 

II.  Ultra  Vires  Holdings 

§  288.     What  Incidents  of  Ownership  attach  to  Ultra  Vires  Holdings. 

§  288a.  Status  of  Parties  to  Ultra  Vires  Purchases  of  Stock. 

§  289.     Liability  for  Assessments  upon   Ultra  Vires  Holdings. 

§  290.      Ultra    Vires  Contracts  for  Purchase  of  Stock.      Who  may    question 

Validity  of  Ultra  Vires  Purchases.      Dependent  Contracts. 
§  291.     Independent  Contracts. 
§  292.     Holding  Stock  to  prevent  Competition. 
§  293.     Remedies  in  Case  of  Ultra  Vires  Stockholding. 

I.    Inti'a  Vires  Holdings 

§  284.  Status  of  Corporation  holding  Stock.  —  The  lawful 
acquisition  by  one  corporation  of  stock  in  another  —  even  to 
the  extent  of  holding  all  its  shares  —  in  no  way  affects  the 
legal  entity  of  the  two  corporations,  as  between  themselves, 
and  each  continues  its  separate  existence.^  This  is  an  appli- 
cation of  the  rule  —  necessary  in  the  relations  between  a 
corporation  and  its  stockholders,  and  between  a  corporation 
and  third  persons,  — that  a  corporation  is  an  entity  distinct 

'  In  Exchange  Bank  v.  Macon,  etc.  created  by  the  Almighty,  and  the 
Co.,  97  Ga.  5  (1895),  (25  S.  E.  Rep.  corporation  is  another  person,  created 
326),  Judge  Lumpkin  said:  "Every  by  the  law.  It  makes  no  difference 
corporation  is  a  person  —  artificial,  it  in  principle  whether  the  sole  owner 
is  true,  but  nevertheless  a  distinct  of  the  stock  of  a  corporation  is  a  man 
legal  entitj\  Neither  a  portion  nor  or  another  corporation.  The  corpora- 
all  the  natural  persons  w-ho  compose  tion  owning  such  stock  is  as  distinct 
a  corporation,  or  who  own  its  stock  from  the  corporation  whose  stock  is 
and  control  its  affairs,  are  the  corpo-  so  owned,  as  the  man  is  from  the 
ration  itself;  and  when  a  single  in-  corporation  of  which  he  is  a  member." 
dividual  composes  a  corporation,  he  See  also  Button  v.  Hoffman,  61 
is  not  himself  the  corporation.  In  Wis.  20  (1884),  (20  N.  W.  Rep.  667, 
such  a  case,   the  man  is  one  person,  50  Am.  Rep.  131). 

516 


CHAP.  XXVl]  CORPORATION   AS   STOCKHOLDER  §   285 

and  apart  from  its  stockholders.  It  is,  however,  founded 
upon  a  legal  fiction,  and  may  be  disregarded  in  the  relations 
between  a  corporation  and  the  State. 

A  corporation,  as  a  stockholder,  has  all  the  rights  of  other 
stockholders,  and  is  equally  subject  to  the  corresponding 
obligatiojis.^ 

§  285.  Nature  of  "Holding  Corporations." — In  a  broad  sense, 
any  corporation,  having  power  to  hold  stock  in  another  cor- 
poration, becomes,  upon  its  exercise,  a  "  holding  corporation." 
The  phrase  in  modern  corporation  law,  however,  is  applied 
specifically  to  corporations  organized,  under  statutes  conferring 
the  power,  for  the  express  purpose  of  acquiring  and  holding 
the  stock  of  other  corporations. 

The  essential  feature  of  a  holding  corporation  is  that  it 
holds  stock.  A  corporation  which  deals  in  stocks  is  not  a 
holding  corporation. 

The  holding  corporation  is  the  modern  device  for  uniting 
corporate  interests.  Consolidation  requires  the  formal  vote 
of  a  stipulated  majority  of  the  stockholders,  and  the  termina- 
tion of  the  existence  of  one  or  more  of  the  corporations.  In 
case  of  a  sale,  the  vendor's  interests  in  the  corporate  property 
are  parted  with  absolutely.  In  case  of  a  lease,  the  lessor  has 
no  other  interest  than  the  rental  and  remainder,  fepress 
legislative  authority  is,  moreover,  essential  in  case  of  consoli- 
dation, sale,  or  lease.  The  holding  corporation,  on  the  other 
hand,  is  a  flexible  agency.  Its  power  depends  upon  its  charter. 
The  only  prerequisite  to  the  practical  union  of  two  or  more  cor- 
porations through  a  holding  corporation,  is  the  ownership  of 
a  bare  majority  of  the  capital  stock  of  each  company.  The  only 
formality  is  the  transfer  of  the  shares  to  the  holding  corporation. 

The  fiction  of  distinct  corporate  existence  may  lead  to  the 
conclusion  that,  although  the  control  of  several  corporations 
is  held  by  a  single  company,  the  corporations  themselves  remain 
separate  and  distinct  as  before.     But  while  this  conclusion, 


'  A  county  which  aids  in  the  build-  the  same  rights  and  duties  as  a  private 

ing  of  a  railroad  and  receives  shares  corporation  or  indi\-idual. 
in   the  company  owning  it  does  not  Hind   County   v.  Natchez,   etc.   R. 

hold   them   in   a  governmental   capa-  Co.,  85  Miss.  599  (1905),  (38  So.  Rep. 

city  but  in  the  same  way  and  with  189). 

517 


§   285  INTERCORPORATE    RELATIONS  [PART   IV 

in  a  merely  technical  sense,  may  be  well  founded,  it  hardly 
warrants  the  corollary  —  convenient  in  some  cases  —  that 
two  corporations  controlled  by  a  single  stockholder  in  its  own 
interest,  are  in  reality  competing  companies  and  entirely 
independent. 

Holding  corporations  have  taken  the  pace  of  the  earlier 
"trusts"  in  the  formation  of  industrial  combinations.  They 
have  also  been  employed  to  effect  a  practical  consolidation  of 
railroad  companies.  Their  validity,  in  such  instances,  depends 
upon  considerations  of  public  policy,  comity  between  States 
and  the  apphcability  of  federal  and  State  anti-trust  statutes.* 

The  advantages  of  a  holding  corporation  may  be  enumerated 
as  follows: 

1.  It  furnishes  a  readily  available  and  effective  method  of 
controlling  several  corporations  for  a  common  object.  Its 
uses  for  this  purpose  have  already  been  indicated. 

2.  It  may  be  employed  to  perpetuate  corporate  control. 
Financiers  holding  the  control  of  corporations  may  transfer 
their  shares  to  a  holding  corporation.  Death  or  disagreement 
will  not  then  affect  the  control.  In  many  cases  also  a  holding 
corporation  may  take  the  place  of  a  voting  trust  —  an  expe- 
dient always  of  doubtful  validity. 

3.  The  holding  corporation  permits  the  capitalization  of 
controlling  stock  interests.  The  control  of  a  corporation  having 
a    capital    of   twenty    milUon   dollars  —  as   an   illustration  — 

1  Where  a  holding  corporation  —  upon  the  winding  up  of  its  affairs 
the  Northern  Securities  Company  —  —  after  ha\'ing  been  declared  an 
in  pursuance  of  a  plan  of  combination  illegal  combination  —  it  was  en- 
acquired  controlling  stock  interests  titled  to  distribute  its  holdings  pro 
in  two  corporations  —  the  Northern  rata  among  its  stockholders. 
Pacific  Railroad  Company  and  the  Harriman  v.  Northern  Securities 
Great  Northern  Railroad  Company  Co.,  197  U.  S.  244  (1904),  (25  Sup.  Ct. 
—  through  the  exchange  with  the  Rep.  493).  See  also  post,  §  397a: 
stockholders  of  such  corporations  of  "The  Northern  Securities  Case." 
its  own  shares  for  -the  shares  of  such  Wliere  a  holding  corporation  pro- 
corporations,  it  was  held  that  the  cured  a  loan  in  order  to  obtain  work- 
contract  of  exchange  was,  in  legal  ing  capital  for  the  companies  con- 
effect,  one  of  purchase  and  sale,  and  trolled  it  was  held  that  it  was  entitled 
that  the  holding  corporation  became  to  charge  such  companies  their 
the  absolute  owner  of  the  shares  which  proportionate  shares  of  the  expenses 
it  acquired  free  from  any  trust  in  incurred  in  negotiating  the  loan, 
favor  of  any  of  the  stockholders  of  Dittman  v.  Distilling  Co.,  64  N.J. 
the  controlled  corporations,  and  that  Eq.  537  (1903),  (54  Atl.  Rep.  570). 

518 


CHAP.  XXVl]  CORPORATION   OF  STOCKHOLDER  §   286 

requires  a  permanent  investment  of  more  than  ten  million 
dollars,  assuming  the  stock  worth  par.  If  a  holding  corporation 
is  formed,  with  a  capital  equal  to  the  investment,  the  shares 
may  be  transferred  to  it  and  forty-nine  per  cent  of  its  stock 
sold.  The  original  controlling  stockholders,  by  retaining 
control  of  the  holding  corporation,  retain  control  of  the  original 
corporation.  Through  the  formation  of  a  series  of  holding 
corporations,  it  is  conceivable  that  the  majority  stockholders 
of  a  holding  corporation  of  a  thousand  dollars  capital  might 
hold  the  ultimate  control  of  a  corporation  of  a  million  dollars 
capital. 

§  286.  Rights  of  Foreign  Corporation  holding  Stock.  —  The 
right  of  a  corporation  of  one  State  to  subscribe  for  or  acquire 
shares  of  stock  in  a  corporation  of  another  State  depends, 
primarily,  upon  the  extent  of  its  chartered  powers  and  the  laws 
of  the  State  of  its  incorporation.  If  it  is  without  the  power 
in  the  State  of  its  creation,  it  is  without  the  power  every- 
where. 

A  corporation,  having  power  to  subscribe  for  stock  in  other 
corporations,  may  exercise  the  power  in  another  State  if  the 
laws  and  policy  of  that  State  permit.^  In  the  absence  of  lan- 
guage clearly  including  corporations  in  a  grant  of  power  to 
become  incorporators,  a  foreign  corporation  could  not  par- 
ticipate in  the  formation  of  a  corporation,  but  its  disability 
would  arise  from  its  corporate,  and  not  from  its  foreign,  char- 
acter. Corporations  are  not  "  persons  "  who  are  authorized 
to  form  corporations;  ^  but,  in  absence  of  statutory  provision, 
there  is  no  distinction  between  residents  and  non-residents 
in  the  right  to  become  incorporators  or  subscribers.' 

'  Rogers  v.  Nashville,  etc.  R.  Co.,  said  compan}^ '  "     Compare  Merz  Cap- 

91  Fed.  312  (1898)  :   "It  is  impossible  sule  Co.  v.  United  States  Capsule  Co., 

in  the  present  state  of  Tennessee  legis-  67  Fed.  414  (1895). 

lation  to  say  that  this  charter  power  *  Factors,  etc.  Ins  Co.  v.  New  Har- 

is  either  opposed  to  any  law  or  policj'^  bor  Protection  Co.,  37  La.  Ann.  233 

of    that    State.     Upon    tlic    contrary  (188.5) ;    Denny  Hotel  Co.  v.  Schram, 

...  the       special       charter  ...  ex-  6   Wash.    134   (1893),    (32   Pac.    Rep. 

pressly    invites    such    ownership    by  1002,  36  Am.  St.  Rep.  130). 

providing    that    'any    State    or    any  '  Moxie  Nerve  Food  Co.  v.  Baum- 

citizen,    corporation    or    company    of  bach,  32  Fed.  205  (1887)  ;    Common- 

this   or   any   other   State   or   country  wealth  i\  Hemmingway,   131   Pa.  St. 

may  subscribe  for  and  hold  stock  in  G14  (1890),  (18  .Vtl.  Rep.  990);   Cen- 

519 


§  286 


INTERCORPORATE   RELATIONS 


[part   IV 


A  corporation,  having  power  to  purchase  stock,  may  pur- 
chase the  shares  of  foreign  corporations,  unless  the  laws  or  policy 
of  the  State  of  their  creation  forbid  such  acquisition.^  In 
Rogers  v.  Nashville,  etc.  R.  Co}  Judge  Lurton,  in  speaking  of 
the  right  of  a  foreign  railroad  company  to  purchase  stock  in 
a  domestic  corporation,  said:  "  Such  a  purchase  was  not 
in  excess  of  its  chartered  power,  for  the  express  power  was 
conferred  by  an  amendment  of  its  charter.  .  .  .  Comity 
requires  that  this  charter  power  shall  be  recognized  as  valid 
if  not  opposed  to  some  law  or  policy  of  the  State  creating 
the  corporation  in  which  stock  has  been  acquired."  ^ 


tral  R.  Co.  v.  Pennsylvania  R.  Co., 
31  N.  J.  Eq.  475  (1879) ;  Humphreys 
V.  Mooney,  5  Colo.  282  (1880). 

»  In  United  Lines  Tel.  Co.  v. 
Boston  Safe  Deposit,  etc.  Co.,  147 
U.  S.  447  (1892),  (13  Sup.  Ct.  Rep. 
396),  the  Supreme  Court  of  the 
United  States  said:  "The  general 
power  of  a  corporation  to  hold  prop- 
erty in  States  other  than  the  one 
which  incorporated  it  (in  the  absence 
of  statutory  prohibition  in  such 
States),  is  firmly  established.  The 
Bankers  Company  received  the  benefit 
of  the  August  agreement  through 
which  alone  it  acquired  control  of  the 
Rapid  Company ;  it  enjoyed  that 
control,  took  all  the  receipts  of  the 
Rapid  Company's  business,  profited 
by  the  good-will  which  that  company 
had  acquired,  and  thus  obtained  a 
benefit  from  the  August  agreement 
which  is  beyond  its  power  to  restore." 
See  also  Rogers  v.  Nash\'ille,  etc.  R. 
Co.,  91  Fed.  299  (1898). 

Comity  between  the  States  will  not 
authorize  a  foreign  corporation  to  ex- 
ercise, in  relation  to  stock  in  a  do- 
mestic corporation,  powers  within  the 
State  which  a  domestic  corporation 
would  not  be  permitted  to  exercise 
under  the  constitution  and  policy  of 
the  State.  Clarke  v.  Central  R.,  etc. 
Co.,  50  Fed.  338  (1892),  (15  L.  R.  A. 
683).  But  compare  later  decision 
insamecase,  62  Fed.  328(1894).     See 

520 


also  Coler  v.  Tacoma  R.,  etc.  Co.,  65 
N.  J.  Eq.  347  (1902),  (54  Atl.  Rep. 
413,  103  Am.  St.  Rep.  786). 

Under  an  early  Pennsylvania 
statute  prohibiting  any  foreign  cor- 
poration from  holding  any  real  estate 
within  the  State,  "directly  in  the 
corporate  name  or  by  or  through  any 
trustee  or  other  device  whatever," 
unless  specially  authorized  by  law, 
it  was  held  that  a  corporation  of 
another  State  could  not,  by  purchasing 
the  charter  of  a  mining  company, 
vesting  the  title  to  certain  land  in  its 
name,  and  then  taking  the  stock  of 
the  mining  company,  become  the 
owner  of  the  land ;  and  that,  in  case 
of  acquisition  by  such  means,  the 
land  was  liable  to  escheat  in  quo 
warranto  proceedings  under  another 
statute.  Commonwealth  v.  New 
York,  etc.  R.  Co.,  114  Pa.  St.  340 
(1886),  (7  Atl.  Rep.  756). 

'  Rogers  v.  Nashville,  etc.  R.  Co., 
91  Fed.  312  (1898). 

^  The  Supreme  Court  of  New 
Jersey  has  recently  rendered  a 
valuable  decision  with  respect  to 
the  rights  of  New  Jersey  corporations 
to  hold  shares  in  corporations  of  other 
States,  the  laws  or  policy  of  which  are 
opposed  to  corporate  stockholding. 
In  this  case  (Coler  v.  Tacoma  R.  etc. 
Co.,  65  N.  J.  Eq.  347  (1902),  (54  Atl. 
Rep.  413,  103  Am.  St.  Rep.  786))  the 
Court   said   of   the   power  of  a  New 


CHAP.  XX Vl] 


CORPORATION    AS   STOCKHOLDER 


§  286 


When  stock  has  been  lawfully  acquired  by  a  foreign  cor- 
poration, it  has  all  the  rights  and  powers,  and  is  subject  to 
all  the  liabilities,  of  other  stockholders.  The  legislature  can 
pass  no  law  impairing  the  obligation  of  the  contract  between 
it,  its  fellow  stockholders  and  the  corporation,  nor  can  its 
property  be  taken  without  "  due  process  of  law."  Legislation 
cannot  affect  vested  rights. 

The  rights  of  a  foreign  corporation  within  a  State  are, 
however,    only    those    which    comity    between     States     per- 


Jersey  corporation  to  hold  stock  in  a 
corporation  of  the  State  of  Wash- 
ington: "The  courts  of  Washing- 
ton have  decided  that  one  corporation 
cannot  subscribe  for,  purchase,  hold 
or  vote  upon  the  shares  of  stock 
of  another  corporation  without  legis- 
lative sanction,  and  that  the  Legis- 
lature of  the  State  has  never  sanc- 
tioned such  acts.  .  .  .  This  doctrine 
rests  altogether  on  considerations 
of  public  policy.  But  it  is  said  that 
the  policy  as  declared  extends  only 
to  domestic  corporations,  and  whether 
it  should  embrace  foreign  corpora- 
tions is  a  matter  to  be  decided  by 
the  courts  of  that  State  alone.  I 
do  not  understand  that  the  policy 
is  so  restricted.  One  of  its  objects 
is  to  prevent  one  corporation  from 
interfering  with  the  control  of  an- 
other. This  was  the  purpose  to  be 
subserved  by  the  decision  just  cited 
(Parsons  v.  Tacoma  Smelting,  etc. 
Co.,  25  Wash.  508  (1901),  (65  Pac. 
Rep.  765)),  where,  although  the  title 
of  the  stockholding  company  was  not 
assailed,  its  right  to  vote  upon  the 
stock  was  denietl.  It  is  true  that 
the  stockholding  company  was  a 
domestic  corporation,  but  the  denial 
of  its  right  to  vote  could  not  be  based 
on  that  circumstance.  The  doctrine 
that  it  was  impolitic  to  allow  a  cor- 
poration whose  chartered  powers 
were  subject  to  modification  at  the 
will  of  the  State  to  exercise  control 
over  a  domestic  corporation,  would 
seem  necessarily  to  imply  that  it  was 


deemed  equalh'  impolitic  to  permit 
such  control  by  a  corporation  whose 
chartered  powers  were  generally 
independent  of  the  State.  The  ap- 
plication of  the  restriction  to  a 
foreign  corporation  is  a  mere  interpre- 
tation, not  an  extension  of  the  doc- 
trine. But  if  it  be  an  extension,  the 
extension  is  made  bj'  the  Constitu- 
tion of  Washington,  which  provides 
(article  12,  §  7)  that  'no  corporation 
organized  outside  the  limits  of  this 
State  shall  be  allowed  to  transact 
business  within  the  State  on  more 
favorable  conditions  than  are  pre- 
scribed by  law  to  similar  corporations 
organized  under  the  laws  of  this 
State.'  The  decisions  already  cited 
are  clearly  to  this  effect :  that,  if  a 
Washington  corporation  owned  prop- 
erty immovably  fixed  in  that  State, 
it  could  not  lawfully  bargain  to  ex- 
change that  propertj'  for  stock  in 
another  Washington  corporation,  and 
after  completion  of  the  exchange 
exercise  in  the  other  corporation  all 
the  rights  and  pri\ileges  of  a  private 
stockholder.  If  this  New  Jersey 
corporation  can  lawfully  do  what 
is  thus  prohibited  to  a  Washington 
corporation,  then  the  foreign  cor- 
poration is  allowed  to  transact  busi- 
ness in  Washington  on  conditions 
more  favorable  than  those  prescribed 
for  its  domestic  corporations.  The 
Constitution  forbids  this.  On  the.se 
grounds  we  think  that  the  carrying 
out  of  the  arrangement  should  be 
enjoined." 

521 


286 


INTERCORPORATE    RELATIONS 


[part   IV 


mits.*  The  right  to  issue  stock  is  in  itself  a  franchise.  "  The 
power  to  create  corporate  capital  stock  is  a  legislative  function."^ 
The  legislature  in  granting  the  power  may  attach  such  condi- 
tions to  its  exercise,  and  to  the  transfer  of  shares,  as  it  may 
deem  expedient.^  It  may  enact  statutes,  having  a  prospective 
application,  forbidding  foreign  corporations  becoming,  directly 
or  indirectly,  stockholders  in  domestic  companies.  It  seems, 
moreover,  upon  principle,  that  while  the  legislature  cannot 
destroy  vested  rights  it  may,  under  an  unconditional  reserva- 
tion of  power  to  repeal  charters,  repeal  the  charter  of  a  domestic 
corporation  on  the  ground  that  its  stock  is  held  by  a  foreign 
corporation  and  that  it  is  controlled  in  a  manner  or  for  objects 
contrary  to  the  policy  of  the  State. ^  In  such  a  case,  the  right 
of  the  corporation,  as  stockholder,  to  its  share  of  the  assets 
would  be  preserved.^ 

The  holding  by  foreign  corporations  of  the  stock  of  domestic 
companies,  for  the  purpose  of  destroying  competition,  is  inimical 


'  In  view  of  the  fact  that  New 
Jersey  issues  most  of  the  charters 
to  corporations  for  the  transaction  of 
business  in  other  States,  an  early 
decision  as  to  the  status  of  corpora- 
tions of  other  States  in  New  Jersey 
is  interesting.  In  Hill  v.  Beach, 
12  N.  J.  Eq.  31  (1858),  it  was  said 
of  a  New  York  corporation:  "[It] 
cannot  be  recognized  by  any  court 
in  New  Jersey  as  a  legally  constituted 
corporation  nor  be  dealt  with  as  such. 
If  it  can  be,  what  need  is  there  of 
any  general  or  special  law  in  our 
State?  Indi\'iduals  desirous  of  carry- 
ing on  any  manufacturing  business, 
may  go  into  the  city  of  New  York, 
organize  under  the  general  laws  of 
that  State,  erect  all  their  manu- 
facturing establishments  here,  and, 
under  their  assumed  napie,  transact 
their  business,  not  only  free  from  all 
personal  responsibility,  but  under 
cover  of  a  corporation  not  amenable 
to  our  laws." 

2  Cooke  V.  Marshall,  191  Pa.  St. 
320  (1899),  (43  Atl.  Rep.  314),  on 
rehearing,    196    Pa.    St.    200    (1900), 

522 


(46  Atl.  Rep.  447).  See  also  Railway 
Co.  V.  Allerton,  18  Wall.  (U.  S.)  233 
(1873). 

^  In  Commonwealth  v.  Standard 
Oil  Co.,  101  Pa.  St.  119  (1882),  an 
Ohio  corporation  owned  shares  of 
stock  in  Pennsylvania  corporations, 
but  never  received  any  special  au- 
thority to  transact  business  in  Penn- 
sylvania. It  was  held  that  the  owner- 
ship of  shares  in  Pennsylvania  cor- 
porations did  not  constitute  "doing 
of  business"  in  the  commonwealth, 
so  as  to  subject  the  corporation  to 
taxation  under  an  act  requiring  for- 
eign corporations  "doing  business  in 
tliis  commonwealth"  to  pay  a  tax 
upon  their  capital  stock. 

*  For  consideration  of  general 
principle  see  Spring  Valley  Water 
Works  V.  Schlottler,  110  U.  S.  347 
(1884),  (4  Sup.  Ct.  Rep.  48);  Green- 
wood V.  Freight  Co.,  105  U.  S.  13 
(1881)  ;  Sinking  Fund  Cases,  99  U.  S. 
700  (1878) ;  Sliields  v.  Ohio,  95  U.  S. 
319  (1877). 

^  Greenwood  v.  Freight  Co.,  105 
U.  S.  19  (1881). 


CHAP.  XXVl] 


CORPORATION   AS   STOCKHOLDER 


§  287 


to  public  policy  and,  consequently,  void.  But,  in  such  a  case, 
the  unlawful  purpose  is  the  essential  objection  rather  than  the 
foreign  domicile  of  the  corporation,  however  much  the  latter 
fact,  in  the  opinion  of  the  court,  may  tend  to  aggravate  the 
evil.^ 

These  general  principles,  applicable  to  all  foreign  corpora- 
tions holding  stock  in  domestic  companies,  apply  with  equal 
force  to  foreign  holding  corporations,  distinctively  speaking. 
Holding  corporations  may  acquire  shares  in  corporations  of 
other  States  unless  the  laws  or  policy  of  those  States  forbid. 
They  cannot  be  used  as  a  cover  for  evading  those  laws,  or  for 
the  accomplishment  of  purposes  contrary  to  public  policy. - 

287.  Incidents  of  Ownership  attach  to  Intra  Vires  Holdings. 
—  A  corporation,  acting  within  the  scope  of  its  powers  in 
acquiring  the  shares  of  other  corporations,  is  entitled  to  all 
the  privileges,  and  is  subject  to  all  the  obligations,  of  a  natural 
person  as  owner. 

The  right  to  vote  is  an  incident  to  the  ownership  of  stock, 
and  whenever  a  corporation  has  power  —  express  or  implied 


'  In  Marble  Co.  v.  Harvey,  92  Tenn. 
119  (1892),  (20  S.  W.  Rep.  427,  36 
Am.  St.  Rep.  71,  18  L.  R.  A.  252), 
Judge  Lurton  said :  "The  purpose 
and  intent  in  granting  a  charter  is, 
that  the  corporation  shall  carry  on 
its  business  through  its  own  agents, 
and  not  through  the  agency  of  another 
corporation.  The  public  policy  of 
tliis  State  will  not  permit  the  con- 
trol of  one  corporation  by  another. 
Especially  is  this  true  where  a  foreign 
corporation  thus  undertakes  to  con- 
trol and  swallow  up  a  domestic  com- 
pany. Such  control  of  one  corpora- 
tion b}'  another  in  a  like  business  is 
unlawful,  as  tending  to  monopoly. 
The  result  is,  that  this  purchase  of 
shares  for  the  express  object  of  con- 
trolUng  and  managing  another  cor- 
poration was  ultra  trires,  and,  there- 
fore, unlawful  and  void." 

A  foreign  corporation  coming  into 
a  State  is  subject  to  the  laws  govern- 
ing domestic  corporations  and  can 
exercise  no  greater  power  to  purchase 


the  control  of  other  corporations  than 
is  conferred  upon  domestic  corpora- 
tions. And  this  is  especially  true 
where  the  purchase  is  made  for  the 
purpose  of  stifling  competition. 

Dunbar  v.  American  Teleplione, 
etc.  Co.,  224  111.  25  (1906),  (79  N.  E. 
Rep.  423). 

2  In  Empire  Mills  v.  Alston  Gro- 
cery Co.  (Tex.  App.  1891),  15  S.  W. 
Rep.  506,  the  Court  said:  "No  rule 
of  comity  will  allow  one  State  to 
charter  corporations  to  operate  in 
another  State,  unless  there  is  a  willing- 
ness on  the  part  of  the  foreign  State 
that  it  should  do  so.  To  hold  other- 
wise would  be  to  say  that  the  right 
of  one  State,  aided  by  comitj',  is 
superior  to  the  sovereign  will  of  the 
other.  This  involves  the  surrender 
of  sovereignty  to  a  rule  of  comity 
and  to  a  matter  of  international 
etiquette,  which  no  independent 
nationality  should  for  a  moment 
think  of  doing." 

523 


§  287 


INTERCORPORATE    RELATIONS 


[part    IV 


—  to  take  title  to  shares  of  stock,  it  has  the  right,  so  long  as 
it  retains  them,  to  exercise  the  voting  power,  — through  an 
authorized  agent,  — upon  which  their  value  may  depend.^ 
All  dividends  declared  upon  the  shares  it  holds  belong  to  it, 
and  it  is  entitled  to  have  the  stock  transferred  to  its  name  upon 
the  books  of  the  corporation  in  which  it  is  held.^ 

A  corporation  is  liable  for  calls  upon  its  authorized  sub- 
scription contracts;   and,  as  a  stockholder,  is  subject  to  all  the 


'  Rogers  v.  Nashville,  etc.  R.  Co., 
91  Fed.  312  (1898) ;  Matthews  v.  Mur- 
chison,  17  Fed.  760  (1883) ;  Davis  v. 
United  States  Electric  Power,  etc. 
Co.,  77  Md.  35  (1893),  (25  Atl.  Rep. 
982) ;  Market  St.  R.  Co.  v.  Hellman, 
109  Cal.  571  (1895),  (42  Pac.  Rep. 
225) ;  State  v.  Rohlffs  (N.  J.  1890), 
19  Atl.  Rep.  1099;  Oelberman  v. 
New  York,  etc.  R.  Co.,  77  Hun  (N. 
Y.),  332  (1894),  (29  N.  Y.  Supp.  545). 
See  also  MacGinnis  v.  Boston,  etc. 
Mining  Co.,  29  Mont  428  (1904), 
(75  Pac.  Rep.  89).  That  a  7numcipal 
corporation,  holding  stock,  may  vote 
upon  it  as  any  other  stockholder, 
see  Hancock  v.  Louisville,  etc.  R.  Co., 
145  U.  S.  409  (1892),  (12  Sup.  Ct. 
Rep.  969). 

A  corporation  holding  stock  in 
another  corporation  has  the  right  — 
it  is  held  —  to  vote  such  stock  in 
favor  of  the  dissolution  of  the  cor- 
poration notwithstanding  it  thereby 
obtains  the  termination  of  a  contract 
favorable  to  such  corporation  but 
burdensome  to  itself. 

WindmuUer  v.  Standard  Distilling, 
etc.  Co.,  114  Fed  491  (1902),  115  Fed. 
748  (1902).  (These  two  cases  are 
between  the  same  parties  but  in 
different  courts.) 

A  corporation  owning  stock  in 
another  corporation  is  an  indispen- 
sable party  to  a  suit  to  enjoin  the 
voting  of  such  stock  at  a  stockholders' 
meeting. 

Taylor  v.  Southern  Pac.  Co., 
122  Fed.  147  (1903). 

In  State  v.  Newman,  51  La.  Ann. 

524 


833  (1899),  (25  So.  Rep.  408,  72  Am. 
St.  Rep.  476),  it  was  held  that,  even 
if  a  corporation  had  implied  power 
to  acquire  and  hold  stock  in  another 
corporation,  its  right  was  that  of 
"imperfect  ownership"  —  including 
the  right  to  enjoy  and  dispose  of  the 
shares,  but  not  the  right  to  vote 
them. 

The  phrase  "imperfect  ownership" 
aptly  describes  the  rights  of  a  cor- 
poration in  respect  of  its  ultra  vires 
holdings,  but  when  a  corporation  has 
power  —  express  or  implied  —  to  hold 
stock,  it  necessarily  must  have  the 
right  to  exercise  the  prixdlege  which 
may  give  the  stock  its  greatest  value. 

For  case  where  right  of  corporation 
to  hold  stock  was  not  questioned  but 
its  right  to  vote  it  was  denied,  see 
Parsons  v.  Tacoma  Smelting,  etc. 
Co.  25.  Wash.  508  (1901),  (65  Pac. 
Rep.  765). 

Where  a  corporation  having  au- 
thority to  acquire  stocks  purchased 
shares  of  another  corporation  and, 
as  a  part  of  the  consideration, 
guaranteed  certain  di\'idends  upon 
the  outstanding  stock  of  the  latter 
company,  it  was  held  that  its  action 
was  not  ultra  vires  as  constituting 
a  guaranty  of  dividends  whether 
earned  or  not,  but  would  be  enforced 
as  an  agreement  to  make  stated  paj'- 
ments  at  stated  periods  on  account 
of  the  purchase  price. 

WindmuUer  v.  Standard  Distilling, 
etc.  Co.,  94  N.  Y.  Supp.    52    (1905). 

2  Royal  Bank  of  India's  Case,  L.  R. 
4  Ch.  App.  252  (1869). 


CHAP.  XXVl] 


CORPORATION   AS   STOCKHOLDER 


§  287a 


obligations  of  other  stockholders,  and  is  bound  to  pay  all 
assessments  lawfully  made  against  its  intra  vires  holdings  of 
shares.^  Its  hability  as  a  stockholder,  for  assessments  for  the 
benefit  of  creditors,  is  not  afiected  by  the  fact  that  while  it 
appears  upon  the  stock  books  as  owner  it  is,  in  reality,  only  a 
pledgee.^  Nor  will  a  merely  colorable  transfer  relieve  it  from 
responsibility.^ 

§  287a.  Collateral  Trust  Bonds.  —  A  corporation  owning 
shares  in  other  corporations  has,  manifestly,  power  to  pledge 
them  as  security  for  its  loans.  In  borrowing  money  upon  such 
stock  as  collateral  it  will,  in  ordinary  transactions,  follow  the 
same  course  as  an  individual. 

But  a  corporation,  having  invested  large  sums  of  money  in 
the  purchase  of  interests  in  other  corporations,  is  ordinarily 
desirous  of  using  the  stock  purchased  as  security  for  bond  issues. 
Such  transactions  cannot  be  carried  out  according  to  the 
ordinary  course  of  business.  The  stock  cannot  be  pledged  to 
the  individual  bondholder.  The  funds  cannot  be  obtained 
cotemporaneously  with  the  deposit  of  the  collateral.     A  trustee 


»  National  Bank  v.  Case,  99  U.  S. 
628  (1878) ;  Calumet  Paper  Co.  v. 
Stotts  Invest.  Co.,  96  Iowa,  147 
(1895),  (64  N.  W.  Rep.  782,  59  Am. 
St.  Rep.  362) ;  Smith  v.  Newark,  etc. 
R.  Co.,  8  Ohio  Cir.  Ct.  Rep.  583 
(1894) ;  Royal  Bank  of  India's  Case, 
L.  R.  4  Ch.  App.  252  (1869). 

2  National  Bank  v.  Case,  99  U.  S. 
631  (1878);  "  It  is  thoroughly  estab- 
lished that  one  to  whom  stock  has 
been  transferred  in  pledge,  or  as  collat- 
eral security  for  money  loaned,  and 
who  appears  on  the  books  of  the  corpo- 
ration as  the  owner  of  the  stock,  is 
liable  as  a  stockholder  for  the  benefit 
of  creditors."  See  also  Pauly  v.  State 
Loan,  etc.  Co.,  165  U.  S.  606  (1897). 
(17  Sup.  Ct.  Rep.  465);  Pullman  v. 
Upton,  96  U.  S.  328(1877);  National 
Foundrj',  etc.  Works  v.  Oconto  Water 
Co.,  68  Fed.  1006  (1895) ;  Ball  Electric 
Light  Co.  V.  Child,  68  Conn.  522  (1897). 
(37  Atl.  Rep.  391) ;  Calumet  Paper  Co. 
V.    Stotts   Invest.    Co.,   96   Iowa,    147 


(1895),  (64  N.  W.  Rep.  782,  59  .\m. 
St.  Rep.  362) ;  Royal  Bank  of  India's 
Case,  L.  R.  4  Ch.  App.  252  (1869). 

A  pledgee  is  not,  however,  person- 
ally liable  as  a  stockholder  when  the 
stocks  stands  in  his  name  "  as  pledgee," 
lor  where  he  is  registered  as  holding  it 
as  collateral.  Pauly  v.  State  Loan,  etc. 
Co.,  165  U.  S.  606  (1897),  (17  Sup.  Ct. 
Rep.  465) ;  Bcal  v.  Essex  Savings 
Bank,  67  Fed.  816  (1895). 

3  National  Bank  v.  Case  99  U.  S. 
628  (1878);  Bowden  v.  .Joiin.son,  107. 
U.  S.  251  (1882),  (2  Sup.  Ct.  Rep. 
246). 

But  the  pledgee,  for  the  avowed 
purpose  of  avoiding  individual  lia- 
bility, may  take  the  securitj',  in  the 
first  place,  in  the  name  of  an  irre- 
sponsible trustee.  Anderson  v.  Phil- 
adelphia Warehou.se  Co.,  Ill  U.  S. 
479  (1883),  (4  Sup.  Ct.  Rep.  525); 
also  Pauly  v.  State  Loan,  etc.  Co., 
165  U.  S.  606  (1897),  (17  Sup.  Ct. 
Rep.  465). 

525 


§  287a 


INTERCORPORATE   RELATIONS 


[part    IV 


must  act  in  behalf  of  all  the  bondholders.  The  securities  must 
be  pledged  before  the  bonds  are  certified  to,  and  this  must 
precede  their  issue  and  sale. 

The  method  generally  adopted,  therefore,  in  case  of  such 
an  issue  of  bonds  is  to  execute  a  deed  of  trust  conveying 
to  a  trustee  —  usually  a  trust  company  —  the  shares  of  stock 
to  be  held  by  it  in  trust  for  the  benefit  of  the  holders  of  the 
bonds,  and  prescribing  the  conditions  under  which  the  col- 
lateral is  to  be  held,  the  procedure  in  case  of  default  of  payment 
and,  generally,  the  rights  and  obligations  of  the  pledgor  cor- 
poration, the  trustee  and  the  bondholders.  Upon  the  execution 
of  the  deed  of  trust  the  certificates  for  the  stock  pledged  as 
collateral  are  delivered  to  the  trustee,  which  may  transfer  them 
to  its  own  name.  The  deed  of  trust  may  or  may  not  contain 
an  after-acquired  property  clause.^ 


'  The  following  extract  from  the 
opinion  of  Judge  Lacombe  in  Park 
V.  New  York,  etc.  R.  Co.,  64  Fed.  192 
(1894),  in  addition  to  the  particular 
point  decided,  illustrates  the  nature 
and  security  of  collateral  trust  bonds 
—  the  bonds  in  question  being  a  com- 
paratively early  issue  of  bonds  of 
that  character  : 

"The  Collateral  Trust  Bonds.  In 
1882  the  defendant  railroad,  being 
the  owner  of  stocks  and  bonds  of 
various  corporations,  pledged  them 
to  the  United  States  Trust  Company 
as  security  for  a  series  of  bonds  issued 
by  defendant.  The  various  stocks 
and  bonds  thus  pledged  were  spe- 
cifically enumerated  in  the  indenture 
of  mortgage,  and  they  were  delivered 
to  the  United  States  Trust  Company, 
the  railroad  reserving  the  power  of 
voting  on  such  stocks  and  bonds,  so 
as  not  to  lose  its  control  of  the  sub- 
sidiary corporations.  In  case  of  six 
months'  default  in  payment  of  in- 
terest on  the  collateral  trust  bonds, 
the  United  States  Trust  Company 
was  authorized  to  sell  the  pledged 
securities  at  public  auction  upon  three 
months'  notice.  The  amount  of 
collateral  trust  bonds  outstanding  is 

526 


$3,344,000.  The  par  value  of  the 
stocks  and  bonds  pledged  for  their 
payment  is  about  $8,000,000,  and 
their  actual  value  not  less  than  three 
times  the  amount  of  collateral  trust 
bonds  outstanding.  The  pledged 
stocks  and  bonds  are  pavdng  interest, 
annually,  in  excess  of  the  interest 
due  on  the  trust  bonds  by  over 
•$50,000.  It  appears,  moreover,  that 
in  some  instances  such  pledged  stocks 
secure  to  their  owner  the  control  of 
propert;/  which  is,  and  has  been  for 
many  years,  an  integral  part  of  the 
Erie  Railroad  sj^stem.  The  anthra- 
cite coal  lands  and  the  bituminous 
coal  lands  are  owned  by  corporations, 
the  entire  capital  stock  of  which  is 
included  among  the  securities  thus 
pledged.  It  is  plain  that  if,  upon 
default  in  the  payment  of  the  interest 
falling  due  on  the  collateral  trust 
bonds,  the  trustee  should,  as  the 
mortgage  provides,  declare  the  whole 
principal  due,  and  sell  the  pledged 
securities  in  the  open  market  to  the 
highest  bidder,  the  value  of  the  prop- 
erty which  was  placed  in  the  hands 
of  these  receivers  to  be  conserved  for 
the  benefit  of  all  the  creditors  would 
be    most    seriously    impaired.     Cer- 


CHAP.  XXVl]  CORPORATION   AS   STOCKHOLDER  §   287a 

Bonds  of  this  character  are  denominated  collateral  trust 
bonds  and  the  deed  of  trust  a  collateral  trust  mortgage,  and 
their  use  has  developed  with  the  development  of  corporate 
stockholding.  But  the  development  has  been  so  recent  that 
the  decided  cases  illustrate  comparatively  few  of  the  legal 
questions  which  may  be  expected  to  arise  in  connection  with 
such  bonds  and  mortgages. 

Where,  according  to  the  provisions  of  the  deed  of  trust, 
the  pledgor  corporation  reserves  to  itself  all  the  rights,  powers 
and  privileges  appertaining  to  the  ownership  of  the  shares 
pledged,  including  the  right  to  vote  them,  it  may  require  from 
the  trustee  a  proxy  for  voting  the  stock  if  transferred  to  its  name. 
And  it  may  even  require  svich  a  proxy  to  vote  for  the  merger 
of  the  corporation  in  which  the  stock  is  held  with  another  cor- 
poration, although  its  effect  will  be  to  compel  the  trustee  to 
receive  back,  in  place  of  the  stock  originally  pledged,  shares 
in  the  consolidated  company.' 

Where  a  deed  of  trust  provides  that  the  voting  power  of  the 
shares  pledged  shall,  after  default,  be  exercised  by  the  trustee 
—  the  pledgor  corporation  having  such  right  until  such  time  — 
the  trustee  is  not  bound  to  vote  according  to  the  wishes  of  a 
majority  of  the  bondholders  but  should  exercise  its  judgment 
and  discretion  for  the  benefit  of  all  the  bondholders.^ 

A  trustee  of  a  collateral  trust  mortgage  containing  an  after- 
acquired  property  clause  is  chargeable  with  notice  of  the  lien 
attaching  to  such  property  when  acquired,  and  such  lien  is  su- 
perior to  the  lien  of  a  subsequent  pledge  thereof  to  the  trustee 
in  its  individual  capacity.  Thus,  where  a  street  railway  cor- 
poration executed  a  deed  of  trust  containing  such  a  clause  and 
the  trustee  certified  to  certain  bonds  to  be  used  for  purchasing 
the  assets  of  a  connecting  road  which,  after  their  purchase, 
were  transferred  to  a  new  corporation,  all  the  stock  of  which 
was  owned  by  the  pledgor  corporation  which  likewise  had 
possession  of  the  stock  certificates,  it  was  held  that  such  stock 
in  equity  was  subject  to  the  deed  of  trust  and  that  the  trustee 

tainly  such  a  catastrophe  should  not  sylvania  etc.Co.   20.5  Pa.  219.  (1903), 

be  allowed  to  overtake  the  property  (54  Atl.  Rep.  78.3). 
while  in  the  hands  of  the  court."  *  Toler  v.  East  Tennessee,  etc.    R. 

•  Pennsylvania    R.    Co.    v.    Penn-  Co.,  67  Fed.  168  (1894). 

527 


§   287a  INTERCORPORATE    RELATIONS  [PART    IV 

did  not  secure  a  superior  lien  thereon  by  accepting  a  subse- 
quent pledge  thereof  to  secure  a  loan  made  by  it  individually 
to  the  pledgor  corporation.* 

Where  a  trustee  received  under  a  deed  of  trust  certain  shares 
of  stock  and  subsequently  agreed  with  the  pledgor  corporation 
that, upon  the  execution  of  certain  mortgages,  it  would  surrender 
the  pledged  stock,  but  although  the  mortgages  were  executed 
failed  to  transfer  back  the  stock,  it  was  held  that  the  security 
of  the  deed  of  trust  upon  such  stock  was  unimpaired.^ 

The  acceptance  by  a  trustee  of  a  deed  of  trust  covering  shares 
of  stock  in  no  way  prevents  it  from  acting  as  trustee  of  a  mort- 
gage of  the  corporation  in  which  such  stock  is  held,  notwith- 
standing that  the  foreclosure  of  the  mortgage  may  render  the 
stock  valueless.^ 

A  holder  of  bonds  secured  by  a  collateral  trust  mortgage 
cannot  maintain  a  bill  in  equity  for  the  removal  of  the  trustee 
upon  the  ground  of  the  failure  of  the  directors  of  the  corpora- 
tions in  which  the  pledged  stock  is  held  to  perform  the  cove- 
nants contained  in  the  deed  of  trust,  in  the  absence  of  aver- 
ments of  knowledge  of  such  failure  on  the  part  of  the  trustee 
and  of  a  request  for  action  by  it.  Moreover,  such  a  suit  cannot 
be  maintained  without  sufficient  reason  being  shown  for  dis- 

^  Guaranty  Trust   Co.   v.   Atlantic  both  companies  were  the  same.     The 

Coast    Electric    Co.,     138    Fed.     517  former    company    executed    a    mort- 

(1905).  gage  upon  all  its  property  including 

That  a  mortgage  containing  an  the  stock  in  the  latter  company  to  a 
after-acquired  property  clause  covers  trust  companj^  as  trustee  to  secure 
stock  in  another  corporation  sub-  an  issue  of  bonds.  Subsequently 
sequently  purchased  by  the  mort-  the  second  company  executed  a  mort- 
gagor, see  Williamson  v.  New  Jersey  gage  upon  its  property  to  the  same 
Southern  R.  Co.,  26  N.  J.  Eq.  398  trustee  to  secure  a  bond  issue  — •  the 
(1875).  bonds  being  turned  over  to  the  first 

See  also  Central  Trust  Co.  v.  Knee-  company  which  used  them  to  secure 

land,  138  U.  S.  414  (1890).  an  indebtedness  of  its  own.     The  first 

^  Blake   v.    Domestic   Mfg.   Co.,  38  company    defaulted   in   its   mortgage 

Atl.  Rep.  242  (N.  J.  Ch.  1897).  and  the  property  and  stock  were  sold 

^  Gasquet    v.    Fidelity  Trust,   etc.  for  less  than  the  amount  of  the  bonds. 

Co.,  75  Fed.  343  (1896).  Some   of   the    bondholders   alleged    a 

In  this  case  a  street  railway  com-  breach  of  trust  upon  the  part  of  the 

pany  owned  nearly  all  the  stock  of  trustee    in    accepting    the    mortgage 

another  street  railway  companj^  oper-  from    the    second    company    but    the 

ating  in  the  same  city,  which  companj'  court    held    that    the    action    of    the 

was  also  indebted  to  the  former  com-  trustee  was  entirely  proper, 
pany.     The  officers  and  directors  of 

528 


CHAP.  XXVl]  CORPORATION   AS   STOCKHOLDER  §   288 

regarding  the  provisions  of  the  deed  of  trust  regarding  the 
removal  of  a  trustee  and  the  appointment  of  another.^ 

A  trustee  of  a  collateral  trust  mortgage  is  a  proper  party 
to  a  suit  to  wind  up  the  pledgor  corporation  as  insolvent  and 
may  intervene  in  such  a  suit  for  the  protection  of  its  trust 
when  it  has  been  ordered  to  turn  over  the  securities  pledged 
in  the  deed  of  trust  to  a  receiver  of  the  pledgor  corporation. 
And  its  right  to  take  such  step  is  not  affected  by  the  fact  that 
there  has  beeri  no  default  upon  the  bonds  secured  by  the  trust 
deed.^ 

Where  a  collateral  trust  mortgage  provides  that  after  default 
in  an  interest  payment  the  trustee  may,  and  upon  the  request 
of  the  holders  of  a  majority  of  the  bonds  shall,  declare  the  prin- 
cipal due  and  payable,  and  may,  and  upon  like  request  shall, 
proceed  to  sell  the  pledged  stock  at  public  auction  but  that 
the  bondholders  may  revoke  their  requests  in  which  case  the 
trustee  shall  not  make  such  sale,  it  is  held  that  the  provisions 
apply  only  to  the  exercise  of  the  power  of  summary  sale  con- 
tained in  the  collateral  trust  mortgage,  and  that  a  suit  to  fore- 
close such  mortgage  for  default  in  interest  may  be  maintained 
in  opposition  to  the  majority  of  the  bondholders.^ 

II.      Ultra  Vires  Holdings 

§  288.  What  Incidents  of  Ownership  attach  to  Ultra  Vires 
Holdings.  —  When  a  corporation,  without  authority,  pur- 
chases the  shares  of  another  corporation,  the  law  recognizes 
a  limited  right  of  ownership  therein.     Otherwise,  the  purchase 

•  Dillaway  v.  Boston  Gas  Light  and  that  the  complainants  were 
Co.,  174  Mass.  80  (1899),  (54  N.  E.  bringing  the  suit  in  the  interests  of 
Rep.  359).  a   rival  railroad  company   which   de- 

2  Miles  V.  New  South  Building,  etc.  sired  to  purchase  the  stock  at  the 
Ass'n,  99  Fed.  4  (1900).  depressed  price,  presented  no  defence 

*  Toler  V.   East  Tennessee,  etc.  R.       to  the  foreclosure. 

Co.,  67  Fed.  169  (1894).  F'or     consideration     of     collateral 

In  this  case  it  was  also  held  that  trust  bonds  issued  by  a  hokiing  cor- 

the  answer  of  a  majority  of  the  bond-  poration    to    obtain    working    capital 

holders  on   the   foreclosure  suit   that  for  the  corporations  in  which  it  held 

the  value  of  the   pledged  stock  was  controlling   interests,    and   the   rights 

abnormally     dcpresseil ;      that     there  and    obligations    of   the    several    cor- 

was  good   ground   for  aiitici|)ating  a  porations    see    Dittman    v.    Distilling 

considerable  enhancement  in  its  value,  Co.  (N.  J.  Ch.  1903),  54  Atl.  Hep.  570. 

529 


§   288a  INTERCORPORATE    RELATIONS  [PART    IV 

would  involve  a  forfeiture  of  the  consideration  paid  for  the 
stock.  A  corporation  is  entitled  to  receive  the  dividends  de- 
clared upon  its  ultra  vires  holdings,  and  has  a  right  to  sell  and 
dispose  of  such  shares.* 

Such  a  corporation,  however,  is  not  entitled  to  participate 
in  the  control  and  management  of  the  corporation  in  which 
it  so  acquires  stock.  It  is  not  entitled  to  vote,  and  other  stock- 
holders may  enjoin  it  from  voting  should  it  attempt  to  do  so.^ 

It  has  also  been  held  that  a  corporation  acquiring,  without 
authority,  stock  in  another  corporation  cannot  compel  the 
latter  corporation  to  transfer  the  shares  upon  the  stock  books 
so  as  to  give  it  the  status  and  privileges  of  a  stockholder  of 
record.^ 

§  288a.  Status  of  Parties  to  Ultra  Vires  Purchases  of  Stock. 
—  It  has  been  said  in  opinions  of  the  highest  authority  that  a 
transfer  of  stock  to  a  corporation  which  it  has  no  power  to  take 
is  an  absolute  nullity  and  wholly  void.  Upon  this  ground,  it 
is  held  that  such  a  transfer  affects  in  no  way  the  status  of  the 
transferrer  of  the  stock,  and  that  he  remains  subject  to  all 
liabilities  attaching  to  stockholders  after  the  transfer  as  before.* 

*  Milbank    v.    New    York,    etc.    R.  other  railroad  company  ha^dng  voting 

Co.,  64  How.  Pr.  20  (1882) ;    State  v.  power,  cannot  vote  them. 
Newman,    51    La.    Ann.    833    (1899),  ^  FrankHn     Bank    v.     Commercial 

(25   So.   Rep.   408,   72  Am.   St.   Rep.  Bank,  36  Ohio  St.  350  (1881),  (38  Am. 

476).  Rep.    594).     While    this    decision    is 

Where    one    corporation    acquires  undoubtedly  correct  upon  the  point 

stock  in   another   company,   and   the  stated,  it  is  manifestly  erroneous  in 

contract  is  fully  executed,  the  latter  the  dictum  that  the  taking  of  shares 

cannot  set  up  the  defence  of  xdtra  vires  by  way  of  pledge  is  ultra  inres.     See 

to  an  action  for  the  recovery  of  di'vi-  ante,    §    278:     "Incidental   Poicer   to 

dends.     Bigbee,    etc.   Packet    Co.    v.  take  Stock  as  Collateral." 
Moore,   121   Ala.  379  (1898),   (25  So.  *  In  Anglo-American  Land,  etc.  Co. 

Rep.  602).  V.  Lombard,  132  Fed.  738  (1904),  the 

^  Milbank  v.  New  York,  etc.  R.  Co.,  Court  said  :  "Defendants'  transfer  of 
64  How.  Pr.  20  (1882) ;  State  v.  New-  their  stock  in  the  Kansas  Company 
man,  51  La.  Ann.  833  (1899),  (25  So.  was  a  nuUitj'.  Nothing  done  in  pur- 
Rep.  408,  72  Am.  St.  Rep.  476).  See  suance  of  the  transfer,  no  acquies- 
also  Parsons  v.  Tacoma  Smelting,  etc.  cence  therein,  and  no  receipt  of  bene- 
Co.,  25  Wash.  508  (1901),  (65  Pac.  fits  therefrom,  could  infuse  validity 
Rep.    765).  into  that  act,  or  prevent  the  success- 

In  State  v.  Mc Daniel,  22  Ohio  St.  ful     assertion     of     its    nullity.     The 

354    (1872),  there   is   a  dictum  to  the  claimed  estoppel  is  not  tenable.     The 

effect  that  a  railroad  company  acquir-  liability  for  the  corporate  debts,  with 

ing,   without  authority,   bonds  of  an-  which    the    holders    of    the    Kansas 

530 


CHAP.  XXVlJ  CORPORATION   AS   STOCKHOLDER  §    288a 

And  upon  the  same  ground,  as  we  shall  see,  it  is  held  that  the 
transferee  corporation  is  not  liable  for  assessments  upon  its 
ultra  vires  holdings. 

But  is  it  believed  that  these  opinions  go  too  far  —  that  the 
same  conclusions  may  be  reached  upon  narrowei-  grounds. 
The  ultra  vires  acquisition  of  stock  by  a  corporation  is  not  a 
nulHty.  As  already  shown,  the  law  recognizes  a  limited  right 
of  ownership  in  such  stock  on  the  part  of  the  corporation.  The 
corporation  may  sell  the  stock  and  pass  good  title  to  the  pur- 
chaser. The  ultra  vires  act  in  making  the  purchase  does  not 
affect  the  legality  of  the  sale.  None  of  these  results  could  follow 
if  the  acquisition  by  the  corporation  were  wholly  void.  The 
corporation  could  take  nothing  by  that  which  was  a  nullity. 

The  correct  rule  would  seem  to  be  that  an  ultra  vires  purchase 
of  stock  is  a  nullity  only  in  so  far  as  relates  to  the  status  of  the 
parties  to  the  transaction  as  stockholders  of  the  corporation 
in  which  the  stock  is  held.  The  stockholders  of  a  corporation 
—  entitled  to  the  privileges  and  sul^ject  to  the  obligations  at- 
taching to  stockholders  —  can  only  be  persons  or  corporations 
capable  of  holding  the  stock.  When  a  corporation,  acting 
beyond  its  powers,  takes  stock  it  acquires  a  limited  ownership 
therein  but  does  not  become  a  stockholder  and  is  not  subject 
to  a  stockholder's  Uabilities.  The  vendor,  on  the  other  hand, 
although  he  has  parted  with  the  practical  ownership  of  the 
stock  continues  liable  as  stockholder  because  no  one  compe- 
tent to  occupy  that  position  has  succeeded  him.  But  when  the 
corporation  has  sold  its  idtra  vires  holdings  to  a  person  or  cor- 
poration authorized  to  take  and  hold  them,  the  latter  becomes 


Company's  stock  were  charged,  under  A  subscriber  for  stock  in  a  corpora- 
the  Constitution  and  laws  of  Kansas,  tion  which  is  not  authorized  to  hold 
was  not  extinguished  or  discharged  by  stock  in  other  corporations,  who 
the  transfer.  Tiiat  liability  did  not  turns  over  in  payment  of  his  sub- 
pass  to  the  Missouri  Company,  scription  the  stock  of  another  cor- 
because  it  could  not,  and  therefore  poration,  remains  liable  for  the  full 
did  not,  become  a  stockholder  in  the  amount  of  his  subscription,  less  the 
Kansas  Company.  It  follows  that  proceeds  of  the  sale  of  such  stock 
defendants  continued  to  be  stock-  received  by  the  corporation, 
holders  in  the  Kansas  Company,  and  Lester  v.  Bemis  Lumber  Co.,  71 
remained  liable  for  the  corporate  Ark.  379  (1903),  (74  S.  W.  Rep. 
debts  in  like  manner  as  if  the  transfer  518). 
had  never  occurred." 

531 


§   289  INTERCORPORATE    RELATIONS  [PART   IV 

a  stockholder  in  the  corporation  and  succeeds  the  original 
vendor  as  such. 

§  289.  Liability  for  Assessments  upon  Ultra  Vires  Holdings. 
—  When  a  subscription  by  one  corporation  for  stock  in  an- 
other is  without  authority,  it  is  void,  and  the  corporation  is 
not  liable  for  calls  or  assessments  made  upon  stockholders, 
because  it  is  not  a  stockholder.^  Upon  similar  principles,  a 
corporation  which  purchases,  or  otherwise  acquires,  shares  of 
another  corporation  cannot  be  assessed  or  held  liable  as  a 
stockholder,  when,  in  taking  the  stock,  it  acted  beyond  its 
powers.^  Obligations  of  this  nature  are  not  incurred  by 
ultra  vires  acts. 

A  distinction  has,  however,  been  drawn  between  cases  where 
the  acquisition  of  stock  is  wholly  beyond  the  powers  of  the 
corporation  and  cases  where  it  is  only  partially  so.  Thus,  it 
has  been  held  that  the  fact  that  a  corporation  might,  under 
certain  circumstances,  have  acquired  stock  in  another  corpo- 
ration, renders  its  purchase,  for  any  other  purpose,  merely  the 
unauthorized  exercise  of  an  existing  power  and  estops  it, 
when  the  corporation  becomes  insolvent,  from  setting  up  the 
defence  of  ultra  vires  to  an  action  to  enforce  an  assessment 
upon  the  stock.^     Such  an  exception  is,  however,  as  broad  as 

1  Peshtigo  Co.  v.  Great  Western  empowered  to  purchase  for  invest- 
Tel.  Co.,  50  111.  App.  624  (1893) ;  ment  shares  of  a  certain  character, 
Pauly  V.  Coronado  Beach  Co.,  56  Fed.  it  was  not  empowered  to  purchase 
428  (1893).  stock  which  would  practically  con- 
Alien  of  a  corporation  on  its  stock,  stitute  it  a  partner  in  a  business 
for  debts  due  from  its  stockholders,  venture,  and  that  the  transfer  of  the 
does  not  attach  to  the  ultra  vires  stock  in  question  into  the  name  of 
holdings  of  another  corporation.  the  association  was  ultra  vires  and 
Lanier  Lumber  Co.  v.  Rees,  103  Ala.  void. 

622  (1894),  (16  So.  Rep.  637,  49  Am.  »  ^  State  bank  ha\'ing,   under  its 

St.  Rep.  57).  charter,   power  to  accept  stock  in  a 

^  CaUfornia  Bank  v.  Kenned}^  167  national  bank  as  security  for  a  loan, 

U.  S.  362  (1897),  (17  Sup.  Ct.  Rep.  but  without  power  to  purchase  such 

831).     In    ex    parte     British    Nation  stock    as    an    investment,    purchased 

Life  Assurance  Ass'n,  L.  R.  8  Ch.  679  stock  in  a  national  bank,  which  was 

(1878),  the  Court  of  Appeal  dismissed  transferred  to  its  name.     The  latter 

an  order  putting  a  life  association  on  bank  subsequentlj'  became  insolvent, 

the  Ust  of  contributories  to  a  corpora-  and   an   assessment   upon   the   stock- 

tion    in    liquidation    because    certain  holders  was'  made  by  a  comptroller 

shares  of  such  corporation  had  been  of  the   currenc}%    paj-ment   of   which 

transferred  to  it.     Lord  Justice  James  was  resisted  by  the  State  bank  on  the 

held  that,  while  the  association  was  ground  that   the   purchase  was  ultra 

532 


CHAP.  XXVl]  CORPORATION   AS   STOCKHOLDER  §   289 

the  rule,  for  there  are  circumstances  under  which  every  cor- 
poration, unless  expressly  prohibited,  may  acquire  stock. 
The  distinction  is  not  well  founded  upon  principle  and  is 
opposed  to  the  latest  decisions  of  the  Supreme  Court  of  the 
United  States. 

In  California  Bank  v.  Kennedy^  Mr.  Justice  White  said: 
"  The  transfer  of  the  stock  in  question  to  the  bank  being  unau- 
thorized hj  law,  does  the  fact  that,  under  some  circumstances, 
the  bank  might  have  legally  acquired  stock  in  the  corporation, 
estop  the  bank  from  setting  up  the  illegality  of  the  transaction  f 
Whatever  divergence  of  opinion  may  arise  on  this  question 
from  conflicting  adjudications  in  some  of  the  State  courts, 
in  this  Court  it  is  settled  in  favor  of  the  right  of  the  corpora- 
tion to  plead  its  want  of  power,  that  is  to  say,  to  assert  the 
nullity  of  an  act  which  is  an  ultra  vires  act.  .  .  .  The  power 
to  purchase  or  deal  in  stocks  of  another  corporation,  as  we 
have  said,  is  not  expressly  conferred  upon  national  banks,  nor 
is  it  an  act  which  may  be  exercised  as  incidental  to  the  powers 
expressly  conferred.  A  dealing  in  stocks  is,  consequently, 
an  ultra  vires  act.  Being  such,  it  is  without  efficacy.  .  .  . 
Stock  so  acquired  creates  no  liability  to  the  creditors  of  the 
corporation  whose  stock  was  attempted  to  be  transferred."  ^ 

vires.     It  was  held  that,  as  the  pur-  U.  S.  362  (1897),  (17  Sup.  Ct.  Rep. 

chaseofstockwasmerelytheexerci.se,  831),  tn/ra,  and   it  was   subsequently 

for    an    unauthorized    purpose,    of    a  reversed     by     the     Supreme     Court 

power  existing  for  a  legitimate  pur-  (Concord  National  Bank  v.  Hawkins, 

pose,  such  defence  was  not  available.  174   U.  S.   364    (1899),    (19    Sup.    Ct. 

Citizens  State   Bank  v.   Hawkins,   71  Rep.   739)). 

Fed.  369  (1896).  '  California  Bank  v.  Kennedy,  167 

In   First   National   Bank   v.   Haw-  U.  S.  367  (1897),   (17  Sup.  Ct.   Rep. 

kins,  79  Fed.  51   (1897),  it  was  held  831),  reversing  Kennedy  v.  California 

that  a  national  bank,  which  had  pur-  Sav.   Bank,   101  Cal.  495  (1893),   (35 

chased    shares    of    stock    in    another  Pac.  Hep.  1039). 

national  bank  as  an  investment,  and  ^  In  Robinson  v.  Southern  Nat. 
which  appeared  on  the  books  of  the  Bank,  180  U.  S.  309  (1900),  (21 
latter  bank  as  a  stockholder,  was  Sup.  Ct.  Rep.  383)  the  Supreme 
estopped,  after  the  insolvency  of  the  Court  said:  "This  court  has  held  in 
latter,  from  dcnjTng  liability  for  an  California  Bank  v.  Kennedy,  167  U.  S. 
assessment  on  the  stock,  on  the  ground  362  (1897),  (17  Sup.  Ct.  Rep.  831) 
that  its  purchase  was  ultra  vires.  The  and  Concord  National  Bank  v.  Haw- 
decision  in  this  case  was  rendered  a  kins,  174  U.  S.  364  (1899),  (19  Sup. 
few  weeks  before  the  decision  of  the  Ct.  Rep.  739)  that  it  is  not  corn- 
Supreme  Court  of  the  United  States,  petent  for  national  banking  assoria- 
in  California  Bank  v.   Kennedy,   167  tions  to  invest  anj'   portion   of  their 

533 


§  289 


INTERCORPORATE    RELATIONS 


[part  IV 


Where,  under  the  laws  of  a  State,  a  judgment  against  a  cor- 
poration holding  it  liable  for  an  assessment  as  a  stockholder 
in  another  corporation  is  conclusive  upon  its  stockholders  as 
to  such  liability,  a  stockholder,  when  sued  upon  such  a  judg- 


capital  permanently  in  the  stocks 
of  another  corporation  and  that  they 
are  not  estopped  from  setting  up  such 
want  of  power  against  suits  to  enforce 
hability  for  assessments  made  by 
the  Comptroller  of  the  Currency. 
AMiile  not  disposed,  as  at  present 
ad\-ised,  to  push  the  principle  of 
these  cases  so  far  as  to  exempt  such 
banks  from  liability  as  other  share- 
holders when  they  have  accepted 
and  hold  stock  of  other  corporations 
as  collateral  security  for  money 
advanced  (a  proposition  which  we 
wathhold  from  decision)  we  think 
there  is  a  presumption  in  such  cases 
against  any  intention  on  the  part  of 
the  lending  bank  to  become  the  owner 
of  the  collateral  shares." 

See  also  Chemical  Nat.  Bank  v. 
Havemeyer,  120  Cal.  601  (1S98), 
(52  Pac.  Rep.  1071,  65  Am.  St.  Rep. 
206)  ;  Schofield  v.  Goodrich  Bros. 
Co.,  98  Fed.  273  (1899). 

In  Hunt  1'.  Hauser  Malt  Co., 
90  Minn.  282  (1903),  (96  N.  W.  Rep. 
85)  the  Supreme  Court  of  Minnesota 
declined  to  follow  the  decision  in 
California  Bank  v.  Kennedy,  supra. 
The  Court  said  that  while  as  a  State 
court  it  was  bound  by  the  decisions 
of  the  Supreme  Court  of  the  United 
States  as  to  the  power  of  national 
banks,  it  was  not  bound  to  apply  such 
decisions  to  State  banks  when  they 
were  not  in  accord  with  State  deci- 
sions. And  in  tliis  case  it  was  held 
that  a  malting  company  which  had 
purchased  and  held  bank  stock  as 
an  investment  and  had  received 
dividends  for  several  years  was 
estopped  to  assert  its  itltra  vires  act 
in  acquiring  such  stock  in  a  suit  to 
enforce  a  stockholder's  liability  under 
the  Minnesota  laws,  brought  by  a 
receiver  of  the  bank  which  had  become 

534 


insolvent.  In  the  same  case,  95 
Minn.  206  (1905),  (103  N.  W.  Rep. 
1032),  the  Court  adhered  to  its  pre- 
vious decision. 

In  FideUty  Ins.  Co.  v.  German  Sav. 
Bank,  127  Iowa,  591  (1905),  (103 
N.  W.  Rep.  958)  the  Supreme  Court 
of  Iowa  distinguished  California  Bank 
V.  Kennedj%  supra,  and  held  that  wliile 
the  Iowa  statutes  did  not  authorize 
an  insurance  company  to  invest  its 
funds  in  the  purchase  of  bank  stock 
yet  that  such  in^-estment  was  not 
expressly  prohibited  and  the  insurance 
company  could  not  claim  that  it  was 
ultra  vires  after  ha\-ing  received  the 
benefits  of  the  transaction.  The 
Court  said  (p.  596)  :  "Counsel  for 
appellant  take  the  broad  ground, 
however,  that  the  acquisition  of  this 
stock  b}'  the  plaintiff  company  in  the 
defendant  bank  was  ^lltra  vires,  and 
therefore  illegal  and  void,  and  that 
plaintiff  may  entirely  disregard  it, 
and  recover  from  the  defendant 
the  balance  of  plaintiff's  deposit 
in  the  old  bank  ;  and  we  shall  proceed 
to  consider  the  soundness  of  this  con- 
tention. It  is  claimed  that  the  act 
of  the  plaintiff  company  in  acquiring 
stock  in  the  defendant  bank  was 
ultra  vires,  because  it  was  outside 
tlie  scope  of  the  plaintiff's  business 
as  an  insurance  company,  and  pro- 
hibited by  statute.  As  to  the  claim 
that  this  acquisition  of  stock  was 
outside  of  the  general  scope  of  plain- 
tiff's business,  it  is  sufficient  to  saj' 
that  a  corporation  caniaot  repudiate 
an  executed  contract  of  which  it  has 
received  the  benefit  on  the  ground 
that  such  contract  is  ultra  inres 
that  is,  not  within  the  scope  of  the 
business  which  is  it  authorized  to 
transact." 


CHAP.  XXVl]  CORPORATION   AS   STOCKHOLDER  §   290 

ment  in  another  jurisdiction  to  enforce  his  statutory  liability, 
cannot  set  up  as  a  defence  the  want  of  power  of  the  former  cor- 
poration to  hold  stock  in  the  latter.^ 

§  290.  Ultra  Vires  Contracts  for  Purchase  of  Stock.  Who 
may  question  Validity  of  Ultra  Vires  Purchases,  —  Dependent 
Contracts.  —  A  contract  entered  into  l)y  a  corporation  for  the 
purchase  of  stock  in  another  corporation,  which  it  has  no  au- 
thority to  acquire,  is  invalid.  No  recovery  can  be  had  upon  it 
and  the  defence  of  ultra  vires  is  equally  available  to  the  corpora- 
tion and  to  the  other  contracting  party .^ 

The  right  of  a  corporation  to  hold  stock  in  other  corporations 
cannot,  however,  be  the  subject  of  collateral  attack  by  third 
persons.  Thus,  a  subscriber  for  stock  in  a  corporation  cannot 
set  up  as  a  defence  to  an  action  upon  his  subscription  contract 
that  other  subscriptions  have  been  made  by  corporations  — 
it  not  being  shown  that  such  corporations  have  in  any  way 
failed  to  fulfil  their  obligations.-''  So  the  question  whether  a 
railroad  company,  in  violation  of  a  State  constitutional  pro- 
vision, holds  control  of  a  coal  company  cannot  be  raised  col- 
laterally in  a  suit  for  the  specific  performance  of  a  contract.^ 
And  a  creditor  attaching  stock  standing  in  the  name  of  his 
debtor  —  an  individual  —  cannot  raise  against  the  equitable 
owner  of  the  stock  —  a  corporation  —  the  objection  that  it 
has  no  right  to  own  stock  in  other  corporations.^  An  officer 
of  a  corporation  who  wrongfully  conveys  its  property  in  ex- 
change for  stock  of  another  corporation,  taking  such  stock  in 
his  own  name,  will  hold  it  in  trust  for  the  corporation  and 
cannot  set  up  that  the  corporation  has  no  power  to  hold  such 
stock.^ 

Contracts  collateral  to,  and  dependent  upon,  an  ultra  vires 


>  Martin  v.  Wilson,   120  Fed.  202  119   Mo.   9    (1893),    (24  S.   W.   Rep. 

(1903) — Circuit    Court    of    Appeals,  223). 
Seventh  Circuit.  '  Kern    v.    Day,    45    La.    Ann.    71 

2  De  la  Vergne  Refrigerating  Mach.  (1893),  (12  So.  Rep.  6). 

Co.  V.  German  Savings  Inst.,  175  U.  S.  "  liear   River  Valley  Orchard   Co., 

40  (1899),  (20  Sup.  Ct.  Rep.  20).  v.     Hanley,    15     Utali     508     (1897), 

3  McCoy     V.     World's     Columbian  (50  Pac.  Rep.  611). 

Exposition,    186    111.    356    (1900),  (93  See  also  Manchester  St.  R.  Co.  r. 

N.  W.  Rep.  225).  Williams,  71   X.    II.    312  (1902),    (.52 

«  Hill  V.   Rich  Hill  Coal   Min.   Co.,  Atl.  Rep.  461). 

535 


§  291 


INTERCORPORATE    RELATIONS 


[part  IV 


contract  for  the  purchase  of  stock  cannot  be  enforced.*  Thus, 
where  a  corporation  purchased  stock  in  another  company  and 
the  vendor,  as  a  part  of  the  consideration,  agreed  to  assume 
certain  indebtedness  of  the  corporation  whose  stock  was 
transferred,  it  was  held  that  an  action  upon  this  agreement 
was  in  furtherance  of  the  original  unlawful  contract  and  could 
not  be  sustained.^ 

§291.  Independent  Contracts. — Although  a  contract  by 
one  corporation  to  purchase  stock  in  another  is  ultra  vires 
and  cannot  be  enforced  between  the  parties,  yet  when  it  has 
been  executed  and  negotiable  instruments  have  been  given  in 
payment  of  the  purchase  price,  a  bona  fide  holder  for  value, 
without  notice  of  the  illegahty,  may  collect  them  from  the 


1  Marble  Co.  v.  Harvey,  92  Tenn. 
115  (1892),  (20  S.  W.  Rep.  427,  36 
Am.  St.  Rep.  71,  18  L.  R.  A.  252). 

An  agreement  between  the  officers 
of  a  bank  and  the  maker  of  a  note 
payable  to  it,  that  the  note  may  be 
paid  by  the  transfer  to  the  bank  of 
stock  of  another  bank,  is  illegal. 
TilUnghast  v.  Carr,  82  Fed.  298 
(1897). 

Where  an  ultra  vires  contract  for 
the  purchase  of  stock  by  a  corporation 
has  been  executed,  and  a  note  given 
in  payment,  equity  will  not  intervene 
to  cancel  the  agreement,  but  will 
leave  the  corporation  to  its  legal 
defence  to  the  note.  Cincinnati, 
etc.  R.  Co.  V.  McKeen,  64  Fed. 
36  (1894). 

2  Marble  Co.  v.  Harvey,  92  Tenn. 
115  (1892),  (20  S.  W.  Rep.  427,  36 
Am.  St.  Rep.  71,  18  L.  R.  A. 
252). 

In  this  case  Judge  Lurton,  after 
referring  to  cases  where  iiltra  vires 
had  not  been  permitted  as  a  defence, 
or  as  a  ground  for  collateral  attack, 
said:  "The  question  here  is  not 
like  any  of  these.  The  complainant 
sues  upon  its  contract,  and,  in  affirm- 
ance of  it,  seeks  to  have  the  defendant 
perform  an  arrangement  which  sprung 
from  and  was  collateral  to  it.      It  has 

536 


received  the  shares  it  purchased,  and 
holds  on  to  them.  It  simply  asks  that 
the  defendant  be  further  compelled 
to  perform  his  contract  by  contribut- 
ing, in  accordance  wth  his  agreement, 
his  proportion  of  the  liability  paid  off 
by  the  complainant  in  protection  of 
the  property  of  the  McMillan  Marble 
Company.  The  suit  is  clearly  in 
furtherance  of  the  original  unlawful 
and  void  contract.  That  the  con- 
tract has  been  executed  by  the  plain- 
tiff does  not  make  it  lawful  or  entitle 
it  to  an  enforcement  of  it."  The 
judge  then  referred  at  length  to  Pitts- 
burgh, etc.  R.  Co.  V.  Keokuk,  etc. 
Bridge  Co.,  131  U.  S.  389  (1889), 
(9  Sup.  Ct.  Rep.  770),  and  Central 
Transportation  Co.  v.  Pullman  Car 
Co.,  139  U.  S.  24  (1891),  (11  Sup.  Ct. 
Rep.  478),  and  continued  (p.  124)  : 
"To  sustain  this  suit,  as  now  pre- 
sented, would  be  in  affirmance  and 
furtherance  of  an  unlawful  and  void 
contract.  It  is,  in  no  sense,  a  suit  in 
disaffirmance.  Whether  complainant 
could  tender  back  the  shares  received, 
and  maintain  a  suit  to  recover  the 
money  paid  for  the  shares  upon  an 
implied  agreement  to  return  money 
which  the  defendant  had  no  right 
to  retain,  is  a  question  not  presented 
upon  this  record." 


CHAP.  XXVl] 


CORPORATION   AS   STOCKHOLDER 


§291 


corporation.^  But  such  a  holder  has  only  the  right  to  demand 
payment  of  his  note,  and  has  no  standing  to  compel  the  rescis- 
sion of  the  contract  of  purchase  on  the  ground  that  it  was 
ultra  vires} 

Independent  contracts  made  b}'  a  corporation,  although 
relating  to  stock  held  without  authority,  are  not  necessarily 
tainted  with  the  original  illegality.  It  does  not  follow  that 
it  is  illegal  to  dispose  of  stock  because  it  was  unla^\^ul  to  acquire 
it  in  the  first  instance.^  Upon  this  principle,  it  has  been  held 
that  a  purchaser  of  stock  from  a  corporation,  giving  a  note  in 
payment  therefor,  cannot  set  up  ultra  vires  as  a  defence  to  an 
action  upon  the  note.  In  Holmes,  etc.  Manufacturing  Co.  v. 
Holmes,  etc.  Metal  Co.  the  Court  of  Appeals  of  New  York  said:  * 
"  The  contract  under  which  the  note  in  suit  was  given  was  made 
.  .  .  nearly  four  years  after  the  plaintiff  became  the  owner  of 
the  stock.     No  claim  is  made  that  that  contract  is,  for  any 


•  In  Woodcock  v.  First  National 
Bank,  113  Mich.  236  (1897),  (71  N.  W. 
Rep.  477),  where  a  note  and  mortgage 
had  been  given  in  payment  for  an 
ultra  vires  purchase  of  stock,  the 
Supreme  Court  of  Michigan  said : 
"If  the  complainant  was  not  aware 
of  an  infirmity  in  these  securities 
in  the  hands  of  the  First  National 
Bank,  as  the  paper  was  not  dishonored 
when  received  by  complainant,  and 
was  negotiated  by  the  officers  of  the 
gas  light  company,  the  security  could 
not  be  defeated  in  complainant's 
hands. " 

In  Wright  v.  Pipe  Line  Co.,  101  Pa. 
St.  204  (1882),  (47  Am.  Rep.  701), 
where  a  corporation,  although  pro- 
hibited by  its  charter,  entered  into 
a  contract  for  the  purchase  of  stock 
in  another  corporation,  which  was 
executed  and  a  note  given  in  pay- 
ment, which  was  acquired  by  a  bona 
fide  purchaser  for  value,  but  with 
knotdrdge  of  the  character  of  the  con- 
sideration, it  was  held  that  the  cor- 
poration coidd  not  .sot  up  the  tlcfence 
of  jdtra  vires  to  the  note. 

The  purchase  by  a  trust  company, 
authorized   to   acquire   the   shares   of 


other  corporations,  of  the  stock  of 
a  forrj-  company  in  behalf  of  a  foreign 
railroad  company  as  an  undisclosed 
principal  is  not,  between  the  parties 
thereto,  rendered  invalid  by  reason  of 
the  lack  of  power  of  the  railroad  com- 
pany to  legally  hold  the  stock. 

Newman  v.  Mercantile  Trust  Co., 
189  Mo.  423  (1905),  (88  S.  W.  Rep.  6). 

^  Woodcock  i\  First  National  liank, 
113  Mich.  236  (1897),  (71  N.  AV.  Rep. 
477). 

^  Bigbee,  etc.  Packet  Co.  v.  Moore, 
121  Ala.  379  (1898),  (25  So.  Rep.  602). 
In  this  case  it  was  held  that  it  was 
immaterial  in  a  suit  by  a  transferee 
of  stock  that  the  transferrer  —  a  cor- 
]ioration  —  acted  beyond  its  powers 
in  acquiring  the  stock. 

A  corporation  having  sold  its  jirop- 
orty  and  received  the  purchasing 
corporation's  stock  in  payment,  can- 
not be  enjoined  by  the  latter  from 
transferring  the  stock.  American 
Water  Works  Co.  f.  Venner,  63  Hun, 
6.32  (1892),  (18  N.  Y.  Supp.  .379). 

*  Holmes,  etc.  Mfg.  Co.  v.  Holmes, 
etc.  Metal  Co.,  127  N.  Y.  260  (1891), 
(27  N.  E.  Rep.  831,  24  Am.  St.  Rep. 
448). 

537 


292 


INTERCORPORATE    RELATIONS 


[part  IV 


reason,  illegal  or  void.  Numerous  cases  are  found  in  which 
the  courts  have  refused  to  execute  contracts  that  were  ultra 
vires,  but  this  action  is  not  based  upon  such  contract.  .  .  . 
To  hold  that  the  plaintiff  could  not  dispose  of  the  stock  would 
deprive  it  of  the  consideration  received  for  the  transfer  of  its 
rolling  mill  and  material,  thus  accomplishing  a  wrong  and  not 
advancing  justice." 

§  292.  Holding  Stock  to  prevent  Competition.  —  While  the 
purchase  of  stock  in  aity  other  corporation  is  beyond  the  gen- 
eral powers  of  a  corporation,  the  purchase  of  stock  in  a  com- 
peting corporation  in  order  to  prevent  competition,  is  not  onl}' 
ultra  vires  but  is  contrary  to  public  policy.^ 

The  rule  of  public  policy  is  not  to  be  evaded  by  indirection. 


'  United  States:  Louis\'ille,  etc.  R. 
Co.  V.  Kentucky,  161  U.  S.  698  (1896), 
(16  Sup.  Ct.  Rep.  714)  :  "Not  only  is 
the  purchase  of  stock  in  another  cora- 
panj^  be3'ond  the  power  of  a  railroad 
corporation  in  the  absence  of  an 
express  stipulation  in  the  charter, 
but  the  purchase  of  such  stock  in  a 
rival  and  competing  line  is  held  to 
be  contrary  to  public  policy  and 
void."  See  also  McCutcheon  v.  Merz 
Capsule  Co.,  71  Fed.  787  (1896). 

Georgia:  Central,  etc.  R.  Co.  v. 
ColUns,  40  Ga.  582  (1869) ;  Hazle- 
hurst  V.  Savannah,  etc.  R.  Co.,  43 
Ga.   13  (1871). 

Illinois:  People  v.  Chicago  Gas 
Trust  Co.,  130  111.  268  (1889),  (22 
N.  E.  Rep.  798,  17  Am.  St.  Rep. 
319,  8  L.  R.  A.  497).  This  is  the 
leading  case  upon  the  subject.  See 
also  Dunbar  v.  American  Telephone, 
etc.  Co.,  224  111.  9  (1906),  (79  N.  E. 
Rep.  423). 

New  Hampshire:  Pearson  v.  Con- 
cord R.  Corp.,  62  N.  H.  537  (1883), 
(13  Am.  St.  Rep.  590). 

New  Jersey:  Elkins  v.  Camden, 
etc.  R.  Co.,  36  N.  J.  Eq.  5  (1882). 

Pennsylvania :  Pennsylvania  R. 
Co.  V.  Commonwealth  (Pa.  1886), 
7  Atl.  Rep.  374. 

Tennessee:   Marble  Co.  v    Harvej^ 

538 


92  Tenn.  115  (1892),  (20  S.  W.  Rep. 
427,  36  Am.  St.  Rep.  71,  18  L.  R.  A. 
252). 

Compare  EUerman  v.  Chicago 
Junction  R.,  etc.  Co.,  49  N.  J.  Eq.  217 
(1891),  (23  Atl.  Rep.  287)  where 
the  Court  said:  "The  corporate 
business  of  the  Junction  Company 
being  to  deal  in  stock  of  the  Transit 
Company,  and  to  do  anything  au- 
thorized by  its  charter  to  increase  its 
value,  and  being,  as  above,  author- 
ized to  buy  the  stock  of  any  corpora- 
tion, the  buj-ing  of  the  stock  of  an 
intended  rival,  with  the  probable 
intent  to  use  the  purchase  for  the 
extension  of  the  Transit  Company's 
business,  and  with  the  certain  effect 
of  preventing  the  depreciation  of  that 
company's  stock,  is  certainly  within 
the  powers  contemplated  by  the  cer- 
tificate of  the  Junction  Company." 

Compare,  also,  Rafferty  v.  Buffalo 
City  Gas  Co.,  49  App.  Div.  (N.  Y.) 
618  (1899),  (56  X.  Y.  Supp.  288)  where 
it  was  held  that  a  gas  company  hav- 
ing, under  its  charter,  authority  to 
acquire  and  hold  the  stocks  of  other 
corporations,  had  power  to  purchase 
the  stocks  of  a  company  owning  a 
franchise  which  if  operated  adversely 
to  the  former  company  might  be 
ruinous  to  its  business. 


CHAP.  XXVl] 


CORPORATION   AS    STOCKHOLDER 


293 


The  fact  that  the  stock  is  purchased  in  the  name  of  another 
person  or  corporation  for  the  benefit  of  the  competing  corpora- 
tion does  not  affect  its  application.* 

This  subject  is  considered  at  length  in  the  following  part 
of  this  treatise.- 

§  293.  Remedies  in  Case  of  Ultra  Vires  Stockholding.  — 
Every  stockholder  in  a  corporation  may  stand  upon  his  rights 
as  secured  by  the  contract  of  association.  He  cannot  be  forced 
into  an  outside  enterprise,  and  may  insist  that  the  funds  of 
the  corporation  shall  be  used  only  for  the  purposes  permitted 
by  its  charter  and  the  laws  governing  it. 

Upon  these  principles,  any  stockholder  in  a  corporation 
proposing,  without  authority,  to  purchase  stock  in  another 
corporation  may  enjoin  the  purchase;  ^  and  it  has  been  held 
that  the  fact  that  he  obtains  his  stock  after  the  passage  of  the 
resolution  authorizing  the  purchase  and  with  the  purpose  of 
preventing  its  consummation  makes  no  difference.^  It  does 
not,  however,  follow,  conversely  to  this  proposition,  that  a 
stockholder  in  the   corporation   whose  stock  is  acquired  by 


'  Pennsylvania  R.  Co.  v.  Conimou- 
wealth  (Pa.  1886),  7  Atl.  Rep.  374. 

In  Dunbar  v.  American  Telephone, 
etc.  Co.,  224  111.  25  (1906),  (79  N.  E. 
Rep.  423)  the  Supreme  Court  of 
Illinois  said :  "These  authorities 
fully  sustain  the  position  that  the 
purchase  by  the  American  Company, 
either  in  its  own  name  or  in  the  names 
of  others,  of  the  majority  stock  of  the 
Kellogg  Company  wdth  the  purpose 
and  intent  of  controlling  the  latter 
and  putting  it  out  of  business  as  a 
competitor  of  the  American  Company 
.  .  .  was  an  attempt  to  exercise  a 
power  which  it  did  not  have.  To 
permit  it  to  do  so  would  be  against 
the  law  of  this  State  and  its  public 
policy." 

The  Court  in  this  case  also  held  that 
the  transaction  was  not  a  mere  exer- 
cise of  an  excess  of  power  and  void- 
able, but  that  it  was  against  public 
policy  and  wholly  void. 

'^  Post,  Part  V.  :  "Combinations  of 
Corporations." 


3  Central,  etc.  R.  Co.  v.  Collins,  40 
Ga.  582  (1869) ;  Memphis,  etc.  R.  Co. 
V.  Wood,  88  Ala.  630  (1889),  (7  So. 
Rep.  108)  ;  Elkins  v.  Camden,  etc.  R. 
Co.,  36  N.  .1.  Eq.  5  (1882) ;  Solomons 
V.  Laing,  12  Beav.  339  (1849). 

For  case  where  bill  of  a  dissenting 
stockholder  to  restrain  the  purchase 
by  his  corporation  of  stock  in  other 
corporations  upon  the  ground  that 
price  was  grossly  excessive  was 
tlenied  .see  Geer  v.  Amalgamated 
Copper  Co.,  48  Atl.  Rep.  159,  (N.  J. 
Ch.   1901). 

■•  In  Elkins  v.  Camden,  etc.  R.  Co., 
36  X.  J.  Eq.  5  (1882),  the  directors 
of  a  railroad  company,  without  any 
statutory  authority,  passed  a  resolu- 
tion to  buy  the  stock  of  a  competing 
road,  and  it  was  held  : 

(A)  That  the  proposed  purchase 
was  ultra  vires,  and  hence  could  not  be 
executed   if  ratified   by   stockholders. 

(/?)  That  it  was  void  and  against 
public  policy,  in  that  its  object  was 
to  prevent  lawful  competition. 

539 


293 


INTERCORPORATE    RELATIONS 


[part    IV 


another  company  can  raise  the  objection  of  ultra  vires.  The 
purchase  is  beyond  the  powers,  not  of  his  corporation,  but 
of  the  purchaser.^ 

Irrespective  of  the  question  of  ultra  vires,  however,  minor- 
ity stockholders  of  a  corporation  are  entitled  to  relief  in  equity 
against  the  acquisition  of  controlling  stock  interests  in  their 
corporation  by  a  competing  corporation  for  the  purpose  of 
eliminating  competition  and  creating  a  monopoly.^ 

The  laches  of  a  stockholder  in  taking  steps  to  prevent  the 
ultra  vires  holding  by  his  corporation  of  stock  in  another  com- 
pany may  bar  him  from  relief  in  equity.^ 


(C)  That  it  could  be  enjoined  upon 
application  of  a  single  stockholder  of 
the  purchasing  company,  and  tlie  fact 
that  he  obtained  his  stock  after  the 
passage  of  the  resolution,  and  with 
avowed  design  of  preventing  its  con- 
summation, made  no  difference. 

'  Oelbermann  v.  New  York,  etc.  R. 
Co.,  77  Hun  (N.  Y.),  332  (1894),  (29 
N.  Y.  Supp.  545). 

2  In  Dunbar  v.  American  Telephone, 
etc.  Co.,  224  111.  29  (1906),  (79  N.  E. 
Rep.  423)  the  Court  said:  "But 
aside  from  the  question  as  to  whether 
the  contract  of  purchase  was  ultra 
vires  in  the  sense  that  the  contract 
became  a  nullity,  we  think  that  such 
equitable  rights  are  shown  in  the  com- 
plainants, though  minority  stock- 
holders, as  ought  to  entitle  them  to 
maintain  this  bill.  It  is  alleged  in  the 
bill,  and  admitted  by  the  demurrer, 
that  in  order  to  stifle  competition 
in  trade  and  create  a  monopoly 
in  itself  and  its  licensee  company, 
and  for  the  purpose  of  enabling  it  to 
secure  and  maintain  unreasonable 
and  excessive  rates  and  charges,  said 
American  Company  conceived  the 
illegal  purpo.se  of  acquiring  at  least 
two-thirds  of  the  stock  of  said  Kellogg 
Company,  and  through  such  owner- 
ship to  select  and  maintain  a  board 
of  directors  which  should  act  in  the 
real  interests  of  and  subser\'ient  to 
the  American  Company  and  free  that 

540 


company  and  its  licensee  from  the 
competition  of  the  Kellogg  Company 
and .  independent  exchanges ;  also, 
that  its  ultimate  purpose  was  to 
injure  and  finally  destroy  the  Kellogg 
Company.  That  such  conduct  on 
the  part  of  the  American  Company 
was  fraudulent  as  against  the  stock- 
holders of  the  Kellogg  Company 
cannot  be  denied,  and  against  which, 
on  the  plainest  principles  of  equity, 
a  stockholder  in  the  Kellogg  Company 
should  have  the  right  to  relief." 

A  bill  filed  by  a  stockholder  of  a 
corporation  to  restrain  it  from  per- 
mitting certain  shares  of  its  stock, 
alleged  to  be  held  by  another  corpora- 
tion in  vdolation  of  law,  to  be  voted 
by  such  corporation  or  on  its  behalf, 
cannot  be  maintained  where  neither 
the  latter  corporation  nor  its  receiver 
is  made  a  party  defendant. 

Hollifield  v.  Wrights\-ille,  etc.  R. 
Co.,  99  Ga.  365  (1896),  (27  S.  E. 
Rep.  715). 

^  Alexander  v.  Searcy,  81  Ga.  536 
(1888),  (8  S.  E.  Rep.  630,  12  Am.  St. 
Rep.  337). 

A  purchase  of  stock  in  a  corpora- 
tion, with  knowledge  that  it  assumes 
and  exercises  the  power  to  hold  stock 
in  other  corporations,  may  amount  to 
an  implied  recognition  of  the  assumed 
power.  Venner  v.  Atchison,  etc.  R. 
Co.,  28  Fed.  581  (1880).  This 
decision   is   contrary   to   sound   prin- 


CHAP.  XXVl] 


CORPORATION   AS   STOCKHOLDER 


§  293 


The  State  may  institute  proceedings  to  prevent  corporations 
from  exceeding  their  chartered  powers  in  purchasing  shares  in 
other  companies.  This  is  especially  true  in  the  case  of  corpora- 
tions serving  public  purposes.  An  injunction  may  be  granted 
in  behalf  of  the  State  to  restrain  an  unlawful  acquisition  or 
holding  of  stock;  ^  and  proceedings  in  quo  warranto  will  lie 
against  the  corporation  usurping  the  power.* 


ciple.  Laches  may  bar  a  stockholder 
in  equity,  but  his  recognition  of,  or 
acquiescence  in,  an  ultra  vires  act 
cannot  validate  it. 

In  McCampbell  v.  Fountain  Head 
R.  Co.,  Ill  Tenn.  55  (1903),  (77, 
S.  W.  Rep.  1073,  102  Am.  St.  Rep. 
731),  however,  the  Court  said  :  "From 
the  facts  already  stated,  we  have  here 
a  case  where  the  parties  complaining, 
by  their  active  cooperation  with  all 
the  other  stockholders  of  the  railroad 
company,  brought  about  the  zdtra 
vires  complication  from  which  they 
now  seek  to  be  relieved.  Will  their 
complaint  be  listened  to?  In  Green's 
Brice's  Ultra  Vires,  p.  783,  mere  ac- 
quiescence in  unauthorized  and  illegal 
transactions  will  be,  it  is  said,  suf- 
ficient to  repel  complaining  stockhold- 
ers. That  author  uses  these  words  : 
'If  an  act  be  ultra  vires,  a  corporation 
may  raise  the  objection,  whether 
against  a  corporation  or  against  a 
creditor  or  other  contracting  jiarty  at- 
tempting to  enforce  such  act,  or  his 
alleged  claims  or  rights  resulting 
therefrom.  But  if  an  incorporator  de- 
sire protection  against  the  party  who 
has  thus  dealt  with  the  corporation, 
he  must  have  been  prompt  and  ener- 
getic in  repudiating  the  transaction, 
as  he  can  be  bound  by  acquiescence. 
So,  if  he  do  not  quickly  object,  and 
give  his  objection  vitality,  the  creditor 


will  be  justified  in  answering  that  he 
con.sents.'" 

In  a  suit  in  equity  by  a  stockholder 
to  set  aside  an  ultra  vires  purchase  of 
stock  made  by  the  directors  nine 
years  before,  it  was  held  that  the  coni- 
plainant  was  giiilty  of  laches,  and, 
therefore,  was  not  entitled  to  relief. 
CuUen  V.  Coal  Creek,  etc.  R.  Co. 
(Tenn.  1897),  42  S.  W.  Rep.  693. 

'  Pennsylvania  R.  Co.  v.  Common- 
wealth (Pa.  1886),  7  .\tl.  Rep.  368. 

Delay  does  not  affect  the  right  of 
the  State  to  prevent  an  ultra  vires 
holding  of  stock.  Alexander  v. 
Searcy,  81  Ga.  536  (1888),  (8  S.  E. 
Rep.  630,  12  Am.  St.  Rep.  337). 

2  People  V.  Chicago  Gas  Trust  Co.. 
130  111.  268  (1889),  (22  N.  E.  Rep, 
798,  17  Am.  St.  Rep.  319,  8  L.  R.  A. 
497). 

Where  a  bank  purchased  stock  in 
other  corporations  in  violation  of  its 
charter  and  the  statutes  of  the  State 
but,  upon  the  demand  of  the  Secre- 
tary of  State,  immediately  disposed 
of  such  holdings,  it  was  held  that 
such  ^•iolations  of  the  law  under  the 
circumstances  were  not  ground  for 
the  appointment  of  a  receiver  to  wind 
up  the  bank  in  an  action  by  the 
State. 

State  V.  Peoples'  United  States 
Bank,  197  Mo.  574  (1906),  (94  S.  W. 
Rep.  953). 


541 


294  INTERCORPORATE    RELATIONS  [PART   IV 


CHAPTER   XXVII 


CONTROL    OF    ONE    CORPORATION    BY    ANOTHER 

§  294.  Meaning  of  Term  "Control." 

§  295.  Distinction  between  Control  of  Corporation  and  Control  of  its  Property. 

§  296.  Distinction  between  Control  and  Community  of  Interest. 

§  297.  Distinction  between  Control  and  Consolidation. 

§  298.  Power  to  purchase  Stock  to  obtain  Control. 

§  299.  Status  of  Corporation  as  Controlling  Stockholder. 

§  300.  Trust  Relation  of  Controlling  Corporation  to  Minority  Stockholders. 

§  301.  Remedies  of  Minority  Stockholders  of  Controlled  Corporation. 

§  294.  Meaning  of  Term  "Control."  — The  control  of  a  cor- 
poration has  two  phases.  The  ultimate  power  of  control 
always  lies  in  the  stockholders.  They  determine,  directly, 
matters  of  fundamental  importance.  They  provide,  through 
the  election  of  directors,  for  the  corporate  management,  and 
may  thereby  settle  the  corporate  policy.  The  immediate 
power  of  control  lies  in  the  directors  and  officers  appointed  to 
manage  the  affairs  of  the  corporation.^ 

The  term  "  control,"  as  applied  to  a  corporation  in  its  relations 
with  other  corporations  —  as  distinguished  from  its  internal 
management  —  refers  to  the  ultimate  power  of  control  and 
means,  specifically,  the  ownership  of  a  controlling  interest  in 
a  corporation.  A  corporation  which  owns  a  majority  of  the 
shares  of  the  capital  stock  of  another  corporation  controls  it.^ 

*  In  Pullman  Car  Co.   v.  Missouri  or  executive  control  which  is  exercised 

Pac.  R.  Co.,  11  Fed.  636  (1882),  (a/-  by  the  officers  and  agents  chosen  by 

firmed  115  IT.  S.  587  (1885),  (6  Sup.  and  acting  under  the  direction  of  the 

Ct.   Rep.  194)),  Judge  McCrary  said:  board  of  directors." 
"What  are  we  to  understand  by  the  Yazoo,  etc.    R.   Co.   v.   Searles,   85 

word  ' control '  as  employed  in  the  con-  Miss.  520    (1905),   (37  So.    Rep.    939, 

tract?     The    language   is,    'all    roads  68  L.  R.  A.  715)  :    "'Control'    of  the 

which   it   controls   or    may   hereafter  business  of  a  corporation  .   .   .  means 

control,'     which     in     our     judgment  power  to  dictate  the  corporate  action 

means  controlled  by  the  corporation.  of  the  corporation,  not  the  mere  man- 

The  language   does  not   refer   to  the  agement   of    some  special  limited  de- 

ultimate     power     of     control     which  partment  of  its  operations." 
always  lies  in  the  stockholders,   and  ^  Jessup  r.  Illinois  Cent.  R.  Co.,  36 

which  may  be  indirectly  exercised  by  Fed.   741   (1888)  :    "The  bill  charges 

them  at  stated  periods  by  the  election  that    the    Illinois    Central    Railroad 

of  directors.      It  means  the  immediate  Companj-  has  obtained  control  of  the 

.542 


CHAP.  XXVIl]      CONTROL  OF   OXE   CORPORATION   BY  ANOTHER  §   295 

§  295.  Distinction  between  Control  of  Corporation  and  Con- 
trol of  its  Property.  — A  distinction,  analogous  to  that  between 
the  ultimate  and  immediate  control  of  the  affairs  of  a  cor- 
poration, exists  between  the  control,  by  a  corporation,  of  its 
property,  and  the  control,  by  majority  stockholders,  of  the 
corporation. 

The  owner  of  shares  in  a  corporation  does  not  own  the 
corporate  property.  The  holders  of  controUing  stock  in- 
terests control  the  corporation,  the  corporation  controls  its 
property.^  In  Pullman  Car  Co.  v.  Missouri  Pacific  R.  Co} 
Mr.  Chief  Justice  Waite  said:    "  It  has  all  the  advantages  of 


stock  of  the  Dubuque  and  Sioux  City 
Railroad  Company.  This  allegation, 
upon  the  familiar  rule  that  state- 
ments of  this  character  will  be  taken 
most  strongly  against  the  pleader, 
onlj'  implies  that  the  Illinois  Central 
Railroad  Company  has  obtained  a 
majority  of  the  stock  of  the  Dubiuiue 
&  Sioux  City  Railroad  Company." 

'  Pullman  Car  Co.  v.  Missouri  Pac. 
R.  Co.,  115  U.  S.  587  (1885),  (6  Sup. 
Ct.  Rep.  194),  affirming  11  Fed.  636 
(1882). 

In  Fitzgerald  v.  Missouri  Pac.  R. 
Co.,  45  Fed.  818  (1891),  Judge  Cald- 
v/ell  said  :  "The  owner  of  all  the  stock 
and  bonds  of  a  corporation  does  not 
own  the  corporate  property.  The 
corporate  property,  which  includes 
all  rights  of  action  and  claims  for 
damages,  belongs  to  the  corporation, 
and  is  subject  to  the  management 
and  control  of  its  board  of  directors." 

In  Humphreys  v.  McKissock,  140 
U.  S.  304  (1891),  (11  Sup.  Ct.  Rep. 
779)  it  was  held  where  a  railroad  com- 
pany acquired  stock  in  an  elevator 
company  that  its  interest  in  such 
company  was  that  of  a  stockholder 
only,  and  that  it  had  no  interest  in 
the  property  of  such  company  which 
it  could  mortgage. 

See  also  Crane  v.  Fry,  126  Fed.  278 
(1903);  Jessup  v.  Illinois  Cent.  R. 
Co.,  36  Fed.  741  (1883). 

Where    one    corporation    owns    all 


the  stock  of  another  corporation  and 
elects  its  directors  —  the  corporate 
existence  being  maintained  —  the 
former  corporation  has  only  the  rights 
and  powers  of  a  stockholder  in  the 
latter ;  and  is  not  the  corporation 
itself  either  in  respect  of  the  manage-_ 
ment  of  the  corporate  business  or  of 
control  of  the  corporate  property. 

Shepp  V.  Schuylkill  Valley  Trac- 
tion Co.,  17  Montgomery  County  (Pa.) 
Law  Rep.  52  (1900).  The  decision 
in  this  case  is  based  upon  Pullman 
Car  Co.  V.  Missouri  Pac.  R.  Co.,  supra. 

Ownership  by  one  corporation  of 
all  the  stock  of  another  corporation 
which  maintains  its  corporate  exist- 
ence does  not  make  the  former 
liable  for  the  negligence  of  the 
latter. 

Louisville  Gas  Co.  v.  Kaufman, 
105  Ky.  131  (1898),  (48  S.  W.  Rep. 
434). 

2  Pullman  Car  Co.  v.  Missouri  Pac. 
R.  Co.,  115  U.  S.  597  (1885),  (6  Sup. 
Ct.  Rep.  194).  In  this  ca.se,  a  rail- 
road company  made  a  contract  con- 
cerning all  roads  which  it  did  then  or 
might  thereafter  "control."  It  after- 
wards accjuired  a  maji)rity  of  the 
stock  of  another  railroad  company, 
and  the  cjuestion  was  whether  it 
thereby  controlled  the  road  of  that 
company  witliin  the  meaning  of  the 
contract.  The  Court  held  that  it 
di<l  not. 

543 


§   296  INTERCORPORATE    RELATIONS  [PART    IV 

the  control  of  the  road,  but  that  is  not,  in  law,  the  control 
itself.  Practically  it  may  control  the  company,  but  the  com- 
pany alone  controls  its  road.  In  a  sense,  the  stockholders  of 
a  corporation  own  its  property,  but  they  are  not  the  managers 
of  its  business  or  in  the  immediate  control  of  its  affairs."  ^ 

§  296.  Distinction  between  Control  and  Community  of  Inter- 
est. —  The  phrase,  "  community  of  interest,"  as  used  in  rela- 
tion to  corporations,  especially  railroad  companies,  means 
the  acquisition  and  holding  for  a  common  purpose,  by  several 
corporations,  of  stock  in  other  corporations;  or  the  mutual 
holding  by  two  or  more  corporations  of  each  other's  shares. 
The  "  community  of  interest  idea,"  with  reference  to  railroads, 
is  that  competing  railroad  companies,  having  common  stock- 
holders or  owning  each  other's  shares,  will  maintain  rates; 
that  the  practical  pooling  of  interests  will  more  than  fill  the 
place  of  the  prohibited  pooling  of  traffic  or  earnings,  and 
prevent  traffic  wars  and  ruinous  competition. 

The  element  of  control  is  not  essential  to  a  community  of 
interest,  and  the  one  does  not  necessarily  imply  the  other. 
''  It  may  be  true  that  the  two  companies  are  acting  in  har- 
mony, and  that  the  same  persons  own  a  majority  of  the  stock 
of  both;  but  that  is  something  very  different  from  the  control 
of  one  by  the  other."  ^ 

'  In  Pennsylvania  R.  Co.  v.  Com-  company  alone  controls  its  road.' 
monwealth  (Pa.  1886),  7  Atl.  Rep.  .  .  .  This  distinction  seems  very 
368,  a  case  involving  the  construction  narrow,  but  it  is  certainly  involved 
of  the  Pennsylvania  constitutional  in  the  conclusion  reached,  which  can- 
provision  (Art.  17,  §  4),  against  the  not  stand  unless  it  is  recognized: 
acquisition  by  railroad  corporations  for  it  is  too  plain  to  bear  argument, 
of  the  control  of  competing  companies,  that  the  ownership  of  the  stock  of  a 
the  Court  said  with  reference  to  the  corporation  carries  with  it  the  control 
case  of  Pullman  Car  Co.  v.  Missouri  of  the  corporation.  Indeed,  this  is 
Pac.  R.  Co.,  supra:  "The  decision  merely  a  different  way  of  stating  the 
of  the  question  of  control  was  not  truism,  that  a  corporation  is  con- 
called  for  in  the  case,  which  was  trolled  by  its  stockholders.  That 
already  decided  on  another  and  a  thej'  do  it  through  the  agency  of  a 
fundamental  point.  But,  waiving  this,  board  of  directors  and  other  officers 
the  point  decided  is,  merely,  that  the  does  not  alter  the  fact." 
ownership  of  the  stock  does  not  ^  Pullman  Car  Co.  v.  Missouri  Pac. 
necessarily  give  control  of  the  road.  R.  Co.,  11  Fed.  637  (1882),  affirmed 
The  Chief  Justice  says,  speaking  of  the  115  U.  S.  587  (1885),  (6  Sup.  Ct. 
stockholding  companj- :  'Practically,  Rep.  194). 
it  maj^  control  the  company,  but  the 

544 


CHAP.  XXVIl]      CONTROL   OF   ONE    CORPORATION    BY   ANOTHER  §   298 


§  297.    Distinction    between    Control    and    Consolidation.  — 

The  distinction  between  the  union  of  stockholders  and  prop- 
erties effected  by  consolidation  and  the  continued  .separate 
existence  of  the  corporations,  controlled  and  controlling,  has 
already  been  pointed  out.^ 

§  298.  Power  to  purchase  Stock  to  obtain  Control.  —  A  cor- 
poration having  power  to  purchase  and  hold  shares  may  exercise 
the  power  for  the  purpose  of  obtaining  control  of  another  cor- 
poration and  of  participating  in  its  management.^     A  corpora- 


'  See  ante,  §  12:  "Distinction  be- 
tween Consolidation  and  Control." 

2  United  States:  Do  la  Vergne  Re- 
frigerating Mach.  Co.  V.  German  Sav- 
ings Inst.,  175  U.  S.  54  (1899),  (20 
Sup.  Ct.  Rep.  20) ;  Louisville,  etc. 
R.  Co.  V.  Kentucky,  161  U.  S.  698 
<1896),  (16  Sup.  Ct.  Rep.  714); 
Nashua,  etc.  R.  Co.  v.  Boston,  etc. 
R.  Co.,  136  U.  S.  385  (1890),  (10 
Sup.  Ct.  Rep.  1004) ;  Tod  v.  Kentucky 
Union  Land  Co.,  57  Fed.  58  (1893). 

Illinois:  Martin  v.  Ohio  Stove  Co., 
78  111.  App.   105  (1898). 

New  Hampshire :  Pearson  v.  Con- 
cord R.  Corp.,  62  N.  H.  548  (1883), 
(13  Am.  St.  Rep.  590)  :  "A  corpora- 
tion cannot  become  a  stockholder  in 
another  corporation  unlesss  such  power 
is  given  to  it  by  its  charter,  or  is 
necessarily  implied  in  it,  especially 
if  the  purchase  be  for  the  purpo.se  of 
controlling  or  affecting  the  manage- 
ment of  the  other  corporation." 

New  Jersey:  Elkins  v.  Camden, 
etc.  R.  Co.,  36  N.  J.  Eq.  5  (1882). 

Ohio :  One  railroad  company  haa 
no  power  to  acquire  the  bonds  of 
another  corporation  in  order  to  con- 
trol the  elections  of  the  latter,  such 
bonds  having  a  voting  power.  State 
r.  McDaniel,  22  Ohio  St.  368  (1872). 

In  Anglo-American  Land,  etc.  Co. 
V.  Lombard,  132  Fed.  721  (1904)  it 
was  held,  however,  that  power  to 
purchase  stocks  for  investment  does 
not  authorize  the  purchase  of  all 
the  stock  of  a  corporation  for  the 
purpose    of    controlling    its    manage- 


ment. In  this  case  the  Court  said : 
"The  only  authority  of  the  Missouri 
Company  to  purchase  stock  in  an- 
other corporation  is  found  in  sub- 
di\-ision  9,  §  2839,  Rev.  St.  Mo.  1889, 
which  reads :  '  To  buy  and  sell  all 
kinds  of  government,  state,  munici- 
pal and  other  bonds,  and  all  kinds 
of  negotiable  and  non-negotiable 
paper,  stocks  and  other  investment 
securities.'  The  context  shows  very 
clearly  that  the  purpose  was  not  to 
authorize  the  purchase  of  all  of  the 
stock  of  another  company  for  the 
purpose  of  controlling  its  manage- 
ment but  to  authorize  the  buying  and 
selling  of  stocks  as  investment  se- 
curities, in  like  manner  as  govern- 
ment bonds  and  the  other  securities 
named  are  bought  and  sold.  Con- 

trolling the  management  of  a  corpora- 
tion of  another  State  through  the 
ownership  of  its  entire  stock  is  not 
bujang  or  selling  investment  securities, 
nor  is  it  fairly  incidental  thereto. 
The  hazards  of  such  a  venture  are 
altogether  repugnant  to  the  purposes 
for  which  the  Missouri  Company 
was  formed,  which  inclutle  the  hand- 
ling and  investing  of  the  money  of 
others,  executing  trusts  under  deeds 
and  wills,  acting  as  guardian  of 
infants  and  insane  persons,  and 
guarantying  the  fidelity  of  persons 
holding  places  of  public  and  jirivate 
trust ;  all  reciuiring  the  maintenance 
of  a  high  standard  of  credit  and 
stability  on  the  part  of  that  company. 
It    is   impossible   to   escape    the   con- 

545 


298 


INTERCORPORATE   RELATIONS 


[part   IV 


tion,  without  such  express  authority,  cannot  purchase  for 
control. 

In  De  la  Vergne  Refrigerating  Mach.  Co.  v.  German  Savings 
Inst.  Mr  Justice  BrowTi  said:  ^  "  As  the  powers  of  corporations, 
created  by  legislative  act,  are  limited  to  such  as  the  act  expressly 
confers  and  the  enumeration  of  these  implies  the  exclusion  of 
all  others,  it  follows  that,  unless  express  provision  is  given 
to  do  so,  it  is  not  within  the  general  powers  of  a  corporation 
to  purchase  the  stock  of  other  corporations  for  the  purpose  of 
controlling  their  management." 

This  statement  of  the  law  while  correct  does  not  go  far 
ejiough.  It  is  not  only  beyond  the  general  powers  of  a  corpora- 
tion to  purchase  the  stock  of  other  corporations  for  the  purpose 
of  obtaining  control,  but  it  is  beyond  its  general  powers  to  make 
such  purchases  for  any  purpose.  The  only  distinction  is  that 
while  for  certain  purposes  power  to  acquire  stock  may  exist 
as  incidental  to  other  powers,  there  can  never  be  an  implied 
power  to  purchase  for  control.^  A  purchase  for  control,  with- 
out express  authority  to  purchase  stock,  is  necessarily  ultra 
vires.  A  purchase  for  other  purposes,  without  such  authority, 
is  also  ultra  vires  unless  the  requisite  power  can  be  implied. 

A  purchase  by  a  foreign  corporation  of  stock  in  a  domestic 
corporation  for  the  purpose  of  obtaining  control  of,  and  stifling 
competition  with,  it  has  been  held  to  be  ultra  vires  the  foreign 
corporation  regardless  of  the  powers  expressed  in  its  charter, 
as  well  as  contrary  to  public  policy.^ 


elusion  that  the  purchase  of  the 
Kansas  Company's  stock  was  beyond 
the  power  of  the  Missouri  Com- 
pany." 

Compare,  however,  Robotham  v. 
Prudential  Ins.  Co.,  64  N.  J.  Eq.  673 
(1903),  (53  Atl.  Rep.  842)  where  it  was 
held  that  the  fact  that  an  insurance 
company,  having  power  to  invest  its 
funds  in  the  shares  of  other  corpora- 
tions, purchased  a  controlling  interest 
in  the  stock  of  another  corporation 
would  not  make  such  purchase  illegal 
pro\'ided  it  were  made  in  good  faith 
for  investment  purposes. 

•  De  la  Vergne  Refrigerating  Mach. 

546 


Co.  V.  German  Sa\'ings  Inst.,  175 
U.  S.  54  (1899),  (20  Sup.  Ct.  Rep. 
20). 

2  "While  this  power  [to  purchase 
shares]  may  be  incidental  to  some  un- 
disputed authority  its  exercise  can 
never  be  sustained  as  an  incidental 
power  when  the  object  is  to  obtain  the 
control  and  management  of  another 
corporation."  Editorial  note  to 
Denny  Hotel  Co.  v.  Schram,  36  Am. 
St.  Rep.  137. 

^  Dunbar  v.  American  Telephone, 
etc.  Co.,  224  111.  9  (1906),  (79  N.  E. 
Rep.  423). 


CHAP.  XXVIl]      CONTROL  OF   ONE   CORPORATION   BY  ANOTHER  §  300 


§  299.  Status  of  Corporation  as  Controlling  Stockholder.  — 
There  is  nothing  in  the  nature  of  a  corporation  which  forbids 
it  exercising  control  of  another  corporation,  if  power  to  acquire 
control  is  conferred.^ 

When  a  corporation  acquires  control  of  another  corporation 
its  rights,  in  law,  are  the  same  as  those  of  any  natural  person 
holding  control.  The  two  corporations  continue  to  exist  as 
before  and  each  acts  through  its  own  directors  and  officers.^ 
They  are  legally  distinct,  although  acting  together  for  a  common 
purpose  and  managed  in  a  common  interest. 

§  300.  Trust  Relation  of  Controlling  Corporation  to  Minority 
Stockholders.  —  When  a  majority  of  the  stock  of  one  corpora- 
tion is  owned  by  another,  which  thereby  acquires  the  right  to 
control  its  management,  the  controlling  corporation  assumes 
a  relation  of  trust  towards  the  minority  stockholders  of  the 
corporation  controlled,  and  is  under  an  obligation  to  manage 
its  affairs  for  the  benefit  of  all  the  stockholders  and  not  for 
its  own  aggrandisement.^     This  is  merely  an  application  of 


'  Citizens  State  Bank  v.  Hawkins, 
71  Fed.  369  (1896);  Matthews  v. 
Murchison,  17  Fed.  760  (1883)  ; 
Market  Street  R.  Co.  v.  Hellman, 
109  Cal.  571  (1895),  (42  Pac.  Rep. 
225) ;  White  v.  Syracuse,  etc.  R.  Co., 
14  Barb.  (N.  Y.)  559  (1853). 

*  Pullman  Car  Co.  v.  Missouri  Par. 
R.  Co.,  11  Fed.  637  (1882),  affirmed 
115  U.  S.  597  (1885),  (6  Sup.  Ct.  Rep. 
194) ;  Jessup  v.  Illinois  Cent.  R.  Co., 
36  Fed.  735  (1888). 

'  Farmers  Loan,  etc.  Co.  v.  New 
York,  etc.  R.  Co.,  150  N.  Y.  410 
(1896),  (44  N.  E.  Rep.  1043,  55  Am. 
St.  Rep.  689,  34  L.  R.  A.  76) ;  Barr 
V.  New  York,  etc.  R.  Co.,  96  N.  Y. 
444  (1884);  George  v.  Central  R., 
etc.  Co.,  101  Ala.  607  (1893),  (14 
So.  Rep.  752)  ;  Davis  v.  United  States 
Electric  Power,  etc.  Co.,  77  Md.  35 
(1893),  (25  Atl.  Rep.  982);  Goodin 
V.  Cincinnati,  etc.  Canal  Co.,  18  Ohio 
St.  169  (1868)  ;  Pearson  v.  Concord 
R.  Corp.,  62  N.  H.  537  (1883),  (13 
Am.  St.  Rep.  590). 

In   Glengary   Consol.    Min.    Co.    v. 


Boehmer,  28  Colo.  1  (1900),  (62 
Pac.  Rep.  839)  the  Court  said: 
"No  combination  of  stockholders  of 
a  corporation  less  than  the  whole 
will  be  permitted  to  manage  or  con- 
trol its  affairs  in  their  interest  alone. 
Minority  stockholders  cannot  be  de- 
prived of  their  rights  by  such  a  com- 
bination under  the  guise  of  a  policy 
of  the  corporation  dictated  by  the 
majority.  So  far  as  the  rights  of 
the  minority  are  concerned,  the  ma- 
jority, in  furtherance  of  their  plan  to 
reap  a  benefit  to  themselves  through 
a  transaction  in  which  the  minority 
do  not  participate,  become  the  cor- 
poration itself,  and  assume  the  trust 
relation  occupied  by  the  corporation 
towards  its  stockholders." 

For  a  different  \'iew  of  the  obHga- 
tions  of  a  corporation  as  a  controlling 
stockholder,  see  Robotham  v.  Pru- 
dential Ins.  Co.,  64  N.  J.  Eq.  673 
(1903),  (53  Atl.  Rep.  848)  where  tho 
Court  said:  "Authorities  have  been 
cited  to  support  the  proposition  that 
an  individual  or  corporation  holding  a 

547 


300 


INTERCORPORATE    RELATIONS 


[part   IV 


the  principle  that,  while  a  majority  of  the  stockholders  may 
legally  control  the  corporation's  business,  they  assume  the 
correlative  duty  of  good  faith,  and  cannot  manipulate  such 
business  in  their  own  interest  to  the  injury  of  minority  stock- 
holders.^ 

In  Farmers  Loan,  etc.  Co.  v.  New  York,  etc.  R.  Co."^  Judge 
Martin,  after  considering  a  number  of  cases  illustrating  the 
general  principle,  said:  "  While  the  question  in  some  of  the 
cases  cited  arose  between  stockholders  and  the  directors  and 


majority  of  the  capital  stock  of  an- 
other corporation  sustains,  by  reason 
of  such  holding,  a  fiduciary  relation 
to  the  minority  stockholders  and, 
therefore,  it  is  urged  that  the  acqui- 
sition of  a  majority  of  Fidelity  stock 
by  the  Prudential  Company  should 
be  avoided  [citing  this  section]. 
But  these  authorities  only  hold  in 
effect  that  the  fiduciary  relation  arises 
when  the  majority  stockholder  as- 
sumes control  of  the  corporation  and 
dictates  the  action  of  the  directors. 
The  naajority  stockholder  is  not  made 
a  trustee  for  the  minority  stockholder 
in  any  sense  by  the  mere  fact  that  he 
holds  a  majority  of  the  stock,  or  by 
the  further  fact  that  he  uses  the  voting 
power  of  his  stock  to  elect  a  board 
of  directors  for  the  corporation.  The 
majority  stockholder  does  not  neces- 
sarily control  the  directors  whom 
he  appoints,  and  in  fact  he  has  no 
right  to  control  them,  and  if  they  are 
controlled  by  him  they  may  be  vio- 
lating their  duty  for  which  he  also 
may  be  liable." 

See  also  Colgate  v.  United  States 
Leather  Co.,  67  Atl.  Rep.  657  (N.  J. 
Ch.  1907).  And  see  Pierce  v.  Old 
Dominion  Copper  Min.,  etc.  Co.,  58 
Atl.  Rep.  319  (N.  J.  1904). 

*  United  States:  Er\'in  v.  Oregon 
R.,  etc.  Co.,  27  Fed.  630  (1886)  ; 
Meeker  v.  Winthrop  Iron  Co.,  17  Fed. 
48  (1883).  See  also  Jackson  v.  Ludel- 
ing,  21  Wall.  616  (1874).  Compare 
Rogers  v.  Nashville,  etc.  R.  Co.,  91 
Fed.  312  (1898). 

548 


California:  Wright  v.  Or\'ille  Min- 
ing Co.,  40  Cal.  20  (1870). 

Maryland :  In  Cannon  v.  Brush 
Electric  Co.,  96  Md.  446  (1903), 
(54  Atl.  Rep.  121)  an  electric  Hght 
companjr  owned  a  controlling  interest 
in  another  electric  light  company 
doing  business  in  the  same  city  in 
competition  with  the  former  com- 
pany. A  .stockholder  of  the  latter 
company  brought  a  bill  against  the 
former  denying  that  it  was  fraudu- 
lently using  the  latter  company  for 
its  own  benefit  at  the  expense  of 
the  latter's  stockholders.  The  Court 
held,  and  was  undoubtedly  correct 
in  holding,  that  none  of  the  acts 
complained  of  established  bad  faith. 
But  the  case  well  illustrates  the  im- 
possibility of  two  corporations  con- 
trolled by  the  same  persons  being 
real  rivals  in  bu.siness. 

New  York:  Gamble  v.  Queens 
County  Water  Co.,  123  N.  Y.  91 
(1890),  (25  N.  E.  Rep.  201) ;  Sage  v. 
Culver,  147  N.  Y.  241  (1895),  (41  N.  E. 
Rep.  513) ;  Pondir  v.  New  York,  etc. 
R.  Co.,  72  Hun,  384  (1893),  (25  N.  Y. 
Supp.  560) ;  Meyer  v.  Staten  Island 
R.  Co.,  7  N.  Y.  St.  Rep.  245 
(1887). 

England:  Menier  v.  Hooper's  Tele- 
graph Works,  L.  R.  9  Ch.  App.  350 
(1874)  ;  Gregory  v.  Patchett,  33  Beav. 
595  (1864). 

2  Farmers  Loan,  etc.  Co.  v.  New 
York,  etc.  R.  Co.,  150  N.  Y.  430 
(1896),  (44  N.  E.  Rep.  1043,  55  Am. 
St.  Rep.  689,  34  L.  R.  A.  76). 


CHAP,  XXVIl]       CONTROL    OF   ONE   CORPORATION   BY   ANOTHER  §    300 

officers  of  a  company,  who,  as  such,  held  a  position  of  trust 
as  to  the  former,  still,  where,  as  in  this  case,  a  majority  of  the 
stock  is  owned  by  a  corporation  or  combination  of  individuals, 
and  it  assumes  the  control  of  another  company's  business  and 
affairs  through  its  control  of  the  officers  and  directors  of  the 
corporation,  it  would  seem  that,  for  all  practical  purposes, 
it  becomes  the  corporation  of  which  it  holds  a  majority  of  the 
stock,  and  assumes  the  same  trust  relation  towards  the  minority 
stockholders  that  a  corporation  itself  usually  bears  to  its  stock- 
holders. .  .  .  The  principle  of  these  authorities  renders  it 
quite  obvious  that  a  corporation,  purchasing  a  majority  of  the 
stock  of  a  competing  one,  cannot  obtain  control  of  its  affairs, 
divert  the  income  of  its  business,  refuse  business  which  would 
enable  the  defaulting  company  to  pay  its  interest,  and  then 
institute  an  action  in  equity  to  enforce  its  obligations,  for  the 
avowed  purpose  of  obtaining  entire  control  of  its  property  to 
the  injur}'  of  the  minority  stockholders.  Such  a  course  of  ac- 
tion is  clearly  opposed  to  the  true  interests  of  the  corporation 
itself,  plainly  discloses  that  one  thus  acting  was  not  influenced 
by  any  honest  desire  to  secure  such  interests,  but  that  its 
action  was  to  serve  an  outside  purpose,  regardless  of  conse- 
quences to  the  debtor  company,  and  in  a  manner  inconsistent 
with  its  interest  and  the  interest  of  its  minority  stock- 
holders." ^ 

The  fact  that  the  right  to  purchase  and  hold  stock  is  expressly 
conferred  upon  a  corporation  by  statute,  in  no  way  confers  upon 
it  power  to  employ  the  stock  for  inequitable  purposes.  With- 
out statutory  authority,  it  has  no  power  to  hold  stocks  at  all. 

'  The  primary  injury  in    Farmers  35    Misc.    (N.  Y.)   69   (1901),    (N.  Y. 

Loan,  etc.  Co.  v.  New  York,  etc.  R.  Co.,  Supreme  Court). 

supra,  was    to    the   corporation    fore-  In  De  Neufville  v.  New  York,  etc. 

closed  and  tlie  injury  to  stockholders  R.  Co.,  81  Fed.  10  (1897)  it  \va.s  hekl 

was    derivative    only.     Consequently  that  a  .stockhohler's  bill  setting  forth 

it  was  held  in  a  suit  brought  by  an  facts  shown  in  Farmers  Loan,  etc.  Co. 

individual  stockholder  following  that  r.  New  York,  etc.  R.  Co.,  supra,  showed 

decision  that  the  corporation  was  a  an    unlawful    diversion   of   the    funtls 

necessary  party  to  a  suit  by  a  stock-  of  the  corporation  in  question  which 

holder  in  behalf  of  all  similarly  sit-  entitled  it  to  sue   for  the  protection 

uated,  and  that  a  stockholder  could  of  its  rights ;    and  that  in  default  of 

not  maintain  an  individual  action  for  such  action  a  stockholder  could  sue 

injury  to  his  particular  shares.  in  its  behalf. 

Niles   V.    New    York,  etc.    R.   Co., 

549 


§301 


INTERCORPORATE    RELATIONS 


[part  IV 


With  authority,  it  assumes  the  equitable  obligations  of  any 
majority  stockholder. 

§  301.  Remedies  of  Minority  Stockholders  of  Controlled  Cor- 
poration. —  While  a  corporation,  holding  a  controlling  inter- 
est in  another  company,  so  long  as  it  fulfils  the  obligation 
of  its  trust  relation  towards  minority  stockholders,  may  exercise 
its  legal  power  to  determine  the  policy  of  the  corporation  which 
it  controls,  it  will  be  restrained  by  a  court  of  equity,  at  the 
instance  of  a  minority  stockholder,  when  it  disregards  its  obli- 
gations and  manages,  or  undertakes  to  manage,  the  corpora- 
tion for  its  own  use  rather  than  for  the  benefit  of  all  the  stock- 
holders.^    The  temptation  to  regulate  the  affairs  of  a  competing 


^  In  MacGinnis  v.  Boston,  etc. 
Mining  Co.,  29  Mont.  462  (1903), 
(75  Pac.  Rep.  89)  the  Montana 
Supreme  Court  said:  "Whenever, 
in  the  conduct  of  the  business,  the 
purposes  of  the  charter  of  the  Mon- 
tana Company  are  ignored  and  the 
rights  of  the  minority  stockholders 
are  disregarded,  the  courts  of  this 
State  have  ample  power  by  way  of 
injunction,  or  a  receiversliip  if  neces- 
sary, to  compel  it  to  observe  its  con- 
tract obligations  with  the  State  and 
stockholders." 

One  railroad  company,  owning  a 
majority  of  the  stock  of  another 
railroad  company,  and  controlling  its 
affairs,  has  no  right  to  vote  its  stock 
so  as  to  manage  the  corporation  for 
its  own  use  rather  than  for  the  latter 's 
benefit,  to  impair  its  earnings  and 
prejudice  the  rights  of  its  minority 
stockholders  ;  and  equity  will  restrain 
such  voting.  Memphis,  etc.  R.  Co. 
V.  Wood,  88  Ala.  630  (1889),  (7  So. 
Rep.  108). 

Where  a  railroad  company  has 
purchased  a  majority  of  the  stock  of  a 
competing  company  in  order  to  lessen 
competition,  and,  after  assuming  con- 
trol, ^^olates  its  duties  in  respect  to  the 
property  and  rights  of  the  controlled 
company,  and  commits  wilful  waste, 
a  court  of  equity  will  interfere,  at  the 
suit  of  a  minority  stockholder  of  the 

550 


controlled  corporation,  and  will  re- 
strain the  controlling  corporation  from 
further  using  its  stock  in  the  manage- 
ment of  the  corporation,  and  in  the 
election  of  its  officers.  George  v. 
Central  R.,  etc.  Co.,  101  Ala.  607 
(1892),  (14  So.  Rep.  752). 

Generally,  that  one  corporation 
may  be  enjoined  from  voting  the  ma- 
jority stock  held  by  it  in  another  cor- 
poration when  the  two  companies 
have  conflicting  interests,  see  Amer- 
ican, etc.  Co.  V.  Linn,  93  Ala.  610 
(1890),  (7  So.  Rep.  191);  Mack  v. 
DeBardeleben,  etc.  Co.,  90  Ala.  396 
(1890),  (8  So.  Rep.  150). 

Where  the  directors  of  an  insurance 
company  arranged  for  the  transfer 
of  the  control  of  their  corporation 
to  a  trust  company  under  a  scheme 
which  would  confer  upon  them  and 
associates  of  their  choosing  great 
profits  and  power,  it  was  held  that 
they  were  disqualified  from  finally 
determining  that  the  scheme  would 
be  advantageous  to  their  corporation 
and  that  the  burden  was  upon  them 
to  show  that  it  would  be  advanta- 
geous. 

Robotham  v.  Prudential  Ins.  Co., 
64  N.  J.  Eq.673  (1903),  (53Atl.  Rep. 
842). 

Fraudulent  use  of  its  power  by  a 
corporation  holding  a  majority  of  the 
stock  of  another  corporation,  to  the 


CHAP.  XXVIl]      CONTROL   OF   ONE   CORPORATION    BY   ANOTHER  §   301 

company  in  its  own  interest  is,  naturally,  so  great  that  a  court 
of  equity  will  zealously  guard  the  rights  of  minority  stockholders 
from  actual  or  threatened  infringement,  and  will  restrain,  by 
injunction,  the  controlling  corporation  from  administering  the 
affairs  of  the  corporation  in  a  manner  injurious  to  the  cor- 
poration and  its  stockholders  as  a  whole.  Equity  will  compel 
majority  stockholders  to  exercise  their  controlling  power  over 
a  corporation  in  its  interest  and  not  for  ulterior  purposes. 


injury  of  minority  stockholders,  may 
constitute  ground  for  the  appoint- 
ment of  a  receiver  for  tlie  corporation. 
Davis  V.  United  States  Electric 
Power,  etc.  Co.,  77  Md.  35  (1893), 
(25  .\tl.  Rep.  982). 

In  Milbank  v.  New  York,  etc.  R. 
Co.,  64  How.  Pr.  (N.  Y.)  28  (1882), 
the  Court  said  :  "It  is  against  public 
policy  to  have,  or  permit,  one  cor- 
poration to  embarrass  and  control 
another,  and,  perhaps,  competing  cor- 
poration, in  the  management  of  its 
affairs,  as  may  be  done  if  it  is  per- 
mitted to  own  and  vote  upon  the 
stock."  Compare  tliis  language  with 
the  decision  in  another  New  York 
case  (Oelbermann  v.  New  York,  etc. 
R.  Co.,  77  Hun  (N.  Y.),  332  (1894), 
(29  N.  Y.  Supp.  545)),  where  it  was 
held  that  a  court  of  equity  could  not 
restrain  a  controlling  corporation 
from  voting  on  its  stock  upon  allega- 
tion or  proof  that  it  intended  to  cau.se 
a  board  of  directors  to  be  elected, 
who,  by  their  action  or  non-action, 
might  prejudice  the  interests  of  minor- 
ity stockholders. 

Where  one  railroad  companj'  con- 
trols another,  as  a  part  of  its  system. 


through  the  ownership  of  .stock,  and 
operates  the  road  of  the  latter  com- 
pany in  its  own  interest,  and  not  in 
the  interest  of  the  controlled  com- 
pany, a  receiver,  into  whose  hands 
both  roads  have  passed,  cannot  re- 
cover from  the  controlled  company 
expenses  incurred  in  operating  it. 
Phinizy  v.  Augusta,  etc.  R.  Co.,  62 
Fed.  771   (1894). 

A  stockholder  has  no  standing  to 
enjoin  the  sale  of  controlling  interests 
in  his  corporation  to  another  corpora- 
tion upon  the  ground  that  he  appre- 
hends that  the  purchasing  corpora- 
tion will  use  such  control  to  the 
prejudice  of  minority  stockholders. 

Ingraham  v.  National  Salt  Co., 
72  App.  Div.  (N.  Y.)  582  (1902), 
(76  N.  Y.  Supp.  1116),  affirmed  179 
N.  Y.  556  (1904),  (71  N.  E.  Rep. 
1128). 

That  laches  may  bar  a  minority 
stockholder  of  a  corporation,  controlled 
by  another,  from  complaining  of  the 
diversion  of  traffic  and  misuse  of  prop- 
erty by  the  controlling  corporation,  see 
Alexander  v.  Searcy,  81  Ga.  536  (1889), 
(8  S.  E.  Rep.  630). 


551 


§   302  INTERCORPORATE   RELATIONS  [PART   V 


PART   V 
COMBINATIONS   OF  CORPORATIONS 


Article    I 

COMBINATIONS      AS      AFFECTED      BY     PRINCIPLES     OF 
CORPORATION    LAW 


CHAPTER   XXVIII 


NATURE    AND    FORMATION    OF   COMBINATIONS 

§  302.  Definition  of  Term  "Combination." 

§  303.  Definition  of  Term  "Association." 

§  304.  Definition  of  Term  "Trust." 

§  305.  Popular  Use  of  Word  "Trust." 

§  306.  Definition  of  Phrase  "Corporate  Combination.!! 

§  307.  Evolution  of  the  Combination. 

§  308.  Formation  of  Associations. 

§  309.  Formation  of  Trusts. 

§  310.  Formation  of  Corporate  Combinations. 

§  311.  Analysis  of  Principles  determining  Legality  of  Combinations. 

§  302.  Definition  of  Term  "  Combination."  —  The  word 
"  combination  "  is  used  in  this  treatise  as  a  generic  term  to  de- 
scribe any  union  of  corporations/  not  amounting  to  consolida- 

•  Industrial  combinations  are,  of  corporations  and  indi\'iduals.  The 
practically,  combinations  of  cor-  scope  of  this  treatise  includes  only 
porations.  The  modern  combination  an  examination  of  the  principles  relat- 
of  capital  is  a  corporate  combina-  ing  to  combinations  of  corporations, 
tion.  Combinations  of  individuals  but,  in  such  examination,  it  is  be- 
are,  however,  governed  by  the  same  lieved  to  be  both  necessary  and  de- 
rules  of  public  policy,  and  anti-trust  sirable  to  refer  freely  to  all  illustrative 
legislation  —  State  and  federal  —  is  cases  —  whether  of  combinations  of 
directed    both    against    combinations  individuals  or  of  corporations. 

552 


CHAP.  XXVIIl] 


NATURE   AND    FORMATION 


303 


tion,  entered  into  by  mutual  agreement  for  supposed  mutual 
advantage.* 

§  303.  Definition  of  Term  "  Association."  — The  term  "  asso- 
ciation" is  employed  to  describe  that  species  of  combination 
wherein  two  or  more  competing  corporations  unite,  by  agree- 
ment, for  a  special  purpose  of  business,  and  conduct  their 
affairs  according  to  such  agreement,  but  in  which  there  is  no 
community  of  financial  interest  and  each  corporation  retains 
its  own  property  and  manages  its  own  affairs.^ 


'  "The  union  or  association  of  two 
or  more  persons  for  the  attainment  of 
some  common  end,"  Century  Dic- 
tionary sub  nom.  "Combination." 
In  Watson  v.  Harlem,  etc.  Nav.  Co., 
52  How.  Pr.  (N.  Y.)  352  (1877),  the 
Court  thus  discussed  the  meaning 
to  be  attached  to  the  word  "combine  " 
as  used  in  a  statute  forbidding  certain 
companies  to  "combine  "  :  "Theword 
'combine'  is  not  to  be  found  in  either 
of  the  dictionaries  of  Burrill  or 
Bouvier,  and  I  do  not  find  it  defined 
in  the  edition  of  Jacobs  to  which  I 
have  access.  Bou\-icr  defines  'com- 
bination' as  a  union  of  men  for  the 
purpose  of  \'iolating  the  law,  and  as  a 
union  of  different  elements.  Jacobs, 
without  specifically  defining  the  word, 
states  that  'combinations  to  do  un- 
lawful acts  are  punishable  before  the 
unlawful  act  is  executed ;  this  is  to 
prevent  the  consequences  of  combina- 
tions and  conspiracies,'  and  he  refers 
to  the  titles  'Confederacy'  and  'Con- 
spiracy.' He  defines  confederacy  to 
be  'where  two  or  more  combine  to- 
gether to  do  any  damage  or  injury  to 
another,  or  to  do  any  unlawful  act.' 
As  to  the  meaning  of  the  word  'con- 
spiracy,' he  says  this  word  was  for- 
merly used  almost  exclusively  'for 
an  agreement  of  two  or  more  persons 
falsely  to  indict  one,  or  to  procure 
him  to  be  indictee!  of  felony;  now  it 
is  no  less  commonly  used  for  the 
unlawful  combination  of  workmen  to 
raise  their  wages,  or  to  refuse  work- 
ing except  on  stipulated  conditions.' 


Worcester  defines  'combine'  thus* 
'To  join  together;'  'to  coalesce;'  'to 
unite;'  'to  be  united;'  'to  be  joined 
in  friendship  or  in  design.'  And  he 
defines  'combination'  to  be  a  'union 
of  persons  for  certain  purpo.ses, ' 
'association,'  'alliance,'  'coalition,' 
'confederacy.'  And  Roget,  in  his 
Thesaurus,  classifies  the  word  'com- 
bine' as  synonymous  with  or  belong- 
ing to  the  same  class  as  'unite,  incor- 
porate, amalgamate,  embody,  absorb, 
reimbody,  blend,  merge,  fuse,  melt 
into  one,  consolidate,  coalesce,  cen- 
tralize, to  impregnate,  to  put  together, 
to  lump  together.'  ...  I  think  that 
there  can  be  no  difficulty  in  deter- 
mining precisely  what  the  legislature 
intended  in  using  the  word  'combine' 
in  the  twenty-seventh  section  of  the 
act  now  under  consideration.  They 
did  not  intend  to  use,  and  did  not  use, 
that  word  in  the  strict  technical  legal 
sense  which  is  maintained  by  t lie  coun- 
sel for  the  defendants.  The  object  of 
the  legislature  was  to  prevent  coa- 
litions, unions,  mutual  agreements, 
blendings  of  the  companies  which 
might  be  organized  and  incorporated, 
under  the  act,  for  any  purpo.se." 

See  also  ante,  §  16:  "Distinction 
between  Consolidation  and  Combina- 
tion." 

2  "The  act  of  a  number  of  persons 
who  unite  or  join  togetlicr  for  some 
special  purpo.se  or  business.  The 
union  of  a  company  of  persons  for  the 
transaction  of  designatetl  affairs,  or 
the  attainment  of  some  common  ob- 

553 


§  305 


INTERCORPORATE    RELATIONS 


[part  V 


§  304.  Definition  of  Term  "  Trust."  — A  specific  definition 
of  the  term  "  trust,"  as  applied  to  industrial  combinations,  is: 
A  combination  of  competing  corporations  formed  through 
the  transfer  by  the  stockholders  of  several  corporations  to 
a  common  trustee  of  controlling  stock  interests  therein,  in 
exchange  for  certificates  issued  by  the  trustee  for  each  stock- 
holder's proportional  equitable  interest  in  all  the  stock  so 
transferred.^ 

§  305.  Popular  Use  of  Word  "  Trust."  —  The  word  "  trust," 
as  popularly  used,  has  a  much  broader  meaning  than  is  indi- 
cated by  its  specific  definition.  It  is  applied  generally  to  all 
combinations  of  industrial  corporations  formed  for  the  pur- 
pose of  regulating  the  price  and  supply  of  commodities.^    The 


ject."     Black's  Law   Diet.,   sub  nom. 
"Association." 

"  As  mercantile  concerns  under  free- 
dom of  trade  have  tended  in  our  cities 
to  be  more  and  more  vast  and  com- 
prehensive and  absorb  the  smaller 
ones,  so  it  is  reasonable  to  suppose 
that  the  right  of  association  will  be 
made  more  and  more  available  in 
manufacturing.  In  fact  the  two 
tendencies  are,  in  substance,  the 
same.  If  association  is  prevented 
by  law  different  manufactories  may 
be  melted  into  one."  Article  in 
"Political  Science  Quarterly,"  vol.  3, 
p.  609,  by  Prof.  Theodore  W.  Dwight. 
^  "An  organization  for  the  control 
of  several  corporations  under  one 
direction  by  the  device  of  a  transfer 
by  the  stockholders  in  each  corpora- 
tion of  at  least  a  majoritj'  of  the  stock 
to  a  central  committee,  or  board 
of  trustees,  who  issue  in  return  to 
such  stockholders,  respectively,  cer- 
tificates showing  in  effect  that,  al- 
though they  have  parted  with  their 
stock  and  the  consequent  voting 
power,  they  are  still  entitled  to 
di\'idends  or  to  share  in  the  profits  — 
the  object  being  to  enable  the  trustees 
to  elect  directors  in  all  the  corpora- 
tions, to  control  and  suspend  at  pleas- 
ure the  work  of  any,  and  thus  econ- 
omize  expenses,   regulate   production 

554 


and  defeat  competition."  Century 
Diet,  sub  nom.  "  Trust "  (specific 
definition). 

A  trust  "is  an  arrangement  by 
which  the  stockholders  of  various  cor- 
porations place  their  stocks  in  the 
hands  of  certain  trustees,  and  take 
in  lieu  thereof  certificates  showing 
each  stockholder's  equitable  interest 
in  all  the  stock  so  held.  The  result 
is  twofold :  1.  The  stockholders 
thereby  become  interested  in  all  the 
corporations  whose  stocks  are  thvis 
held.  2.  The  trustees  elect  the  di- 
rectors of  the  several  corporations." 
Pamphlet  by  Mr.  S.  C.  T.  Dodd,  gen- 
eral solicitor  Standard  Oil  Co.,  en- 
titled "  Combinations :  Their  Uses 
and  Abuses." 

2  Black's  Law  Diet,  sub  nom. 
"Trusts."  In  Queen  Ins.  Co.  V.  State 
(Tex.  Civ.  App.  1893)  22  S.  W.  Rep. 
1048  (22  L.  R.  A.  492)  the  Court  said : 
"The  term  'trust'  is  not  employed  in  a 
technical  legal  sense.  By  very  recent 
commercial  usage,  the  meaning  of 
the  word  has  been  extended  so  as  to 
comprehend  combinations  of  corpora- 
tions or  capitalists  for  the  purpose  of 
controlling  the  price  of  articles  of 
prime  necessity,  or  the  charges  of 
transportation,  to  the  public." 

Pocahontas  Coke  Co.  v.  Powhatau 
Coal,  etc.  Co.,  60  W.  Va.  508   (1906), 


CHAP.  XXVIIl] 


NATURE   AND   FORMATION 


§   306 


form  of  combination  is  immaterial.  Associations  for  pooling 
products  and  corporations  formed  for  the  purpose  of  purchasing 
corporate  properties  have  both  —  and  with  equal  inaccuracy 
—  been  called  "  trusts." 

The  words  "  trust  "  and  "  combination  "  are  often  used 
synonymously,  and  a  definition  of  a  combination  as  "  a  union 
of  men  for  the  purpose  of  violating  the  law,"  ^  defines  a  trust 
as  it  has  sometimes  existed,  possibly  more  in  the  past  than  in 
the  present,  in  the  popular  imagination. 

This  broad  use  of  the  word  "  trust  "  to  describe  combina- 
tions which  are  not  in  the  trust  form,  producing  confusion  and 
sometimes  unwarranted  prejudice,  should  be  avoided.  The 
word  is  used  in  this  treatise  as  applying  specifically  to  the 
trust  form  of  combination. 

§  306.  Definition  of  Phrase  "  Corporate  Combination."  — 
The  phrase  "  corporate  combination  "  may  be  defined  as  a  com- 
bination of  corporations  formed  by  the  transfer  of  the  control- 
ling stock  interests,  or  the  properties  and  good-will,  of  several 
corporations  engaged  in  the  same  branch  or  connected  branches 


(56  S.  E.  Rep.  269,  116  Am.  St. 
Rep.  901,  10  L.  R.  A.  (n.  s.)  268): 
"A  trust  has  been  defined  as  a  con- 
tract, combination,  confederation  or 
understanding,  express  or  implied, 
between  two  or  more  persons  to  con- 
trol the  price  of  a  commodity  or  ser- 
vices for  the  benefit  of  the  parties 
thereto,  and  to  the  injury  of  the 
public,  and  which  tends  to  create  a 
monoj)oly."  See  also  State  v.  Fire- 
men's Fund  Ins.  Co.,  152  Mo.  1 
(1899),  (52  S.  W.  Rep.  595,  45  L. 
R.  A.  363). 

For  definitions  of  the  term  "trust  " 
in  State  anti-trust  statutes,  see 
post,  Ch.  XLII. 

'  Bouvier's  Law  Diet.  (Rawle's 
Ed.)  siib  noin.   "  Combinations." 

The  following  extract  from  the 
opinion  in  State  v.  Armour  Packing 
Co.,  173  Mo.  356,  387  (1903),  (73 
S.  W.  Rep.  645)  presents  an  extreme 
view  of  the  effect  of  trusts  and  com- 
binations :    '"Competition   is  the  life 


of  trade.'  Pools,  trusts  and  conspir- 
acies to  fix  or  maintain  the  prices  of 
the  necessaries  of  Ufe,  strike  at  the 
foundation  of  government ;  instil  a 
destructive  poison  into  the  life  of  the 
body  politic ;  wither  the  energies  of 
competitors,  blight  individual  invest- 
ments in  legitimate  business ;  drive 
small  and  honest  dealers  out  of  busi- 
ness for  themselves,  and  make  them 
mere  'hewers  of  wood  and  drawers  of 
water'  for  the  trust;  raise  the  cost 
of  li\'ing  and  lower  the  price  of  wages  ; 
take  from  the  average  American 
freeman  the  abiUty  to  supply  his 
family  with  neces.sary,  adequate 
and  wholesome  food  ;  force  the  boys 
away  from  school,  and  into  the  va- 
rious branches  of  traile  and  labor, 
and  the  girls  into  workshops  and  other 
avenues  of  business,  and  make  them 
breadwinners  while  they  are  yet 
almost  infants,  because  the  head 
of  the  house  cannot  earn  enough  to 
feed   and   clothe  his   family." 

555 


§   307  INTERCORPORATE   RELATIONS  [PART    V 

of  business  to  a  single  corporation,  formed  for  the  purpose, 
which  by  virtue  of  the  transfer  acquires  a  proprietary^  interest 
in  such  stock  or  properties.* 

§  307.  Evolution  of  the  Combination.  —  There  have  been 
three  distinct  steps  in  the  development  of  the  present  cor- 
porate combination,  brought  about  in  an  attempt  to  make 
effective  the  tendency  of  modern  business  life  towards  the 
concentration  of  corporate  interests  in  the  face  of  adverse 
judicial  decisions: 

First.  Associations  of  corporations  for  supposed  mutual 
advantage  were  formed,  having  for  their  object,  generally, 
the  restriction  of  production  and  the  regulation  of  prices. 
This  form  of  corporate  cooperation  was  usually  exemplified 
by  pooling  agreements  and  selling  agencies,  which  left  the 
several  corporations  independent  of  each  other,  except  as 
bound  by  a  more  or  less  informal  agreement.  Combinations 
of  this  character  were  declared  illegal  by  the  courts,  as  tend- 
ing to  suppress  competition  and,  consequently,  as  being  con- 
trary to  public  policy. 

Second.  The  trust  form  of  combination  was  resorted  to  in 
an  attempt  to  avoid  the  effect  of  the  decisions  against  associa- 
t"ons,  apparently  in  the  belief  that  the  deposit  by  stockholders 
of  their  shares  with  a  common  trustee  for  a  common  purpose  did 
not  constitute  a  combination  of  corporations,  because 

(1)  The  acts  of  the  stockholders  were  not  the  acts  of  the 
corporations. 

(2)  The  stockholders  of  the  several  corporations  had  a  right, 
if  they  saw  fit,  to  deposit  their  stock  with  a  trustee. 

These  views,  however,  were  not  adopted,  in  their  entirety^ 
by  the  courts,  and  the  trust  form  of  combination  was  con- 
demned, not  only  for  the  reasons  stated  in  the  case  of  associa- 

'  Strictly  speaking,   any   combina-  "Combinations,"     from.     whicH     the 

tion    of   corporations   is    a    corporate  phrase    is    taken,    defines    corporate 

combination.     As   used   in  this    trea-  combinations     as     follows     (§     583)  : 

tise,  however,  the  phrase  has  reference  "Combinations    formed    bj'    the    sale 

rather  to  the  form  of  the  combination  or  lease  of  the  properties,  assets  and 

than    to    its    elements.     The    phrase  good-will    of    the   several    parties    or 

"corporate     form     of     combination"  corporations  to  one  large  corporation 

would  be   more   exact   but   less   con-  organized  for  the  purpose  of  acquiring 

venient.  the  several  properties." 

Mr.    Eddy    in    his    treatise    upon 

556 


CHAP.  XXVIIl] 


NATURE   AND    FORMATION 


308 


tions,   but  because  it  violated  fundamental  principles  of  the 
law  of  corporations. 

Third.  The  corporate  combination  was  then  formed  to 
avoid  the  effect  of  the  decisions  against  the  "trust,"  In  the 
form  of  a  corporation  holding  the  stocks  of  the  subsidiary 
companies  it  has  not  always  withstood  attack,  even  for  rea- 
sons peculiar  to  corporation  law.  In  the  form  of  a  corpora- 
tion purchasing  the  plants  of  the  several  companies,  it  seems 
invulnerable  from  that  standpoint,  but,  in  common  with 
ever}^  form  of  combination,  may  be  successfully  attacked  if 
formed  for  an  unla^\■ful  i)urpose. 

§  308.    Formation  of   Associations, 
(A)     Railroad  Pools:  * 

An  agreement  between  competing  railroad  or  other  trans- 
portation  companies   whereby,   for   the   purpose   of   avoiding 


*  Pools.  "A  railroad  pool  is  an 
agreement  between  competing  rail- 
roads to  apportion  competing  busi- 
ness. More  precisely,  it  is  an  arrange- 
ment made  by  several  railroails  com- 
peting for  business  to  allot  to  each  a 
stated  percentage  of  the  whole  com- 
petitive traffic,  or  of  the  receipts 
thereof,  together  with  a  mutual 
guaranty  that  each  road  shall  receive 
its  share.  The  purpose  of  pooling 
is  to  remove  the  incentive  to  com- 
petition. A  road  will  hardly  cut  its 
rates  to  get  away  another's  traffic 
if  there  is  nothing  to  be  gained  by 
so  doing. 

"  Railroad  pools  are  of  tw'o  kinds  : 

(1)  Traffic  pools. 

(2)  Money  pools. 

"I.  A  traffic  or  tonnage  pool  is  an 
agreement  whereby  each  member  is 
guaranteed  to  receive  and  can  receive 
only  a  stated  percentage  of  the  com- 
petitive traffic.  Taking  a  series  of 
years,  the  percentages  of  freight 
carried  by  competing  and  well  estab- 
lished lines  between  two  important 
points  will  not  vary  greatly.  The 
distribution  of  busine.ss  is  fairly  con- 
stant. It  is,  therefore,  easy  for  the 
makers  of  the  pool  to  determine  the 


proportion  of  the  traffic  which  each 
member  should  receive.  A  pool  to  be 
permanent  should  be  based  upon 
natural  percentages.  A  traffic  pool 
onlj'  applies  to  competitive  traffic  and 
sometimes  only  to  through  competi- 
tive traffic.  Local  business  is  un- 
affected. In  fact,  rate  wars  with 
regard  to  local  competitive  traffic 
have  taken  place  between  members 
of  a  through  traffic  pool.  When  the 
time  for  adjusting  accounts  ap- 
proaches, if  any  member  has  received 
less  than  its  allothient  of  the  traffic, 
sufficient  freight  is  diverted  from  a 
road  which  has  received  in  excess 
of  its  percentage  to  make  up  the  de- 
ficiency. Freight  diverted  for  this 
purpose  is,  if  po.ssible,  freight  not 
specially  routed.  But  sometimes  it 
is  ncces.sary  to  forward  contrary  to 
the  preferences  of  shippers.  This 
makes  trouble,  and  was  so  great  an 
objection  to  the  traffic  pool  that  it 
was  largely  abandoned,  even  before 
the  enactment  of  the  statute  against 
pooling.   .   .   . 

"II.  A  money  pool  is  an  agree- 
ment whereby  each  member  is  guar- 
anteed to  receive  and  can  receive  only 
a   stated  percentage   of  the  receipts 

557 


§   308  INTERCORPORATE    RELATIONS  [PART   V 

competition,  the  joint  traffic  or  earnings  are  divided  between 
the  companies  in  fixed  proportions,  constitutes  "  poohng." 
Railroad  pools  are  of  two  kinds: 

(1)  Traffic  pools,  wherein  an  agreed  proportion  of  the 
traffic  or  business  of  all  the  companies  is  allotted  to  each  cor- 
poration.^ 

(2)  Money  pools,  wherein  all  the  earnings  or  profits  are  placed 
in  a  common  fund  or  pool  and  divided  between  the  corporations 
in  the  proportions  stated  in  the  agreement.^ 

Manufacturing  corporations  may  also,  if  not  unlawful,  "  pool  " 
their  products  or  earnings,  but  the  term  is  generally  used  with 
reference  to  the  agreements  of  railroad  or  other  transportation 
companies.^ 
(B)    Industrial  Associations: 

Associations  of  competing  industrial  corporations  have  for 
their  primary  object  the  restriction  of  competition.  This 
object  has  been  sought  to  be  attained  under  agreements  in 
various  forms: 

(1)  Agreements  prescribing  a  scale  of  prices  at  which  the 
products  of  the  several  companies  shall  be  sold.^ 

from  competitive  traffic.      This  tj^js  of  the  earnings  might  have  been  at- 

of  pool  —  called  a   joint   purse  —  has  tractive  to  a  road  in  need  of  funds. 
been   common   in   England.     It   may  "The   money  paid  into  a  money 

be    based    either    upon    gross    or    net  pool  is  periodically  distributed  by  the 

earnings.     The     percentages     of    the  official    in    charge    according    to    the 

members   are,   of  course,    determined  stipulated   allotments.     In   this   type 

by  past  earnings,  but  they  take  their  of  pool  each  road  takes  all  the  business 

allotments     entirely     irrespective     of  offered  and  conducts  its  affairs  inde- 

actual    earnings     during    the    pool's  pendently    of    the    other    members, 

existence.     But    as    one    road    might  except    as    it    pools    its    receipts    in 

incur  extra  expenses  in  mo\'ing  a  far  whole  or  part." 

greater  bulk  of  traffic  than  its  propor-  From    American    Railroad    Rates, 

tion  of  the  earnings  called  for,  it  was  by  Walter   C.    No5'es,    Boston,    1905, 

customary,  during  the  pooling  period  pp.  137-141. 

of  the   American   railroads,    for   each  '  Eclipse  Towboat  Co.  v.  Pontchar- 

road  to  retain  a  third  or  a  half  of  the  train  R.  Co.,  24  La.  Ann.  1  (1872). 
receipts  from  the  pooled  business  to  ^  Hare    v.    London,    etc.    R.    Co., 

cover  the  actual  expenses  connected  2  Johns.  &  H.  80  (1861),  (30  L.  J.  Ch. 

therewith.     The     remainder     of     the  817,  7  Jur.  (x.  s.),  1145). 
receipts  went  into  the  pool.     In  some  ^  For  consideration  of  the  legality  of 

cases    the    roads    were    permitted    to  "po'nlins,"  see  post,  §  364a:   Associa- 

retain  but  a  very  small  percentage  in  tions    of    Railroad    Companies.  —  (C) 

order    to    avoid    the    temptation    to  Pools." 
compete    for    that    alone.     A   moiety  *  Dolph    v.    Troy    Laundry    Mach. 

558 


CHAP.  XXVIIl]  NATURE   AND    FORMATION  §  309 

(2)  Agreements  limiting  the  amount  of  production  of  each 
company.' 

(3)  Agreements  appointing  a  common  selling  agent  to 
dispose  of  the  products  of  all  the  companies  at  fixed  prices, 
or  at  prices  adjusted  by  a  supervising  committee.^ 

(4)  Agreements  for  the  purchase  of  a  company's  entire 
production  for  a  term  of  years.^ 

(5)  Agreements  to  give  rebates  to  members  of  association.^ 
Many    other    forms    of    agreement,    modifications    of    those 

stated,  have  also  been  adopted. 

§  309.  Formation  of  Trusts.  —  The  following  elements  are 
essential  to  the  formation  and  existence  of  the  trust  form  of 
combination: 

(1)  The  deposit  by  the  holders  of  a  majority  of  the  stock 
of  the  several  corporations  to  be  coml)ined  of  their  shares 
with  a  trustee  or  trustee  body,  and  the  transfer  of  the  legal 
title  thereof  to  the  trustee. 

(2)  The  issue  and  delivery  by  the  trustee  to  the  stockholders, 
in  lieu  of  the  stock  deposited,  of  trust  certificates  showing  the 
proportional  interest  of  each  stockholder  in  all  the  stock  de- 
posited. 

(3)  The  execution  of  a  trust  agreement  ^  defining  the  rights 

Co.,  28  Fed.  (553)  (1886);    De  Witt  Coal  Co.,  68  Pa.   St.   173  (1871),   (8 

Wire  Cloth  Co.  v.   New  Jersey  Wire  Am.   Rep.   159)  ;    Skrainka  v.  Schar- 

ClothCo.,  16Daly(N.  Y.),529(1891),  ringhauscn,  8  Mo.   App.  522  (1880); 

(14  N.  Y.  Supp.  277)  ;  Cohen  v.  Berlin  Central  Shade  Roller  Co.  v.  Cushman, 

&  Jones  Env.  Co.,  38  App.    Div.   (N.  143  Ma.ss.  3.'j3  (1887),  (9  N.  E.  Rep. 

Y.)  499  (1899),  (56  N.  Y.  Supp.  588) ;  629) ;   Cunimings  v.  Union  Blue  Stone 

Nesterv.  Continental  Brewing  Co.,  161  Ass'n,    15    App.    Div.    (N.    Y.)    602 

Pa.  St.  473  (1894),  (29  Atl.  Rep.  102) ;  (1897),    (44   N.   Y.   Supp.   787).     See 

Herriman    v.    Menzies,    115    Cal.    16  also    Pocahontas    Coke    Co.    r.    Pow- 

(1896),    (44  Pac.    Rep.    660,   56    Am.  hatan   Coal,   etc.  Co.,  60  W.  Va.  508 

St.  Rep.  82,  35  L.  R.  A.  318)  ;   Texas  (1906),  (56  S  .E.  Rep.  273,  116  Am.  St. 

Standard  Oil  Co.  v.  Adoue,  83  Tex.  Rep.  901,  10  L.  R.  A.  (n.  s.)  268). 
650  (1892),   (19  S.   W.   Rep.  274,  29  *  Live    Stock    Ass'n    v.    Levy,    54 

Am    St.  Rep.  690,  15  L.  R.  A.  598).  N.  Y.  Super.   Ct.  32  (1886);    Pacific 

•Morris   Run  Coal  Co.   r.   Barclay  Factor  Co.  r.  Adler,  90  Cal.  110  (1891), 

Coal  Co.,   68   Pa.   St.    173   (1871),   (8  (27  Pac.   Rep.   36,  25  Am.    St.    Rep. 

Am.   Rep.   159);    Santa  Clara  Valley  102). 

Mill,   etc.   Co.  V.   Hayes,   76  Cal.   387  *  Mogul     Steamship     Co.     v.     Mc- 

(1888),  (18  Pac.  Rep.  391,  9  Am.  St.  Gregor,  L.  R.  17  App.  Cas.  25  (1891), 

Rep.  211).  (61  L.  J.  R.  295). 

2  Morris  Run  Coal  Co.  v.   Barclay  *  The  trust  agreement  in  the  case  of 

559 


§   310  INTERCORPORATE    RELATIONS  [PART   V 

of  the  parties;  providing,  usually,  for  the  election  and  suc- 
cession of  trustees,  their  term  of  office  and  the  transfer  of  trust 
certificates,  and  necessarily  providing 

(A)  That  the  trustee  shall  vote  the  stock  deposited  and 
elect  the  directors  of  the  several  corporations. 

(B)  That  the  trustee  shall  receive  all  dividends  from  the 
several  corporations  and  place  them  in  a  common  fund. 

(C)  That  the  trustee  shall  make  dividends  from  this  fund 
—  when  sufficient  for  the  purpose  — upon  the  trust  certificates. 

§  310.  Formatioii  of  Corporate  Combinations.  —  As  indi- 
cated by  the  definition,  corporate  combinations  generally  take 
one  of  two  distinct  forms,  and  are  usually  created  in  the  manner 
following : 

(1)  In  pursuance  of  an  agreement  between  persons  in- 
terested in  competing  corporations,  a  holding  corporation  is 
organized,  under  the  laws  of  a  State  permitting  its  corpora- 
tions to  acquire  and  hold  the  stock  of  other  corporations, 
with  a  capital  stock  at  least  equal  to  the  aggregate  capital  of 
the  several  corporations.  This  corporation  issues  its  own 
shares,  upon  an  agreed  basis,  in  exchange  for  the  shares  of 
the  several  corporations,  being  certain  to  obtain  at  least  a 
majority  of  the  shares  of  each  corporation.  All  the  corpora- 
tions continue  in  existence,  and  the  subsidiary  companies  are 
controlled  by  the  holding  corporation,  which  derives  its  income 
from  the  dividends  paid  by  them.  In  organizing  this  form 
of  corporate  combination  the  dealings  are  entirely  between  the 
holding  corporation  and  the  stockholders  of  the  several  com- 
panies.^ 

(2)  As  a  part  of  a  plan  for  combining  competing  corporate 
interests,  a  purchasing  corporation  is  organized,  with  a  share 
capital   sufficiently   large   for   the   purpose,    which   purchases 

the  Sugar  Trust  is  stated  at  length  in  •  Robinson  v.  Holbrook,  148  Fed. 
People  r.  North  River  Sugar  Ref'g  Co.,  109  (1906):  "Ordinarily,  corporate 
121  N.  Y.  582  (1890),  (24  N.  E.  Rep.  combinations  effected  through  a 
834,  18  .Ajn.  St.  Rep.  483,  9  L.  R.  A.  holding  corporation  are  organized 
33),  and  that  in  the  case  of  the  Stand-  by  dealings  which  are  entirely  between 
ard  Oil  Trust,  in  State  v.  Standard  Oil  the  holding  corporation  and  the  share- 
Co.,  49  Ohio  St.  137  (1892),  (30  N.  E.  holders  of  the  several  companies 
Rep.  279,  34  Am.  St.  Rep.  541,  whose  shares  are  to  be  held."  Citing 
36  Am.  &  Eng.  Corp.  Cas.  1,  15  L.  R.  this  section. 
A.  145). 

560 


CHAP.  XXVIIl]  NATURE   AND   FORMATION  §  311 

the  properties  —  plants,  stock  in  trade  and  good-will  —  of  the 
several  corporations  and  issues  its  own  stock  in  payment 
therefor.  Preferred  stock  is  generally  issued  for  tangilile 
assets;  common  stock,  for  good-will.  The  shares  are  usually 
delivered  to  the  vendor  corporations,  but  may  be  directly 
distributed  among  their  stockholders. 

The  purchasing  corporation,  as  the  result  of  this  process, 
becomes  the  absolute  owner  of  the  property  of  all  the  cor- 
porations, and  may  continue  or  suspend  the  business  there- 
tofore carried  on  by  them,  and  otherwise  manage  its  affairs, 
without  restriction  or  supervision  except  by  the  State  and 
its  own  stockholders.  This  form  of  corporate  combination  is, 
in  its  creation,  wholly  between  the  two  corporations,  vendor 
and  purchaser,  and  is  least  liable  of  all  to  violate  any  principle 
of  corporation  law. 

In  particular  instances,  this  form  has  been  modified  and  cor- 
porate properties  have  been  taken  over  under  lease  instead 
of  sale.  So,  corporate  combinations  have  been  brought  about 
by  uniting  the  two  methods  —  by  acquiring  both  the  stock 
and  the  property  of  the  several  corporations,  or  the  stock  of 
some  and  the  property  of  others. 

§  311.  Analysis  of  Principles  determining  Legality  of  Combi- 
nations. —  The  legality  of  a  combination  of  corporations  in  any 
form  —  trust,  corporate  combination  or  simple  association  — • 
must  be  ascertained  by  the  application  of  the  following  nega- 
tive principles: 

(1)  A  combination  of  corporations  is  illegal  which  contravenes 
the  principles  of  law  governing  corporations. 

In  applying  this  principle  it  is  of  importance  to  ascertain: 

(A)  The  manner  of  organization. 

(B)  The  powers  of  the  companies. 

(2)  A  combination  is  illegal  which  contravenes  rules  of  public 
policy.^ 

In  applying  this  principle  it  is  of  essential  importance  to 
ascertain: 

(A)  The  purposes  of  the  coml)ination  — as  a  fact. 

(B)  The  rules  of  pul)lic  policy  — as  a  matter  of  law. 

'  A  combination  amounting  to  a  combinations  of  capital  arc  seldom 
conspiracy  is  also  illegal,  but  modern       conspiracies.     See  post,  §  328. 

561 


§   313  INTERCORPORATE   RELATIONS  [PART  V 

(C)    The  bearing  of  the  rules  upon  the  facts. 

(3)  A  combination  is  illegal  which  contravenes  any  statutory 
provision. 

The  application  of  this  axiomatic  principle,  in  any  particu- 
lar case,  may  depend  upon: 

(A)  The  form  and  object  of  the  combination. 

(B)  The  constitutionality  and  construction  of  the  statute. 


CHAPTER  XXIX 

PRINCIPLES    OF    CORPORATION    LAW   AFFECTING   ASSOCIATIONS 
AND   TRUSTS 

§  312.  Legality  of  Associations  not  generally  a  Question  of  Corporation  Law. 

§  313.  In  Formation  of  Trust,  State  regards  Acts  of  Stockholders  as  Acts  of 

Corporation. 

§  314.  Trust  invalid  as  involving  Partnership  of  Corporations. 

§  315.  Trust  invalid  as  involving  Delegation  of  Corporate  Powers. 

§  316.  Trust  invalid  as  involving  Practical  Consolidation. 

§  317.  Rights  and  Liabilities  growing  out  of  Trusts. 

§  312.  Legality  of  Associations  not  generally  a  Question  of 
Corporation  Law.  —  The  association  of  several  corporations 
for  the  promotion  of  their  common  interests  is  merely  the  ex- 
ercise of  the  general  right  to  contract,  pertaining  to  every 
corporation  within  the  limitations  of  its  charter. 

Corporations,  retaining  the  management  of  their  affairs, 
may  generally  —  so  far  as  principles  of  corporation  law  are 
concerned  —  enter  into  such  agreements  with  other  corpora- 
tions as  they  may  deem  expedient.  Such  agreements  are  sel- 
dom ultra  vires,  except  in  the  broad  sense  that  an  unlawful 
act  is  always  ultra  vires.  The  test  of  illegality,  however,  lies 
in  the  application  of  other  principles  than  those  of  corporation 
law. 

§  313.  In  Formation  of  Trust,  State  regards  Acts  of  Stock- 
holders as  Acts  of  Corporation.  —  One  reason  for  adopting  the 
trust  form  of  combination  was  the  assumption  that  because 
the  corporations  were  not  parties  to  the  agreement  between 
562 


CHAP.    XXIX]  CORPORATION    LAW   AFFECTING   TRUSTS  §   313 

the  stockholders  and  the  trustee,  they  did  not,  themselves, 
participate  in  the  combination. 

This  assumption  was  based  upon  the  legal  fiction  that  a 
corporation  is  a  legal  entity  separate  and  distinct  from  the 
natural  persons  who  compose  it.  This  fiction  is  necessary 
for  the  protection  and  enforcement  of  rights  between  the 
corporation,  its  stockholders  and  persons  with  whom  it  has 
dealings,  but  it  has  no  place  in  the  relations  of  a  corporation 
with  the  State  which  created  it.  The  State  grants  the  charter 
of  incorporation  to  the  corporators  and  may  take  that  charter 
away  from  them.  It  deals  with  a  corporation  as  a  collection 
of  its  members,  and  treats  their  united  acts  as  the  acts  of  the 
corporation,  because,  from  its  point  of  view,  they  are  the  cor- 
poration. A  trust,  formed  by  the  stockholders  of  corporations, 
in  the  eyes  of  the  State  is  the  creation  of  the  corporations. 

In  the  Sugar  Trust  Case,^  the  Court  of  Appeals  of  Xew 
York  said:  "The  abstract  idea  of  a  corporation,  the  legal 
entity,  the  impalpable  and  intangible  creation  of  human 
thought,  is  itself  a  fiction,  and  has  been  appropriately  de- 
scribed as  a  figure  of  speech.  It  sei'ves  very  well  to  desig- 
nate in  our  minds  the  collective  action  and  agency  of  many 
individuals  as  permitted  by  the  law;  and  the  substantial  in- 
quiry^ always  is  what,  in  a  given  case,  has  been  that  collective 
action  and  agency.  As  between  the  corporation  and  those 
with  whom  it  deals,  the  manner  of  its  exercise  usualh-  is  ma- 
terial, but  as  between  it  and  the  State,  the  substantial  inquiiy 
is  only  what  that  collective  action  and  agency  has  done,  what 
it  has,  in  fact,  accomplished,  what  is  seen  to  be  its  effective 
work,  what  has  been  its  conduct.  It  ought  not  to  be  otherwise. 
The  State  gave  the  franchise,  the  charter,  not  to  the  impalpable, 
intangible  and  almost  nebulous  fiction  of  our  thought,  but  to 
the  corporators,  the  individuals,  the  acting  and  living  men,  to 
be  used  by  them,  to  redound  to  their  benefit,  to  strengthen  their 
hands  and  add  energy  to  their  capital.  If  it  is  taken  away,  it 
is  taken  from  them  as  individuals  and  corporators,  and  the 
legal  fiction  disappears.  The  benefit  is  theirs,  the  punishment 
is  theirs,  and  both  must  attend  and  depend  upon  their  conduct; 

'  People  V.  North  River  Sugar  (24  N.  E.  Rep.  8.34,  18  .\ni.  St.  Rep. 
Ref'g    Co.,    121    N.    Y.    621    (1890),       483,  9  L.  R.  A.  33). 

563 


§314 


INTERCORPORATE   RELATIONS 


[part  V 


and  when  they  all  act,  collectively,  as  an  aggregate  body,  with- 
out the  least  exception,  and  so  acting,  reach  results  and  ac- 
complish purposes  clearly  corporate  in  their  character,  and 
affecting  the  vitality,  the  independence,  the  utility,  of  the 
corporation  itself,  we  cannot  hesitate  to  conclude  that  there 
has  been  corporate  conduct  which  the  State  may  review, 
and  not  be  defeated  by  the  assumed  innocence  of  a  convenient 
fiction."  » 

§  314.  Trust  invalid  as  involving  Partnership  of  Corpora- 
tions. —  The  primary  object  in  forming  a  trust  is  to  concentrate 
the  control  of  several  competing  corporations  into  a  single 
board.     The  several  corporations,  through  the  instrumentality 


'  In  the  case  of  State  v.  Standard 
Oil  Co.,  49  Ohio  St.  137  (1892),  (30 
N.  E.  Rep.  279,  34  Am.  St.  Rep.  541, 
15  L.  R.  A.  145,  36  Am.  &  Eng.  Corp. 
Cas.  1),  similar  conclusions  were 
reached  by  the  Supreme  Court  of 
Ohio.  Judge  Minshall  said  (p.  177)  : 
"The  general  proposition  that  a  cor- 
poration is  to  be  regarded  as  a  legal 
entity,  existing  separate  and  apart 
from  the  natural  persons  composing  it, 
is  not  disputed ;  but  that  the  state- 
ment is  a  mere  fiction,  existing  only 
in  idea,  is  well  understood,  and  not 
controverted  by  any  one  who  pre- 
tends to  accurate  knowledge  on  the 
subject.  It  has  been  introduced  for 
the  convenience  of  the  company  in 
making  contracts,  in  acquiring  prop- 
erty for  corporate  purposes,  in  suing 
and  being  sued,  and  to  preserve  the 
limited  liability  of  the  stockholders, 
by  distinguishing  between  the  cor- 
porate debts  and  property  of  the  com- 
pany, and  of  the  stockholders  in  their 
capacity  as  individuals.  All  fictions 
of  law  have  been  introduced  for  the 
purpose  of  convenience  and  to  sub- 
serve the  ends  of  justice.  It  is  in 
this  sense  that  the  maxim.  In  fictione 
juris  stibsistit  acquitas,  is  used,  and 
the  doctrine  of  fictions  applied.  But 
when  they  are  urged  to  an  intent  and 
purpose  not  within  the  reason  and 
policy  of  the  fiction  they  have  always 

564 


been  disregarded  by  the  courts. 
.  .  .  (p.  179)  Now  so  long  as  a 
proper  use  is  made  of  the  fiction  that 
a  corporation  is  an  entity  apart  from 
its  shareholders,  it  is  harmless,  and 
because  convenient,  should  not  be 
called  in  question ;  but  when  it  is 
urged  to  an  end  subversive  of  its 
policy,  or  such  is  the  issue,  the  fiction 
must  be  ignored,  and  the  question 
determined,  whether  the  act  in  ques- 
tion, though  done  by  shareholders, 
that  is  to  say,  by  the  persons  united 
in  one  body,  was  done  simply  as 
indi%Tduals  and  with  respect  to  their 
individual  interests  as  shareholders,  or 
was  done  ostensibly  as  such,  but,  as  a 
matter  of  fact,  to  control  the  corpora- 
tion and  affect  the  transaction  of  its 
business,  in  the  same  manner  as  if  the 
act  had  been  clothed  with  all  the  for- 
malities of  a  corporate  act.  This 
must  be  so,  because  the  stockholders, 
having  a  dual  capacity,  and  capable 
of  acting  in  either,  and  a  possible 
interest  to  conceal  their  character 
when  acting  in  their  corporate  ca- 
pacity, the  absence  of  the  formal  evi- 
dence of  the  character  of  the  act 
cannot  preclude  judicial  inquiry  on 
the  subject.  If  it  w-ere  otherwise, 
then,  in  one  department  of  the  law, 
fraud  would  enjoy  an  immunity 
awarded  to  it  in  no  other." 


CHAP.   XXIX]         CORPORATION   LAW   AFFECTING   TRUSTS  §  314 

of  the  trustees,  are  managed  for  a  common  purpose,  and  their 
stockholders  divide  the  profits  of  a  joint  enterprise.  The 
whole  arrangement  constitutes  a  partnership  of  corporations.' 
As  said  by  the  Supreme  Court  of  Tennessee  in  the  Cotton 
Seed  Oil  Trust  Case:  ^  "  A  careful  examination  of  this  agree- 
ment discloses  every  material  element  of  the  contract  of  partner- 
ship. The  absolute  ownership  of  the  corporate  property,  the 
mills,  machinery,  etc.,  is  not  conveyed  to  the  partnership,  nor 
is  this  necessary.  The  beneficial  use  of  all  such  property  is 
surrendered  to  the  common  purpose.  The  provisions  for  the 
complete  possession,  control  and  use  of  the  properties  of  the 
several  corporations  by  the  partnership  or  syndicate  is  perfect. 
Nothing  is  left  to  the  several  corporations  but  the  right  to  re- 
ceive a  share  of  the  profits  and  participate  in  the  management 
and  control  of  the  consolidated  interests  as  members  of  the 
new  association.  The  contract  is,  both  technically  and  in  its 
essential  character,  a  partnership  in  so  far  as  it  is  possible  for 
corporations  to  form  such  an  association." 

A  trust,  therefore,  constituting  a  partnership  of  corpora- 
tions, must  depend  for  its  validity  upon  the  power  of  the  cor- 
porations to  form  a  partnership.  No  such  implied  power 
exists.  A  partnership  is  inconsistent  with  the  scope,  object, 
powers  and  obligations  of  a  corporation.  It  interferes  with 
the  management  of  the  affairs  of  a  corporation  by  its  own 
officers,  impairs  the  authority  of  the  stockholders,  involves 

*  Trusts  have  been  held  to  amount  St.   Rep.  317).     In  the  last  case  the 

to  partnerships  of  corporations  in  the  Court  said  :  "It  will  thus  be  seen  that 

following   leading   cases  :     Mallory    v.  the  agreement  in  que.stion  makes  pro- 

Hanaur    Oil    Works,    86    Tenn.    598  \ision    for    welding    together    all    the 

(1888),  (8  S.  W.  Rep.  396,  20  Am.  &  interests     engaged     in     the     business 

Eng.  Corp.  Cas.  478) ;  People  v.  North  named    in    the    agreement    into    one 

River  Sugar  Ref'g  Co.,  121  N.  Y.  582  giant     combination     or     partnership, 

(1890),  (24  N.  E.  Rep.  834,   18  Am.  under  the  absolute  dominion  and  con- 

St.  Rep.  483,  9  L.  R.  A.  33) ;   State  v.  trol  of  a  board  of  nine  trustees.   .   .   . 

Standard    Oil    Co.,    49    Ohio    St.    137  The    agreement    wa.s    illegal    as    pro- 

(1892),  (30  N.  E.   Rep.   279,  34   Am.  viding  for  a  partnership  among  cor- 

St.  Rep.  541,  15  L.  R.  A.  145,  36  Am.  porations.     It    is   a    \-iolation    of   the 

&    Eng.    Corp.    Cas.    1)  ;      American  law    for    corporations    to    enter    into 

Preservers  Trust  v.  Taylor  Mfg.   Co.,  partnership." 

46  Fed.  152  (1891) ;    Bishop  v.  Amer-  ^  Mallory  v.  Hanaur  Oil  Works,  86 

lean     Preservers    Co.,     157     111.     284  Tenn.  602  (1888),  (8  S.  W.  Rep.  396, 

(1895),  (41  N.  E.  Rep.  765,  48  Am.  .20  Am.  &  Eng.  Corp.  Cas.  478). 

565 


§  315 


INTERCORPORATE   RELATIONS 


[part  V 


the  corporation  in  outside  enterprises,  and  is  opposed  to  public 
policy.^ 

In  the  absence  of  express  legislative  authority  to  enter  a 
partnership,  it  is  ultra  vires  of  a  corporation  to  enter  a  trust.^ 

§  315.  Trust  invalid  as  involving  Delegation  of  Corporate 
Powers.  —  Statutes  relating  to  the  organization  and  manage- 
ment of  corporations  contain  provisions  for  their  control, 
primarily,  by  their  stockholders,  and,  immediately,  by  their 
directors,  and  indicate  the  policy  of  the  State  that  the  affairs 
of  corporations  should  be  conducted,  really  as  well  as  formally, 
by  their  own  officials.  The  formation  of  a  trust  substitutes 
the  trustees  as  the  governing  body  and  makes  the  directors 
merely  tools.^     It  involves  the  delegation  of  corporate  powers, 


*  United  States:  American  Pre- 
servers Trust  V.  Taylor  Mfg.  Co.,  46 
Fed.  152  (1891). 

Alabama:  Central  R.,  etc.  Co.  v. 
Smith,  76  Ala.  572  (1884),  (52  Am. 
Rep.  353). 

Georgia:  Gunn  v.  Central  R.,  etc. 
Co.,  74  Ga.  509  (1885). 

Illinois:  Bishop  v.  American  Pre- 
servers Trust,  157  111.  284  (1895),  (41 
N.  E.  Rep.  765,  48  Am.  St.  Rep.  317) ; 
Marine  Bank  v.  Ogden,  29  111.  248 
(1862). 

Massachusetts :  Whittendon  Mills 
V.  Upton,  10  Gray,  582  (1858),  (71 
Am.  Dec.  681). 

New  York :  People  v.  North  River 
Sugar  Ref'g  Co.,  121  N.  Y.  623  (1890), 
(24  N.  E.  Rep.  834,  IS  Am.  St.  Rep. 
483,  9  L.  R.  A.  33)  :  "It  is  a  violation 
of  the  law  for  corporations  to  enter 
into  a  partnership.  .  .  .  The  vital 
characteristics  of  the  corporation  are 
of  necessity  drowned  in  the  para- 
mount authority  of  the  partnership." 
See  also  New  York,  etc.  Canal  Co.  v. 
Fulton  Bank,  7  Wend.  412  (1831). 

Ohio:  State  v.  Standard  Oil  Co., 
49  Ohio  St.  137  (1892),  (30  N.  E.  Rep. 
279,  34  Am.  St.  Rep.  541,  15  L.  R.  A. 
145,  36  Am.  &  Eng.  Corp.  Cas.  1). 

Tennessee :  Mallory  v.  Hanaur  Oil 
Works,  86  Tenn.  598  (1888),  (8  S.  W. 

566 


Rep.  396,  20  Am.  &  Eng.  Corp.  Cas 
478). 

^  Southern  Electric  Securities  Co. 
V.  State  (Miss.  1907),  44  So.  Rep.  786 : 
"A  combination  of  two  or  more  cor- 
porations for  a  legitimate  purpose, 
and  which  is  unobjectionable  as  a 
combination,  may  be  subject  to  attack 
if  a  trust  form  is  adopted,  on  the 
ground  that  each  constituent  cor- 
poration has  violated  some  pro^^sion 
of  its  charter  or  some  principle  of  the 
laws  of  its  creation." 

^  In  Gould  V.  Head  ("American 
Cattle  Trust"  Case),  38  Fed.  888 
(1889),  (reversed  on  appeal,  41  Fed. 
240  (1890)),  Judge  Hallett  said  :  "The 
corporations  thus  associated  re- 
nounced autonomy,  but  not  their 
existence.  Thej^  committed  their 
affairs  into  the  hands  of  the  trust, 
because  they  could  be  better  managed 
by  the  trust  than  by  themselves. 
They  still  lived  and  owned  their 
property,  but  the  trust  was  a  regency 
of  their  own  creation,  -with  absolute 
and  irrevocable  power  over  all  their 
concerns.  Ten  corporations  are  men- 
tioned in  the  affidavits  as  thus  imited 
in  the  triLst,  not  by  the  direct  act  of 
the  corporations,  but  by  transfer  of 
their  stock  to  the  trust,  or  to  persons 
holding    in    its    interest.     And    it    is 


CHAP.   XXXl]         CORPORATION   LAW  AFFECTING  TRUSTS  §  316 

is  against  public  policy,  and  is  inconsistent  with  the  purposes 
for  which  corporations  are  created. 

In  the  Case  of  the  Standard  Oil  Trust,^  the  Supreme  Court 
of  Ohio  said:  "  The  law  requires  that  a  corporation  should 
be  controlled  and  managed  by  its  directors  in  the  interests 
of  its  own  stockholders,  and  conformable  to  the  purpose  for 
which  it  was  created  by  the  laws  of  its  State." 

This  principle  underlies  the  objection  that  trusts  amount  to 
corporate  partnerships,  but  is  applicable,  with  equal  force, 
if  any  element  necessary  to  constitute  a  partnership  be  lacking.^ 

§  316.  Trust  invalid  as  involving  Practical  Consolidation. 
—  A  combination  of  corporations  by  means  of  a  trust  amounts 
to  a  practical  consolidation.  The  actual  results  of  a  union 
of  corporate  interests  are  obtained  without  subjection  to  the 
restraints  imposed  by  the  State  when  authorizing  corpora- 
tions to  consolidate.  Under  consolidation  statutes,  the  re- 
sult may  be  a  new  corporation,  owing  obligations  to  the  State 
and  with  limitations  imposed  upon  the  amount  of  its  stock. 
The  result  of  the  formation  of  a  trust  is  an  irresponsible  board 
of  trustees,  and  a  virtual  doubling  of  paper  capital  by  the  issue 
of  trust  certificates  for  shares. 

Consolidation,  without  statutory  authority,  is  opposed  to 
public    policy.     Substantial    consolidation   is    equally    against 

urged  that  by  some  general  expression  279,  34  Am.  St.  Rep.  541,  36  Am.  & 

in  the  articles  of  association  the  trust  Eng.    Corp.    Cas.     1,     15    L.     R.    A. 

was  given  absolute  authority  to  sell  145). 

and  dispose  of  the  stock  in  its  dis-  ^  State  v.  Standard  Oil  Co.,  49 
cretion.  But  this  interpretation  is  Ohio  St.  185  (1892),  (30  N.  E.  Rep. 
not  in  accord  with  the  purpose  for  279,  34  Am.  St.  Rep.  541,  36  Am.  & 
which  the  trust  was  organized.  The  Eng.  Corp.  Cas.  1,  15  L.  R.  A.  145)  : 
stock  was  transferred  to  the  trust  "That  the  nature  of  the  agreement 
not  for  the  purpose  of  being  sold,  is  such  as  to  preclude  the  defendant 
but  to  give  control  of  the  corporation;  from  becoming  a  party  to  it,  is,  we 
to  make  the  ofTicers  puppets  in  the  think,  too  clear  to  require  much  con- 
hands  of  the  trust,  and  thus  substi-  sideration  by  us.  In  the  first  place 
tute  the  latter  as  the  governing  body  whether  the  agreement  should  bo 
of  the  corporation."  regarded  as  amounting  to  a  partner- 
See  also  People  v.  North  River  ship  between  the  several  companies, 
Sugar  Ref'g  Co.,  121  N.  Y.  582  (1890),  Hmited  partnerships  and  indi\-iduals, 
(24  N.  E.  Rep.  834,  18  Am.  St.  Rep.  who  are  parties  to  it,  it  is  clear  that 
483,  9  L.  R.  A.  33).  its  observance  must  subject  the  do- 
'  State  V.  Standard  Oil  Co.  49  fendant  to  a  control  inconsistent  witli 
Ohio  St.  185  (1892),  (30  N.  E.  Rep.  its  character  as  a  corporation." 

567 


§  316  INTERCORPORATE   RELATIONS  [PART   V 

public  policy,  for  it  involves  a  failure  in  the  performance  of  cor- 
porate duties.  Judge  Finch,  in  the  Sugar  Trust  Case,^  stated, 
in  very  vigorous  language,  his  opinion  of  the  tendencies  of 
trusts  and  similar  combinations  and  their  effect  upon  the  public 
interests:  "As  corporate  grants  are  always  assumed  to  have 
been  made  for  the  public  benefit,  any  conduct  which  destroys 
their  normal  functions,  and  maims  and  cripples  their  separate 
activity,  and  takes  away  their  free  and  independent  action, 
must  so  far  disappoint  the  purpose  of  their  creation  as  to  affect 
unfavorably  the  public  interest;  and  that  to  a  much  greater 
extent  when,  beyond  their  own  several  aggregations  of  capital, 
they  compact  them  all  into  one  combination,  which  stands 
outside  of  the  ward  of  the  State,  which  dominates  the  range  of 
an  entire  industry,  and  puts  upon  the  market  a  capital  stock 
proudly  defiant  of  actual  values,  and  capable  of  an  unlimited 
expansion.  It  is  not  a  sufficient  answer  to  say  that  similar 
results  may  be  lawfully  accomplished;  that  an  individual 
having  the  necessary  wealth  might  have  bought  all  these  re- 
fineries, manned  them  with  his  own  chosen  agents,  and  managed 
them  as  a  group  at  his  sovereign  will;  for  it  is  one  thing  for  the 
State  to  respect  the  rights  of  ownership  and  protect  them  out 
of  regard  to  the  business  freedom  of  the  citizen,  and  quite 
another  thing  to  add  to  that  possibility  a  further  extension  of 
those  consequences  by  creating  artificial  persons  to  aid  in  pro- 
ducing such  aggregations.  The  individuals  are  few  who  hold  in 
possession  such  enormous  wealth,  and  fewer  still  who  peril 
it  all  in  a  manufacturing  enterprise;  but  if  corporations  can 
combine,  and  mass  their  forces  in  a  solid  trust  or  partner- 
ship, with  little  added  risk  to  the  capital  already  embarked, 
without  limit  to  the  magnitude  of  the  aggregation,  a  tempt- 
ing and  easy  road  is  opened  to  enormous  combinations,  vastly 
exceeding  in  number  and  in  strength,  and  in  their  power  over 
industry,  any  possibilities  of  individual  ownership;-    and  the 

*  People    V.     North     River      Sugar  reasoning,    however,    is    inconclusive. 

Ref'g  Co.,  121  N.  Y.  625  (1890),  (24  The    State    may    properly   limit    the 

N.  E.    Rep.    834,    18    Am.    St.    Rep.  capital   of  corporations   and   may   re- 

483,  9  L.  R.  A.  33).  strain     their     combination.     But,    in 

^  This     language     seems  prophetic,  the    absence    of    such     limitation    or 

viewed  in  the  light  of  the  present  day  restraint,   the    tendency  of    combina- 

of  billion-dollar   combinations.      The  tions  to  produce  "  enormous  ""  aggre- 

568 


CHAP.    XXIX]  CORPORATION    LAW   AFFECTING    TRUSTS 


317 


State,  by  the  creation  of  the  artificial  persons  constituting  the 
elements  of  the  combination,  and  failing  to  limit  and  restrain 
their  powers,  becomes  itself  the  responsible  creator,  the  volun- 
tary cause  of  an  aggregation  of  capital  which  it  simply  endures 
in  the  individual  as  the  product  of  his  free  agency.  What  it 
may  bear  is  one  thing,  what  it  should  cause  and  create  is  quite 
another." 

§  317.  Rights  and  Liabilities  growing  out  of  Trusts.  —  While 
the  rights  and  liabilities  of  trustees  and  certificate  holders, 
and  the  nature  of  trust  certificates  and  privileges  attaching 
thereto,  have  received  judicial  consideration,* — especially 
in  the  embryonic  stage  of  the  trust,  —  it  must  be  borne  in 
mind,  in  examining  the  decisions,  that  trusts  have  now  been 
generally  declared  invalid,  and  that  the  courts  may  decline  to 
lend  their  aid  to  any  of  the  parties  to  an  illegal  enterprise.^ 

The  holders  of  trust  certificates  are  the  equitable  owners 
of  shares  deposited.'  The  certificates  represent  property, 
and  it  has  been  held  that  although  the  trust  is  illegal  the  rights 
of  certificate  holders  will"  be  respected  by  the  courts  ;  *  that  they 


gations "  of  capital  in  no  way  indi- 
cates their  illegality.  The  words  are 
merely  relative,  and  no  principle  of 
the  common  law  limits  the  amount 
of  property  to  be  held  by  a  person  or 
private  corporation. 

'  I.    Rights  of  trustees. 

The  trustees  hold  the  stock  in  the 
several  corporations  as  trustees  and 
not  as  vendees.  People  v.  North 
River  Sugar  Ref'g  Co.,  121  N.  Y.  582 
(1890),  (24  N.  E.  Rep.  834,  18  Am.  St. 
Rep.  483,  9  L.  R.  A.  33).  Their  right 
to  sell  the  shares  so  held  depends  upon 
the  terms  of  the  trust  agreement. 
Trustees  authorized  by  the  agreement 
"to  acciuire,  receive,  hold  and  dispose 
of"  such  shares  have  power  to  sell 
them  to  third  persons.  Gould  v. 
Head,  41  Fed.  240  (1890),  reversing 
38  Fed.  880  (1889).  Compare  People  i'. 
North  River  Sugar  Rof'g  Co.,  54  IIuu 
(N.Y.),3.54(1889),(3N.Y.  Supp.'401). 

II.    Transfernhilitii  oj  certificates. 

Trust  certificates  are  transferable 
like    shares    of     stock.      Cameron     v. 


Havemeyer,  25  Abb.  N.  C.  438  (1890), 
(12  N.  Y.  Supp.  126).  See  also  Gould 
V.  Head,  41  Fed.  240  (1890).  Where 
trust  certificates  are  made  transferable 
upon  the  books  of  the  trust,  a  trustee 
can  be  compelled  to  make  the  transfer 
and  to  Lssue  a  new  certificate  to  the 
transferee.  Rice  v.  Rockefeller,  134 
N.Y.  174  (1892),  (31  N.  E.  Rep.  907, 
30  Am.  St.  Rep.  658,  17  L.  R.  A.  237). 
See  also  a.s  to  the  nature  of  trust 
certificates.  State  v.  American  Cotton 
Oil  Tru.st,  40  La.  Ann.  8  (1888),  (3  So. 
Rep.  409). 

2  Bishop  V.  American  Preservers 
Co.,  157  III.  284  (1895),  (48  Am. 
St.  Rep.  317,  41  N.  E.  Rep.  765); 
American  Biscuit,  etc.  Co.  v.  Klotz, 
44   Fed.   721    (1891). 

'  People  V.  North  River  Sugar  Ref'g 
Co.,  121  N.  Y.  582  (1890),  (24  N.  E. 
Rep.  834,  18  Am.  St.  Rep.  483,  9  L. 
R.  A.  33). 

*  State  V.  .\merican  Cotton  Oil 
Trust,  40  La.  Ann.  8  (1888),  (3  So. 
Rep.  409)  :   "If,  as  alleged,  these  cer- 

5G9 


§   318  INTERCORPORATE    RELATIONS  [PART   V 

are  entitled  to  have  the  property  and  business  of  the  trust  placed 
in  the  hands  of  a  receiver  for  the  purpose  of  winding  up  its 
affairs.^ 


CHAPTER  XXX 

PRINCIPLES     OF      CORPORATION      LAW      AFFECTING      CORPORATE 
COMBINATIONS 

§318.     Corporate  Combinations  by  Means  of  Purchasing  Corporations  —  In 

General. 
§  319.     Issue  of  Stock  for  Property  in  Formation  of  Corporate  Combination. 
§  320.     Issue  of  Stock  for  Good-will  in  Formation  of  Corporate  Combination. 
§  321.     Over- valuation  of  Property  acquired  by  Issue  of  Stock. 
§  322.     Power  of  Vendor  Corporations  to  sell  Properties  for  Stock  of  Purchasing 

Corporation. 
§  323.     Corporate  Combinations  through  Formation  of  Holding  Corporations. 

§  318.  Corporate  Combinations  by  Means  of  Purchasing  Cor- 
porations —  In  General.  —  Any  purchase  by  one  corporation  of 
the  plants  and  properties  of  other  companies  involves,  in  a 
sense,  a  combination  of  interests.  The  separate  properties 
are  united,  and  the  business  theretofore  carried  on  by  the 
different  corporations  is  conducted  by  one. 

The  result  may  be  the  same  whether  the  several  plants  are 
purchased  from  time  to  time  as  incidental  to  the  development 
and  extension  of  the  business  of  the  purchasing  corporation, 
or  whether  they  are  taken  over  at  one  time  by  a  corporation 
formed  for  that  express  purpose.  The  phrase  "  corporate 
combination"  is,  however,  only  applicable  in  the  latter  case. 
The  methods  adopted  in  forming  corporate  combinations  of 
this  character  vaiy  in  detail,  but  usually  follow  the  forms  out- 
lined in  a  preceding  section." 

tificates  have  been  taken  as  the  price  on  of  any  illegal  business,   yet  they 

or  in  exchange  for  ten  million  dollars  undoubtedly  do  represent  an  interest 

of  property  transferred   to  the  trust,  in  the  property  referred  to,   and,   as 

then,  whatever  be  their  validity  and  such,  have  a  legal  and  real  value." 
effect  as  shares  of  stock,  whether  or  •  Cameron  v.  Havemeyer,  25  Abb. 

not   they   confer   on   the   holders   the  N.  C.«(N.  Y.)  438  (1890),  (12  N.  Y. 

privileges   of   corporate   stockliolders,  Supp.  126). 

or   whether    or    not   they   confer   the  ^  See  ante,   §   310:    "Formation  of 

right   to   participate  in   the   carrying  Corporate  Combinations." 

570 


CHAP.  XXX]  LAW  AFFECTING  CORPORATE  COMBINATIONS       §  319 

The  principles  of  corporation  law,  applicable  in  the  forma- 
tion of  corporate  combinations,  relate,  generally,  to  the  power 
of  the  purchasing  corporation  to  issue  stock  for  property, 
including  good-will,  and  the  method  of  valuing  such  property; 
and  to  the  power  of  the  selling  corporations  to  exchange  their 
property  for  stock  in  another  corporation. 

§  319.  Issue  of  Stock  for  Property  in  Formation  of  Corporate 
Combination.  —  In  the  formation  of  a  corporate  combination, 
payment  for  the  plants  and  properties  taken  over  is  nearly 
always  made  in  the  stock  of  the  purchasing  corporation. 

The  available  cash  is  often  required  for  a  working  capital 
and,  moreover,  the  payment  of  cash  for  plants  would  elimi- 
nate the  vendor  corporations  from  the  transaction.  A  cor- 
porate combination,  while  in  the  form  of  a  purchase  and  sale 
of  properties,  in  reality  is  a  union  of  interests,  and  the  issue 
of  stock  of  the  purchasing  corporation,  directly  or  indirectly, 
to  the  stockholders  of  the  several  companies,  accomplishes  the 
double  purpo.se  of  paying  for  the  plants  acquired  and  of  retain- 
ing the  interests  of  the  old  stockholders  in  the  new  corporation. 

The  transfer  of  property  for  an  original  issue  of  stock  is, 
strictly  speaking,  a  payment  of  an  informal  subscription,  the 
term  "  sale  "  applying  more  exactly  to  the  transfer  of  stock 
alread)^  issued.  The  terms  "purchase"  and  "sale"  are,  how- 
ever, in  common  usage,  applied  to  the  acquisition  by  one  cor- 
poration of  the  properties  of  others  in  exchange  for  its  stock. 

The  right  to  issue  stock  for  any  property  which  a  corpora- 
tion has  power  to  acquire  is  clearly  established.^     Questions 

'The   following   cases   are   merely  Coe  v.  East  &  West  R.  Co.,  52  Fed.  531 

illustrative  of   the  current  of   author-  (1892). 
ity  :  Alabama:    Frenkel  v.  Hudson,  82 

Urnted  States:    Washburn   v.    Na-  Ala.   158  (1887),  (2  So.  Rep.  758,  60 

tional   Wall    Paper   Co.,    81    Fed.    17  Ain.  Rep.  736). 

(1897);     Northwestern    Mutual    Life  Georgia:  Hayden  i'.  .\tlanta  Cotton 

Ins.  Co.  V.  Exchange  Real  Est.  Co.,  Factory,  61  Ga.  233  (1878). 
70    Fed.    155    (1895);     Foreman    v.  Illinois:    Farwell   v.   Great   West. 

Bigelow,    4    Cliff.    508    (1878).     See  Tel.  Co.,  161  111.  .522  (1896),  (44  N.  E. 

also   Loud  V.   Pomona,   etc.   Co.,    153  Rep.  891)  ;    RcichwaUl  v.  Conimercial 

U.  S.  564  (1894),  (14  Sup.  a.  Rep.  Hotel  Co.,  106  111.  439  (1883). 
928);     Coit    v.    Gold    Amalgamating  Indiana:    Cofhn   v.    Ran.sdell,    110 

Co.,  119  U.  S.  343  (1886),  (7  Sup.  Ct.  Ind.  417  (1887),  (11  N.  E.  Rep.  20); 

Rep.  231)  ;  Branch  v.  .Jesup,  106  U.  S.  Bruner  r.  Brown,  139  lad.  600  (1894), 

468   (1882),    (1   Sup.  Ct.   Rep.   495) ;  (38  N.  E.  Rep.  318). 

571 


§319 


INTERCORPORATE    RELATIONS 


[part  V 


may  arise  as  to  the  valuation  of  property  taken,  but  the  power 
of  a  corporation  to  agree  with  a  subscriber  to  receive  property 
in  payment  for  stock  cannot  be  questioned  at  the  present  day. 
Only  where  the  governing  statute  expressly  requires  payment  in 
money  is  money's  worth  insufficient.' 

In  form,  the  transaction  is  direct.  The  property  is  trans- 
ferred to  the  corporation,  and  the  stock  is  issued  in  exchange 
therefor.  The  formality  of  paying  a  subscription  in  money 
and  immediately  paying  back  the  money  for  property  is  entirely 
unnecessary.^ 

Statutes  have  been  passed  in  many  States  authorizing 
corporations,  under  prescribed  conditions,  to  purchase  prop- 
erty by  the  issue  of  stock,  and  to  accept  property  in  payment 


Kansas:  Walburn  v.  Chenault,  43 
Kan.  352  (1890),  (23  Pac.  Rep. 
657). 

Kentucky :  Phillips  v.  Co\'ingtoii, 
etc.  Bridge  Co.,  2  Mete.  219  (1859). 

Louisiana :  Edwards  v.  Bringier 
Sugar  E.xt.  Co.,  27  La.  Ann.  118 
(1875). 

Maryland:  Brant  v.  Ehlen,  59 
Md.  1  (1882). 

Massachxisetts :  New  Haven,  etc. 
Co.  V.  Linden  Spring  Co.,  142  Mass. 
349  (1886),  (7  N.  E.  Rep.  773); 
Wyman  v.  American  Powder  Co., 
8  Cush.  168  (1851). 

Michigan:  Young  v.  Erie  Iron  Co., 
65  Mich.  Ill  (1887),  (31  N.  W.  Rep. 
814). 

Minnesota:  Hastings  Malting  Co. 
V.  Iron  Range  Brewing  Co.,  65  Minn. 
28  (1896),  (67  N.  W.  Rep.  652). 

Missouri:  Woolfolk  v.  January, 
131  Mo.  620  (1895);  Chouteau  v. 
Dean,  7  Mo.  App.  210  (1879). 

Nebraska:  Troup  v.  Horback'  53 
Neb.  795  (1898),  (74  N.  W.  Rep. 
326). 

New  Jersey:  Weatherby  v.  Baker, 
35  N.  J.  Eq.  501  (1882).  See  New 
Jersey  statute  in  a  following  note. 

New  York :  Van  Cott  v.  Van  Brunt, 
82  N.  Y.  535  (1880);  Barr  v.  New 
York,  etc.  R.  Co.,  125  N.  Y.  263 
(1891),  (26  N.  E.  Rep.  145);  Gamble 

572 


V.  Queens  County  Water  Co.,  123 
N.  Y.  91  (1890),  (25  N.  E.  Rep. 
201). 

North  Carolina:  Clayton  v.  Ore 
Knob  Co.,  109  N.  C.  385  (1891),  (14 
S.  E.  Rep.  36,  9  L.  R.  A.  669). 

Ohio:  Goodin  v.  Evans,  18  Ohio 
St.  150  (1868). 

Pennsylvania :  Shannon  v.  Steven- 
son, 173  Pa.  St.  419  (1896),  (34  Atl. 
Rep.  218)  ;  Johnston  v.  Markle  Paper 
Co.,  153  Pa.  St.  189  (1893),  (25  Atl. 
Rep.  560). 

Tennessee:  Shield  v.  Clifton  Hill 
Land  Co.,  94  Tenn.  123  (1894),  (28 
S.  W.  Rep.  668,  45  Am.  St.  Rep.  700, 
26  L.  R.  A.  509) ;  Searight  v.  Payne, 
6  Lea,  283  (1880). 

Washington:  Kroenert  v.  Johns- 
ton, 19  Wash.  96  (1898),  (52  Pac.  Rep. 
605). 

England:  Re  Wragg,  1  Ch.  Div. 
796  (1897),  Spargo's  Case,  L.  R.  8  Ch. 
App.  407  (1873) ;  Larocque  v.  Beau- 
chemin,  App.  Cas.  358  (1897) ;  Burk- 
inshaw  v.  Nichols,  L.  R.  3  App.  Cas. 
1004  (1878). 

'  In  Connecticut,  until  1901,  the 
statute  required  that  twenty  per  cent 
of  the  subscriptions  to  all  joint  stock 
companies  should  be  paid  in  in  cash. 

2  Chouteau  v.  Dean,  7  Mo.  App.  214 
(1879):  "It  is  not  now  questioned 
that  a  corporation  may  issue  its  stock 


CHAP.    XXX]     LAW   AFFECTING    CORPORATE    COMBINATIONS 


320 


of  subscriptions.*  The  conditions  of  such  statutes  are  Umi- 
tations  upon  the  powers  of  the  corporations. 

§  320.  Issue  of  Stock  for  Good-will  in  Formation  of  Cor- 
porate Combination.  —  In  combining  the  interests  of  different 
business  estabUshments  into  a  single  corporation,  it  is  essential 
that  they  should  be  taken  over  as  going  concerns.  The  pur- 
chasing corporation  is  organized  for  the  purpose  of  acquiring, 
not  only  the  plants  and  tangible  assets  of  the  several  companies, 
but  also  their  business,  and  issues  its  stock  —  asually  the  com- 
mon shares  —  for  the  purchase  of  their  good- will. 

The  good-will  of  a  business  is  property  for  which  stock 
may  lawfully  be  issued,  either  at  common  law  or  under  stat- 
utes authorizing  the  issue  of  stock  "  for  property  actually 
received  "  ^  by  the  corporation'      It  has  a  value  independent 


by  way  of  payment  in  the  purchase  of 
property.  This  is  on  the  principle 
that  there  is  no  need  for  the  round- 
about process  of  first  issuing  the  stock 
for  money  and  then  pa3ang  the  money 
for  the  property."  See  also  Liebke  v. 
Knapp,  79  Mo.  22  (1883),  (49  Am. 
Rep.  212) ;  Spargo'.s  Case,  L.  R.  8  Ch. 
App.  407  (1873). 

'  New  Jersey.  Corporation  Act  of 
1896,  §  49,  p.  293  :  ".\ny  corporation 
formed  vmdcr  this  act  may  purchase 
mines,  manufactories  or  other  prop- 
erty necessarj^  for  its  business,  or  the 
stock  or  any  company  or  companies 
owning,  mining,  manufacturing  or 
producing  materials,  or  other  property 
necessary  for  its  business,  and  issue 
stock  to  the  amount  of  the  value 
thereof  in  pajTnent  therefor,  and  the 
stock  so  issued  shall  be  full-paid 
stock  and  not  liable  to  any  further 
call,  neither  shall  the  holder  thereof 
be  liable  for  any  further  payment 
under  any  of  the  pro\nsions  of  this 
act;  and,  in  the  absence  of  actual 
fraud  in  the  transaction,  the  judg- 
ment of  the  directors  as  to  the  value 
of  the  property  purchased  shall  be 
conclusive." 

The  provision  of  the  English  Com- 
panies Act  of  1867,  30  and  31  Vict. 


ch.  131,  §  25,  is  as  follows:  "Every 
share  in  any  company  shall  be  deemed 
and  taken  to  have  been  issued  and 
to  be  subject  to  the  payment  of  the 
whole  amount  thereof  in  cash,  unless 
the  same  shall  have  been  otherwise 
determined  by  a  contract  duly  made 
in  writing,  and  filed  with  the  registrar 
of  joint  stock  companies  at  or  before 
the  issue  of  such  shares." 

*  New  York  Stock  Corporation  Law 
1892,  ch.  688,  §  4,  as  amended  by 
Laws  1901,  ch.  354  (Birdseye's  R.  S. 
1901,  p.  3418,  §  42). 

^  Washburn  v.  National  Wall  Paper 
Co.,  81  Fed.  17  (1897).  See  also 
Bcebe  v.  Hatfield,  67  Mo.  App.  609 
(1897) ;  Pell's  Ca.se,  L.  R.  5  Ch.  App. 
11  (1869).  But  compare  Camden  v 
Stuart.  144  U.  S.  115  (1892),  (12  Sup. 
Ct.  Rep.  585),  where  the  Supreme 
Court  of  the  L^nited  States  said : 
"The  experience  and  good-will  of  the 
partners,  which  it  is  claiineil  were 
transferred  to  the  corporation,  are 
of  too  unsubstantial  and  shadowy  a 
nature  to  be  cai)able  of  jiccuniary 
estimation  in  this  connection.  It  is 
not  denied  that  the  experience  and 
good-will  of  a  business  may  be  the 
subject  of  barter  and  sale  as  between 
the  parties  to  it,   but   in   a  case    of 

573 


§   320  INTERCORPORATE    RELATIONS  [PART   V 

of  the  tangible  assets  of  the  vendor  corporation,  may  be  conveyed 
separately  from  them  and  for  a  different  class  of  stock,  and  its 
value  may  be  fixed  by  appraisal.  The  r^uestion  whether  a 
particular  method  of  appraisal  is  proper  cannot  be  raised  by 
a  party  to  a  combination  who  has  approved  of,  and  participated 
in,  the  application  of  such  method  in  the  sale  of  the  good-will 
of  his  own  business. 

In  Washburn  v.  National  Wall  Paper  Co}  Judge  Lacombe 
said:  "The  first  of  these  pi'opositions  suggests  the  questions 
whether  stock  is  issued  for  'property  actually  received,'  within 
the  meaning  of  the  statute,  when  it  is  issued  for  good-will 
only;  and  whether  .  .  .  the  good- will  taken  in  this  case  was 
taken  at  its  actual  value.  .  .  .  Good-will  has  been  defined 
as  '  all  that  good  disposition  which  customers  entertain  towards 
the  house  or  business  identified  by  the  particular  name  or  firm, 
and  which  may  induce  them  to  continue  giving  their  custom 
to  it.'  There  is  nothing  marvellous  or  mysterious  about  it. 
When  an  individual  or  a  firm  or  a  corporation  has  gone  on 
for  an  unbroken  series  of  years  conducting  a  particular  busi- 
ness, and  has  been  so  scrupulous  in  fulfilling  every  obligation, 
so  careful  in  maintaining  the  standard  of  the  goods  dealt  in, 
so  absolutely  honest  and  fair  in  all  business  dealings  that 
customers  of  the  concern  have  become  convinced  that  their 
experience  in  the  future  will  be  as  satisfactory  as  it  has  been  in 
the  past,  while  such  customers'  good  report  of  their  own  experi- 
ence tends  continually  to  bring  new  customers  to  the  same  con- 
cern, there  has  been  produced  an  element  of  value  quite  as  im- 
portant —  in  some  cases,  perhaps,  far  more  important  —  than 
the  plant  or  machinery  with  which  the  business  is  carried  on, 
.  .  .  Since  good-will  is  property,  and  since,  in  some  cases,  it 
is  valuable  property,  it  would  follow  that,  in  some  way  or  other, 
it  must  be  practically  possible  to  determine  what  that  value  is. 
Whether  the  particular  method  employed  in  the  case  at  bar  to 
ascertain  such  value  is  or  is  not  a  proper  one,  ...  we  are  under 
no  obligation  to  inquire  upon  the  complainants'  request.  The 
method  of  valuation  was  one  which  they  fully  approved,  and 

this  kind    there    is    no    proper    basis  *  Washburn      v.      National      Wall 

for    ascertaining    its    value,   and    the       Paper  Co.,   81    Fed.    19   (1897). 
claim  is  evidently  an   afterthought." 

574 


CHAP.    XXX]     LAW   AFFECTING   CORPORATE   COMBINATIONS  §   321 

which  was  applied  in  fixing  the  value  of  their  own  property. 
.  .  .  They  certainly,  participating  in  the  transaction,  and 
reaping  its  benefits,  are  in  no  position  now  to  claim  that  the 
good-will  bought  by  the  defendant  company  with  common 
stock  was  overvalued." 

§  321.  Over-valuation  of  Property  acquired  by  Issue  of  Stock. 
—  The  formation  of  every  corporate  combination  is  in  the  nature 
of  an  experiment,  entered  into  for  the  anticipated  benefit  of 
the  owners  of  the  several  establishments  entering  the  combina- 
tion. The  stock  of  the  new  corporation  is,  necessarily,  of  un- 
certain value.  The  valuation  to  be  placed  upon  the  various 
plants  and  the  good-will  of  the  business  of  each  company  can- 
not be  reached  by  the  application  of  any  hard  and  fast  rule. 

In  determining  the  amount  of  stock  to  be  issued  for  prop- 
erty, including  good-will,  under  such  circumstances,  the  only 
requirement  is  that  the  contracting  parties  shall  act  in  good 
faith  in  the  transaction.  As  said  by  Judge  Bunn  in  Dicker- 
man  V.  Northern  Trust  Co.:^  "Assuming  that  the  stock  of 
the  new  company  was  of  par  value,  and  that  the  plants  were 
worth  only  the  prices  fixed  upon  them  in  the  several  options, 
of  course  there  would  appear  to  be  an  over-valuation  in  the 
sale.  But  this  is  an  assumption  that  would  scarcely  be  war- 
ranted. Probably  there  was  not  much  market  value  for  the 
stock,  especially  the  common  and  unpreferred  stock.  It  was 
supposed  that  the  new  enterprise  would  make  the  plants  more 
valuable,  so  that  the  value  of  any  plant  before  the  transfer 
would  not  be  evidence  of  its  value  after  the  consolidation  should 
be  completed.  Every  one  interested  proceeded  with  his  eyes 
open,  and  it  was  entirely  competent  to  make  such  a  contract  as 
they  might  agree  upon.  There  was  no  compulsion  practised  and 
no  evidence  of  fraud.  The  mill  owners  could  set  such  valuation 
upon  their  plants  as  they  chose,  or  as  they  could  agree  upon 
with  those  taking  the  options.  The  holders  of  options  and  the 
new  company,  in  the  absence  of  fraud,  could  do  the  same 
thing  and  make  such  bargain  for  the  transfer  as  they  saw  fit." 

When  stock  has  been  issued  as  fully  paid  up,  in  exchange 
for  property  acquired,  the  weight  of  authority  supports  the 

>  Dickerman  v.  Northern  Trust  Co.,  80  Fed.  453  (1897). 

575 


§321 


INTERCORPORATE    RELATIONS 


[part  V 


view  that  mere  over-valuation  is  not  sufficient  to  invalidate 
the  issue,  and  that  fraud,  actual  or  constructive,  must  be 
shown;  *  and  the  same  rule  is  sometimes  provided  by  statute.^ 


'  I.  Cases  holding  that,  unless  the 
over-valuation  of  the  property  is  inten- 
tional and,  consequently,  fraudulent, 
the  issxie  of  stock  cannot  be  attacked  or 
the  stock  treated  as  only  partially  paid 
up. 

United  States:  Coit  v.  Gold  Amal- 
gamating Co.,  119  U.  S.  345  (1886), 
(7  Sup.  Ct.  Rep.  231) ;  Dickerman  v. 
Northern  Trust  Co.,  80  Fed.  450 
(1897) ;  Northwestern  Mut.  Life  Ins. 
Co.  V.  Exchange  Real  Est.  Co.,  70 
Fed.  157  (1895);  Du  Pont  v.  Tilden, 
42  Fed.  87  (1890) ;  Phelan  v.  Hazard, 
5  Dill.  45  (1878). 

Indiana:  Bruner  v.  Brown,  139 
Ind.  600  (1894),  (38  N.  E.  Rep.  318) ; 
Coffin  V.  Ransdell,  110  Ind.  417  (1887), 
(11  N.  E.  Rep.  20). 

Maryland :  Brant  v.  Ehlen,  59  Md. 
1  (1882). 

Michigan :  Young  v.  Erie  Iron  Co., 
65  Mich.  Ill  (1887),  (31  N.  W.  Rep. 
814). 

Minnesota:  Hastings  Malting  Co. 
V.  Iron  Range  Brew.  Co.,  65  Minn.  28 
(1896),  (67  N.  W.  Rep.  653). 

Nebraska:  Troup  v.  Horbach,  53 
Neb.  795  (1898),  (74  N.  W.  Rep.  326). 
Compare  Gilkie,  etc.  Co.  v.  Dawson, 
etc.  Co.,  46  Neb.  333  (1895),  (64  N.  W. 
Rep.  978). 

New  Jersey:  Bickley  v.  Schlag,  46 
N.  J.  Eq.  533  (1890),  (20  Atl.  Rep. 
250).  See,  however,  Weatherby  v. 
Baker,  35  N.  J.  Eq.  501  (1882). 

New  York :  Seymour  v.  Spring 
Forest  Cem.  Ass'n,  144  N.  Y.  333 
(1895),  (39  N.  E.  Rep.  365,  26  L.  R.  A. 
859) ;  Schenck  v.  Andrews,  57  N.  Y. 
133  (1874);  Powers  v.  Knapp,  85 
Hun,  38  (1895),  (32  N.  Y.  Supp.  622). 

North  Carolina :  Clayton  i'.  Ore 
Knob  Co.,  109  N.  C.  385  (1891),  (14 
S.  E.  Rep.  36). 

Pennsylvania :  American  Tube, 
etc.    Co.    V.   Hays,    165    Pa.    St.    489 

576 


(1895),  (30  Atl.  Rep.  936);  Carr  v. 
Le  Fevre,  27  Pa.  St.  413  (1856). 

Tennessee :  Kelley  v.  Fletcher,  94 
Tenn.  1  (1895),  (28  S.  W.  Rep.  1099) ; 
Jones  v.  Whitworth,  94  Tenn.  602 
(1895),  (30  S.  W.  Rep.  736). 

W ashington :  Kroenert  v.  .Johnston, 
19  Wash.  96  (1898),  (52  Pac.  Rep. 
605). 

England:  In  re  Wragg,  1  Ch.  Div. 
796  (1897);  Curries  Case,  3  De  Gex, 
J.  &  S.  367  (1863). 

Canada :  In  re  Hess  Mfg.  Co.,  23 
Can.  S.  C.  644  (1894). 

II.  Cases  holding  that  proof  of  over- 
valuation, even  without  fraud,  leaves  the 
stock  only  paid  up  to  the  extent  of  the 
true  rvalue. 

United  States:  Altenburgh  v. 
Grant,  85  Fed.  345  (1897),  construing 
peculiar  provision  of  Kentucky  con- 
stitution. 

Alabama:  Roman  v.  Dimmick,  115 
Ala.  233  (1897),  (22  So.  Rep.  109). 

Illinois :  Sprague  v.  National  Bank, 
172  111.  149  (1898),  (50  N.  E.  Rep.  19, 
64  Am.  St.  Rep.  17). 

Missouri:  Van  Cleve  v.  Berkey, 
143  Mo.  109  (1898),  (44  S.  W.  Rep. 
743,  42  L.  R.  A.  593). 

Ohio:  Gates  v.  Tippecanoe  Stone 
Co.,  57  Ohio  St.  60  (1897),  (48  N.  E. 
Rep.  285,  63  Am.  St.  Rep.  705). 

Utah:  Salt  Lake  Hardware  Co.  v. 
Tintic  Mill.  Co.,  13  Utah,  423  (1896), 
(45  Pac.  Rep.  200). 

2  New  Jersey  Corporation  Act  of 
1896,  §  49,  p.  293.  See  note  to  §  319, 
ante. 

A  wilful  disregard  of  the  rule 
prescribed  by  this  statute,  invoh-ing 
an  intentional  over- valuation  of  prop- 
erty acquired  by  a  corporation,  is 
fraud  within  the  meaning  of  the 
statute  and  the  issuing  of  .stock  with- 
out an  appraisal  of  the  actual  cost 
value  of  such  property  is  illegal. 


CHAP.    XXX]     LAW   AFFECTING    CORPORATE    COMBINATIONS  §   323 

Gross  and  obvious  over-valuation   would,  however,  make  the 
transaction  presumptively  fraudulent.' 

Constitutional  provisions  have  been  adopted  and  statutes 
enacted,  in  many  States,  against  the  fictitious  issue  of  stock. 
A  consideration  of  these  provisions,  and  of  the  remedies  of 
creditors  or  stockholders  in  the  case  of  watered  stock,  belongs 
more  appropriately  in  a  treatise  upon  general  corporation  law. 

§  322.  Power  of  Vendor  Corporations  to  sell  Properties  for 
Stock  of  Purchasing  Corporation.  —  The  general  principles  of 
law  governing  the  exchange  of  corporate  property  for  stock 
in  other  corporations,  which  have  already  been  fully  considered, 
are  applicable  in  the  case  of  the  formation  of  a  corporate  com- 
bination and  do  not  require  further  examination.^ 

§  323.  Corporate  Combinations  through  Formation  of  Hold- 
ing Corporations.  — Corporate  combinations  have  sometimes 
been  created  by  the  formation  of  a  corporation  to  acquire  control 
of  several  competing  corporations,  through  the  ownership  of 
a  majority  of  their  respective  shares. 

Upon  principles  elsewhere  considered,  such  holding  cor- 
porations can  only  be  organized  under  laws  permitting  corpo- 
rations to  acquire  and  hold  stock  in  other  corporations.  A 
corporate  combination  by  means  of  a  holding  corporation, 
therefore,  depends  for  its  validity  upon  the  power  of  such  cor- 
poration to  hold  the  shares  of  the  several  subsidiary  companies. 
In  the  absence  of  such  power,  the  combination  is  invalid,  and 
the  holding  corporation  is  liable  to  be  proceeded  against  in 
quo  warranto,  entirely  irrespective  of  the  question  whether  the 
combination  is  opposed  to  public  poUcy.^ 

Strickland    v.    National    Salt    Co.,       §  281  :    "Power  to  take  Stock  in  Ex- 

64  Atl.  Rep.  982  (N.  J.  Ch.  1906).  change  for  Corporate  Assets." 

'  Coit  V.  Gold  Amalgamating  Co.,  '  People  v.  Chicago  Gas  Trust  Co., 

119  U.  S.  343  (1886),  (7  Sup.  Ct.  Rep.  130  111.  268  (1889),  (22  N.  E.  Rep.  798, 

231) ;   Lloyd  v.  Preston,  146  U.  S.  630  17  Am.  St.  Rep.  319,  8  L.  R.  A.  497). 

(1892);    Coleman   v.    Howe,    154  111.  is,    perhaps,    the    leading    case    illus- 

458    (1895),    (39    N.    E.    Rep.    725,  trating  the   principles  governing  this 

45     Am.    St.    Rep.     133) ;    Hastings  form  of  corporate  combination. 
Malting  Co.  v.  Iron  Range  Brew.  Co.,  For  examination   of  this  case,  see 

65  Minn.  28  (1896),  (67   N.  W.   Rep.  post,    §  346:     "Basis   of  Rule  —  {E) 
652).  Case  of  the  Chicago  Gas  Trust." 

^  See  ante,  subdiv.  II.  ch.  11  :  "Ex-  See  also  ai}tc,  §  264  :  "  Xeccssity  for 

change  of  Property  of  One  Corporation       Statutory  Authority  to  purchase  Stock, 
for  Stock  of  Another."     See  also  ante,       RtUe  in  United  States." 

577 


§324 


INTERCORPORATE    RELATIONS 


[part  V 


Article   II 

COMBINATIONS    AS    AFFECTED    BY    PRINCIPLES    OF 
COMMON    LAW    AND    PUBLIC    POLICY 


CHAPTER    XXXI 


application    of    law    of    conspiracies 


§  324.  Definition  and  Classification  of  Conspiracies. 

§  325.  Criminal  and  Civil  Conspiracies  distinguished. 

§  326.  Applicability  of  Law  of  Conspiracies  to  Corporations. 

§  327.  What  Combinations  are  Conspiracies. 

§  327a.  Remedies  and  Procedure  in  Case  of  Conspiracies. 

§  328.  Modern  Combinations  of  Capital  seldom  Conspiracies. 

§  324.  Definition  and  Classification  of  Conspiracies.  —  A  con- 
spiracy is  a  species  of  the  genus  combination,  and  may  be 
broadly  defined  as  a  combination  to  effect  an  illegal  object, 
as  an  end  or  means ;  or,  in  the  language  of  Lord  Denman,^ 
"to  do  an  unlawful  act,  or  a  lawful  act  by  unlawful  means."  ^ 

Case,    4    B.    &    Ad.    349 


'  Jones 
(1832). 

2  United  States.  Pettibone  v. 
United  States,  148  U.  S.  203  (1893), 
(13  Sup.  Ct.  Rep.  542):  "A  con- 
spiracy is  sufficiently  described  as  a 
combination  of  two  or  more  persons, 
by  concerted  action,  to  accomplish 
a  criminal  or  unlawful  purpose,  or 
some  purpose  not  in  itself  criminal  or 
unlawful,  by  criminal  or  unlawful 
means."  See  also  United  States  v. 
Cassidy,  67  Fed.  698  (1895). 

Georgia.  Brown  v.  Jacobs'  Phar- 
macy Co.,  115  Ga.  429,  433  (1902), 
(41  S.  E.  Rep.  553,  90  Am.  St.  Rep. 
126,  57  L.  R.  A.  547):  "A  con- 
spiracy has  been  defined  as  a  com- 
bination either  to  accomplish  an 
unlawful  end,  or  to  accomplish  a 
lawful  end  by  unlawful  means." 

578 


Illinois.  Smith  v.  People,  25  111. 
17  (1860),  (76  Am.  Dec.  780). 

Maine.  State  v.  Bartlett,  30  Me. 
134(1849)  :  "A  conspiracy  at  common 
law  consists  in  the  unlawful  agree- 
ment of  two  or  more  persons  to  com- 
pass or  promote  some  criminal  or 
illegal  purpose,  or  in  the  unlawful 
agreement  to  compass  or  promote  a 
purpose  not  in  itself  criminal  or  un- 
lawful, by  criminal  or  unlawful 
means." 

Maryland.  Klingel's  Pharmacy  v. 
Sharp,  104  Md.  230  (1906),  (64  Atl. 
Rep.  1029):  "A  combination  is  a 
conspiracy  in  law  whenever  the  act 
to  be  done  has  a  necessary  tendency 
to  prejudice  the  public,  or  oppress 
individuals  by  unjustly  subjecting 
them  to  the  power  of  the  confedera- 
tion and  gi\'ing  effect  to  the  purposes 


CHAP.    XXXl]        APPLICATION    OF   LAW    OF   CONSPIRACIES 


§324 


Conspiracies  are  of  two  kinds,  criminal  and  civil.  A  criminal 
conspiracy  is  a  combination  of  two  or  more  persons  to  accom- 
plish, by  concerted  action,  a  criminal  or  unlawful  object;  or 
a  lawful  object,  by  criminal  or  unlawful  means. ^ 


of  the  latter,  whether  of  extortion  or 
mischief." 

Massachusetts.  Commonwealth  v. 
Waterman,  122  Mass.  57  (1877) :  A 
conspiracy  is  "the  combination  of 
two  or  more  [persons]  to  do  some- 
thing unlawful,  either  as  a  means  or 
as  an  ultimate  end." 

Michigan.  Alderman  v.  People, 
4  Mich.  414  (1857),  (69  Am.  Dec.  321). 

West  Virginia.  There  can  be  no 
conspiracy  to  do  that  which  is  lawful 
by  lawful  means. 

Porter  v.  Mack,  50  W.  Va.  581 
(1901),  (40  S.  E.  Rep.  459). 

See  also  West  Virginia  Trans.  Co. 
V.  Standard  Oil  Co.,  50  W.  Va.  611 
(1902),  (40  S.  E.  Rep.  591,  88  Am. 
St.  Rep.  895). 

The  Texas  anti-trust  statute  of 
1903  (§3)  contains  a  definition  of  a 
conspiracy  in  restraint  of  trade. 

'  See  definitions  in  preceding  note. 

In  Commonwealth  v.  Hunt,  4  Met. 
(Mass.)  123  (1842),  Chief  Justice 
Shaw  thus  defined  a  criminal  con- 
spiracy:  "A  conspiracy  must  be  a 
combination  of  two  or  more  persons, 
by  some  concerted  action,  to  accom- 
plish some  criminal  or  unlawful  pur- 
pose, or  to  accomplish  some  purpose, 
not  criminal  or  unlawful,  by  criminal 
or  unlawful  means." 

The  term  "unlawful,"  in  addition 
to  the  term  "criminal,"  was  used, 
said  the  Chief  .Justice,  because  "it  is 
manifest  that  many  acts  are  unlawful 
which  are  not  punishable  by  indict- 
ment or  other  public  prosecution ; 
and  yet  there  is  no  doubt,  we  think, 
that  a  combination  by  numbers  to 
do  them  would  be  an  unlawful  con- 
spiracy, and  punishable  by  indict- 
ment." 

As  to  the  use  of  the  phrase  "by 


concerted  action,"  see  United  States 
V.  Cassidy,  67  Fed.  698  (1895) ;  Alder- 
man V.  People,  4  Mich.  424  (1857), 
(69  Am.  Dec.  321). 

The  manifest  difficulty  of  stating  a 
rule  for  determining  what  acts,  un- 
lawful but  not  criminal  when  com- 
mitted by  an  indiN-idual,  constitute 
a  criminal  offence  when  committed 
by  a  combination  of  indi^•iduaLs,  was 
considered  by  the  Supreme  Coxirt  of 
Errors  of  Connecticut  in  State  i'. 
GHdden,  55  Conn.  70  (1887),  (8  Atl. 
Rep.  890):  "It  has  often  been  said 
that  a  conspiracy  to  effect  an  unlawful 
purpose,  or  a  lawful  purpose  by  unlaw- 
ful means,  is  an  offence.  But  this  is 
said  to  be  a  limitation  rather  than  a 
definition.  It  certainly  lacks  definite- 
ness.  Many  acts  are  .said  to  be  un- 
lawful which  would  not  be  the  sub- 
ject of  a  criminal  conspiracy.  Other 
acts  are  unlawful  because  they  are 
in  \'iolation  of  the  criminal  law  or 
some  penal  statute.  If  the  end  or 
means  are  criminal  in  themselves, 
or  contrary  to  some  penal  statute, 
the  conspiracy  is  clearly  an  offence. 
Between  these  two  extremes  a  great 
variety  of  cases  may  arise,  many  of 
which  ought  not  to  be  regarded  as 
criminal.  ...  If  we  were  to  at- 
tempt to  give  a  rule  applicable  to 
this  branch  of  the  subject,  we  should 
say  that  it  is  a  criminal  offence  for 
two  or  more  persons,  corruptly  or 
maliciously  to  confederate  and  agree 
together  to  deprive  another  of  his 
liberty  or  property.  Such  a  rule  is 
proximately  correct  and  jsractically 
just." 

The  theory  that  acts  niertly  unlaw- 
ful may  become  criminal  when  done  in 
concert  is  supported  by  the  autliorities 
to  such  an  extent  that  the  writer  has 

579 


§  325 


INTERCORPORATE   RELATIONS 


[part  V 


A  civil  conspiracy  is  a  combination  of  two  or  more  persons 
to  accomplish,  by  concerted  action,  an  unlawful  or  oppress- 
ive object;  or  a  lawful  object,  by  unlawful  or  oppressive  means 
—  resulting  in  damage.^ 

§  325.  Criminal  and  Civil  Conspiracies  distinguished.  —  A 
criminal  and  a  civil  conspiracy,  aside  from  the  element  of 
criminality,  may  be  distinguished  from  the  fact  that  the  gist 
of  the  action  in  case  of  the  one  is  merely  an  act  of  aggravation 
in  the  other.^ 

The  gist  of  the  offence  of  criminal  conspiracy  is  the  com- 
hination.  The  ofTence  is  complete  when  the  confederacy  is 
made,  and  no  overt  act  is  necessary.  Any  act  in  pursuance 
of  the  combination  is  matter  of  aggravation.^ 


felt  obliged  to  follow  it  in  formulating 
a  definition  of  a  criminal  conspiracy. 
It  is  difficult,  however,  to  support  it 
upon  principle.  Mere  concert  of 
action  —  except  when  invoKnng  force 
or  false  statement  —  is  not,  in  itself, 
criminal ;  and  if  neither  the  object 
nor  means  are  criminal  wherein  lies 
the  criminality?  See,  in  this  con- 
nection, Bohn  Mfg.  Co.  v.  Hollis, 
54  Minn.  223  (1893),  (55  N.  Rep. 
119);  Rourke  v.  Elk  Drug  Co.,  75 
App.  Div.  (N.  Y.)  145  (1902),  (78 
N.  Y.  Supp.  1135). 

It  is  not  necessary  that  the  object 
of  a  criminal  conspiracy  should  con- 
stitute a  criminal  offence. 

Chicago,  etc.  Coal  Co.  v.  People, 
214  111.  421  (1905),  (73  N.  E.  Rep. 
770). 

*  The  same  combination,  of  course, 
miay  amount  to  a  criminal  as  well  as  a 
civil  conspiracy.  Acts  constituting  a 
criminal  conspiracy,  if  accompanied 
with  damage,  may  also  subject  the 
conspirators  to  a  civil  action. 

For  consideration  of  the  element  of 
damage  in  civil  conspiracies,  see  next 
section. 

*  In  Van  Horn  v.  Van  Horn,  52 
N.  .7.  L.  286  (1890),  (20  Atl.  Rep.  485, 
10  L.  R.  A.  184),  the  Court  said: 
"  It  is  not  necessary  to  consider  the 
office  of  the  ancient  writ  of  conspiracy, 

580 


and  the  process  by  which,  in  time,  it 
was  superseded  by  the  later  and  more 
efficacious  action  on  the  case  for  con- 
spiracy, and  the  still  more  modern 
action  for  malicious  prosecution. 
Nor  will  it  now  be  advantageous  to 
show  how  long  and  difficult  it  was  to 
separate  the  idea  of  a  criminal  con- 
spiracy at  common  law,  where  the 
agreement  or  conspiracy  was  the 
gravamen  of  the  offence,  from  the 
real  complaint  in  a  civil  action,  that 
the  combination  of  two  or  more 
persons  has  enabled  them  to  inflict 
a  great  wrong  on  the  plaintiff.  The 
combination  or  conspiracy  in  the 
latter  case  was,  therefore,  a  matter 
of  aggravation  or  inducement  only, 
of  which  one  or  all  might  be  found 
guilt}^  while  in  the  former  it  was 
essential  to  show  that  two  or  more 
had  joined  in  an  agreement  to  do  an 
unlawful  act,  or  to  do  a  lawful  act 
in  an  unlawful  manner.  The  dis- 
tinction is  now  well  established,  that 
in  civil  actions  the  conspiracy  is  not 
the  gravamen  of  the  charge." 

'  Commonwealth  v.  Judd,  2  Mass. 
329  (1807),  (3  Am.  Dec.  54)  {per 
Parsons,  C.  J.)  :  "The  gist  of  a  con- 
spiracy is  the  unlawful  confederacy 
to  do  an  unlawful  act,  or  even  a 
lawful  act  for  unlawful  purposes ; 
the  offence  is  complete  when  the  con- 


CHAP.   XXXl]        APPLICATION   OF   LAW   OF   CONSPIRACIES 


§  32(3 


Damage  is  essential  to  a  right  of  action  for  civil  conspiracy. 
It  is  the  gravamen  of  the  charge,  and  the  combination  is  only 
a  matter  of  aggravation.* 

§  326.  Applicability  of  Law  of  Conspiracies  to  Corporations. 
—  The  law  of  civil  conspiracies  is  equally  applicable  to  cor- 
porations and  to  individuals.  A  combination  of  corporations 
for  an  unlawful  or  oppressive  object  —  as  an  end  or  means  — 


fcderacy  is  made  ;  and  any  act  ilone  in 
pursuance  of  it  is  no  constituent  part 
of  the  offence,  but  merely  an  aggrava- 
tion of  it.  The  rule  of  tlie  common 
law  is  to  prevent  unlawful  combina- 
tions. .  .  .  The  unlawful  confed- 
eracy is,  therefore,  pvmished  to  pre- 
vent the  doing  of  any  act  in  execution 
of  it." 

People  V.  Sheldon,  139  N.  Y.  264 
(189.3),  (34  N.  E.  Rep.  785,  36  Am. 
St.  Rep.  690,  23  L.  R.  A.  221) :  "The 
gravamen  of  the  offence  of  conspir- 
acy is  the  combination.  Agreements 
to  prevent  competition  in  trade  are, 
in  contemplation  of  law,  injurious 
to  trade,  because  they  are  liable  to 
be  injuriously  used." 

Both  of  these  opinions  refer  to 
criminal  conspiracies  and  are  indica- 
tive of  the  uniform  current  of  author- 
ity that,  unless  expressly  provided 
by  statute  (as  is  sometimes  the  case), 
proof  of  an  overt  act  is  not  necessary 
in  a  prosecution  for  consipracy ;  nor 
is  it  necessary  to  set  forth  such  act 
in  the  indictment. 

>  Robertson  v.  Parks,  76  Md.  13.5 
(1892),  (24  Atl.  Rep.  413)  :  "It  is  a 
general  rule,  that  a  conspiracy  cannot 
be  made  the  subject  of  a  ci^^l  action, 
unless  something  is  done  which,  with- 
out the  conspiracy,  would  give  a  right 
of  action.  The  damage  done  is  the 
gist  of  the  action,  not  the  conspiracy. 
Where  the  mischief  contemplated  is 
accomplished,  the  conspiracy  becomes 
important,  as  it  may  affect  the  means 
and  measures  of  redress.  The  party 
wronged  may  look  beyond  the  actual 
participants    in    committing   the    in- 


jurj-,  and  join  with  them  as  defend- 
ants all  who  conspired  to  accom- 
plish it ;  and  the  fact  of  conspiracy 
may  aggravate  the  wrong;  but  the 
simple  act  of  conspiracy  does  not 
furnish  a  substantial  ground  of 
action." 

Doremus  v.  Hennessey,  62  111.  -App. 
402  (1895):  "A  civil  action  will  not 
lie  for  a  mere  conspiracy.  It  is  the 
damage  done  in  pursuance  of  the 
conspiracy  which  gives  the  right  of 
action.  It  is  now  well  established 
that,  in  civil  actions,  the  conspiracy 
is  not  the  gravamen  of  the  charge, 
but  may  be  pleaded  and  proved  in 
aggravation  of  the  wrong  of  which  the 
plaintiff  comjilains,  and  as  enabling 
him  to  recover  against  all  the  con- 
spirators, as  joint  tortfeasors." 

The  damage  and  not  the  wrongful 
confederation  is  the  gist  of  the  action 
for  civil  conspiracy.  In  order  to 
state  a  cause  of  action  for  such  a  con- 
spiracy the  facts  from  which  the 
damage  has  resulted  nmst  be  alleged 
as  well  as  the  confederation  and  con- 
spiracy-. 

Commercial  I'nion  Ins.  Co.  r.  Shoe- 
maker, 65  Neb.  173  (1901),  (88  N.  W. 
Rep.  150). 

See  also  Adlcr  i\  I'enton,  24  How. 
(U.  S.)  407  (1800)  ;  Van  Horn  v.  Van 
Horn,  52  N.  3.1..  284  (1890),  (20  Atl. 
Rep.  485,  10  L.  R.  A.  184) ;  Kimball 
V.  Ilarman,  34  Md.  407  (1871),  (6  Am. 
Rep.  340)  ;  Stevens  v.  Rowe,  .59  N.  H. 
578  (1880),  (47  Am.  Rep.  231); 
Hutchins  r.  Hutchins,  7  Hill,  104 
(1845). 

581 


326 


INTERCORPORATE    RELATIONS 


[part  V 


is  a  conspiracy,  if  a  similar  combination  of  natural  persons 
would  amount  to  a  conspiracy;  and  the  converse  of  the  propo- 
sition is  equally  true. 

In  Buffalo  Lubricating  Oil  Co.  v.  Standard  Oil  Co,^  the 
Court  said:  "We  entertain  no  doubt  that  an  action  against 
a  corporation  may  be  maintained  to  recover  damages  caused 
by  conspiracy.  ...  If  actions  can  be  maintained  against 
corporations  for  malicious  prosecution,  libel,  assault  and 
battery,  and  other  torts,  we  can  perceive  no  reason  for  holding 
that  actions  may  not  be  maintained  against  them  for  con- 
spiracy. It  is  well  settled  by  the  authorities  cited,  that  the 
malice  and  wicked  intent  needful  to  sustain  such  actions  may 
be  imputed  to  corporations."  ^ 

Upon  similar  principles,  it  seems  clear  that  a  combination 
of  corporations  for  a  criminal  object  would  amount  to  a  criminal 
conspiracy,  if  such  would  be  the  result  of  a  combination  of  in- 
dividuals for  the  same  purpose.  In  several  States,  the  anti- 
trust laws  expressly  provide  that  corporations,  as  well  as  natural 
persons,  violating  their  provisions,  shall  be  guilty  of  the  crime 
of  conspiracy.^ 


*  Buffalo  Lubricating  Oil  Co.  v. 
Standard  Oil  Co.,  106  N.  Y.  670 
(1887),  (12  N.  E.  Rep.  826). 

2  In  West  Virginia  Trans.  Co.  v. 
Standard  Oil  Co.,  50  W.  Va.  611 
(1902),  (40  S.  E.  Rep.  591),  88  Am. 
St.  Rep.  895,  the  Court  said:  "It  is 
very  clear  that  a  corporation  can  be 
guilty  of  a  combination  or  conspiracy 
with  other  corporations  or  persons 
aimed  at  and  accomplishing  the  in- 
jurj'  of  other  corporations  or  persons. 
It  is  a  mere  legal  entity  and  itself  is 
incapable  of  so  doing ;  but  it  is 
moved  by  human  beings,  is  operated 
by  human  agents,  and  is  thus  an 
active  person  not  only  for  damage 
done  in  the  breach  of  contracts, 
but  for  torts  doing  others  harm." 

^  The  Missouri  anti-trust  act  (see 
post,  ch.  XLI.)  pro\ides  in  its  first 
section  that  any  corporation,  indi\-id- 
ual  or  other  association  of  persons, 
entering    into    any    combination    in 

582 


\'iolation  of  its  pro\nsions,  "shall 
be  deemed  and  adjudged  guilty  of  a 
conspiracy  to  defraud."  In  National 
Lead  Co.  v.  Grote  Paint  Store  Co., 
80  Mo.  App.  247  (1899),  the  Missouri 
Court  of  Appeals,  referring  to  this 
statute,  said:  "By  the  language 
of  the  first  section  of  that  enactment 
a  ^nolation  of  its  provisions  is  made  a 
crime,  i.e.  'a  conspiracy  to  defraud.'" 
And  in  discussing  the  liability  of  a 
corporation  for  its  %'iolation  the  Court 
said  (p.  269)  :  "A  corporation  can 
only  act  through  its  members  or  their 
agents.  The  corporate  entity  with 
which  the  law  clothes  it  for  special 
purposes  is  not  self-acting,  hence 
there  was  no  thought  of  its  action 
alone  in  the  mind  of  the  framers  of  the 
statute.  The  e^•ident  purpose  of  the 
legislature  was  to  specify  certain  acts, 
which,  if  done  by  its  stockholders 
or  governing  bodies,  should  constitute 
a  crime  on  the  part  of  the  corporation. 


CHAP.    XXXI  ]        APPLICATION    OF   LAW    OF    CONSPIRACIES 


327 


§  327.  What  Combinations  are  Conspiracies.  —  \  combina- 
tion amounts  to  a  criminal  conspiracy  only  when  the  end 
or  means  are  criminal  or  unlawful.  A  combination  amounts 
to  a  civil  conspiracy  only  when  the  ends  or  means  are  un- 
lawful or  oppressive,  and  the  legal  rights  of  others  are  infringed. 
Whether  a  particular  combination  is  a  conspiracy  depends, 
therefore,  upon  its  object,  and  the  means  adopted  for  accom- 
plishing it.     The  question  of  motive  may  also  be  of  importance.'. 

Thus  in  the  celebrated  Mogul  Steamship  Case  ^  Lord  Chief 


It  ditl  not  contemplate  the  commission 
of  an  offence  by  an  imimlpable  ab- 
straction, which  could  neither  think 
nor  act ;  but  it  intended  to  bind  this 
corporate  entity  by  the  imputed 
actions  of  its  human  agencies." 

In  State  v.  Firemen's  Fund  Ins. 
Co.,  1.52  Mo.  37  (1899),  (52  S.  W. 
Rep.  595,  45  L.  R.  A.  3G3),  the 
Supreme  Court  of  Missouri  dis- 
cussed the  applicability  of  the  same 
law  to  insurance  companies:  "It 
could  not  be  tolerated  for  a  mo- 
ment that  an  insurance  company 
could  hide  under  the  skirts  of  its 
agents  and  \'iolate  the  anti-trust  laws 
of  our  State  with  impunity.  .  .  .  The 
company  can  and  must  control  its 
agents,  and  must  see,  at  its  peril, 
that  its  agents  do  not  \iolate  the  law 
while  attending  to  the  business  of  the 
company.  This  is  the  rule  as  to  libels, 
assaults,  malicious  torts  by  agents 
of  incorporated  companies,  and  there 
is  greater  reason  for  it  being  the  true 
rule  in  cases  involving  the  anti-trust 
laws. " 

That  a  corporation  cannot  be 
indicted  for  making  an  imlawful  agree- 
ment in  restraint  of  competition  does 
not  stand  in  the  way  of  counting  it 
as  a  party  to  such  a  conspiracy. 

Standard  Oil  Co.  v.  State  (Tenn., 
1907),  100  S.  W.  Rep.  705. 

'  In  Hawarden  v.  Youghiogheny, 
etc.  Coal  Co.,  Ill  Wis.  545  (1901), 
(87  N.  W.  Rep.  472,  55  L.  R.  A.  828) 
the  Court  held  that  while  persons 
have  a  right  to  combine  in  a  legiti- 


mate way  yet  that  where  the  object 
of  a  combination  is  to  inflict  injury 
upon  others  and  injury  results,  a 
wrong  is  committed  for  which  the 
injured  person  may  recover  damages. 
In  this  case  the  business  of  a  retail 
coal  dealer  had  been  destroyed  bj- 
combination  between  wholesale  deal- 
ers and  certain  retail  dealers  for  the 
purpose  of  forcing  out  of  business  all 
retailers  not  parties  thereto. 

^  Mogul  Steamship  Co.  v.  Mc- 
Gregor, L.  R.  21  Q.  B.  552  (1888). 
This  is  the  leading  case  upon  the  law 
of  conspiracies  as  applied  to  trade 
competition,  and,  in  its  various  stages, 
is  reported  in  L.  R.  15  Q.  B.  476 
(1885),  L.  R.  21  Q.  B.  544  (1888), 
L.  R.  23  Q.  B.  598  (1889),  L.  R.  17 
App.  Cas.  (1891)  25.  In  this  case 
certain  owners  of  steam  vessels  trad- 
ing between  China  and  England,  for 
the  purpose  of  obtaining  a  monop- 
oly of  the  homeward  tea  trade  and 
maintaining  the  rates  of  freight 
thereon,  formed  an  association,  and 
offered  to  all  shippers  of  tea  who  used 
exclusively  the  vessels  of  members 
of  the  a.ssociation  a  rebate  of  five  per 
cent  on  all  freights.  The  plaintiffs, 
who  were  rival  ship  owners,  were 
excluded  from  the  benefits  of  the 
association  to  their  damage,  as  al- 
leged, and  they  institutc<l  an  action 
for  the  recovery  of  damages  and  for  an 
injunction.  The  gist  of  the  plaintiffs' 
ca.se,  as  stated,  was  a  cnnspiranj  on 
the  part  of  the  respondents  to  pre- 
vent   the    plaintiffs    from    obtaining 

583 


§  327  INTERCORPORATE   RELATIONS  [PART   V 

Justice  Coleridge  said:  "  I  do  not  doubt  the  acts  done  by  the 
defendants  here,  if  done  wrongfully  and  maliciously,  or  if  done 
in  furtherance  of  a  wrongful  and  malicious  combination, 
would  be  ground  for  an  action  on  the  case  at  the  suit  of  one 
who  has  suffered  injury  from  them.  The  question  comes  at 
last  to  this:  What  was  the  character  of  those  acts,  and  what 
was  the  motive  of  the  defendants  in  doing  them?  " 

A  combination  entered  into  for  the  malicious  purpose  of 
injuring  a  person  in  his  business  may  amount  to  a  conspiracy, 
and  furnish  a  ground  of  action  for  the  damage  sustained.  The 
essential  element  of  a  conspiracy  —  the  unlawful  end  or  means 
—  may  be  the  intentional  doing  of  acts  detrimental  to  the 
business  of  a  competitor,  without  justification  or  excuse. 
But  combinations  without  such  ulterior  object,  and  merely 
for  the  purpose  of  promoting,  by  lawful  means,  the  common 
interests  of  the  parties,  are  not  conspiracies.  A  trader  or 
manufacturer  has  the  right  to  push  his  trade  or  business  in 
a  lawful  manner,  although  his  success  may  necessarily  involve 
loss  to  his  competitors.  So,  several  traders  and  manufacturers 
may  combine  for  mutual  advantage  and,  so  long  as  the  motive 
is  not  maHcious,  the  object  not  unlawful  or  oppressive,  and  the 
means  neither  deceitful  nor  fraudulent,  the  result  is  not  a  con- 
spiracy, although  it  may  necessarily  work  injuiy  to  other  persons 
engaged  in  the  same  business.  The  essential  question  is  whether 
the  object  of  a  combination  is  to  do  harm  to  others  or  to  exer- 
cise the  rights  of  the  association  for  its  own  benefit.^ 

cargoes  for  their  steamers.     A  motion  bj'  a  majority  of  its  members,  held 

for     a     preUminary     injunction     was  tliat    the    association,    being    formed 

denied  (L.  R.   15  Q.   B.  476)   (1885),  by    the    defendants    merely    for    the 

upon    the    ground    that,    although    a  purpose  of  winning  trade  and  without 

conspiracy  to  obtain  a  monopoly  of  any    malice    or    ill-will    towards    the 

a    carrying    trade    might    constitute  plaintiffs    or    with    the    intention    of 

an  actionable  conspiracy,  irreparable  ruining  their  trade,  did  not  constitute 

damage  warranting  an  injunction  had  a  conspiracj^  and  rendered  judgment 

not  been  shown.     The  case  then  came  for  the  defendant.     The  case  was  then 

before    Lord    Coleridge    (C.    J.),    who  taken  to  the  House  of  Lords  and  the 

held  (L.  R.  21  Q.  B.  544)  (1888),  that  judgment    affirmed    upon    the    same 

the     essential     element     of     "unlaw-  grounds  (L.   R.   17  App.  Cas.   (1891) 

fulness"  in  the  combination  had  not  25). 

been  shown   and   rendered   judgment  '  In    the    Mogul    Steamship    Case 

for   the    defendants.     The   case   then  (L.   R.   23,   Q.    B.   614)    (1889),   Lord 

went  to  the  Court  of  Appeal,  which,  Justice  Bowen  of  the  Court  of  Appeal 

584 


CHAP.   XXXl]        APPLICATION    OF   LAW   OF  CONSPIRACIES 


§327 


Whether  the  purpose  of  a  combination  is  unla\\'ful  or  op- 
pressive does  not  wholly  depend  upon  whether  such  purpose 
if  formed  and  carried  out  by  an  individual  would  be  unlaw- 
ful or  oppressive.  The  doing  of  an  act  by  a  number  of  per- 
sons may  give  it  an  impulse  and  injurious  effect  far  beyond 
that   which   could   possibly   result   from   the  act  of  a    single 


considered  at  length  the  principles 
stated  in  the  text:  "What,  then, 
are  the  limitations  which  the  law 
imposes  on  a  trader  in  the  con- 
duct of  his  business  as  between  him- 
self and  other  traders  ?  There  seems 
to  be  no  burdens  or  restrictions 
in  law  upon  a  trader  which  arise 
merely  from  the  fact  that  he  is  a 
trader,  and  which  are  not  equally 
laid  on  all  other  subjects  of  the 
crown.  His  right  to  trade  freely  is 
a  right  which  the  law  recognizes 
and  encourages,  but  it  is  one  which 
places  him  at  no  special  disadvan- 
tage as  compared  with  others.  No 
man,  whether  trader  or  not,  can, 
however,  justify  damaging  another 
in  his  commercial  business  by  fraud 
or  misrepresentation.  .  .  .  But  the 
defendants  have  been  guilty  of 
none  of  these  acts.  They  have 
done  no  more  against  the  plaintiff's 
than  pursue  to  the  bitter  end  a 
war  of  competition  waged  in  the 
interest  of  their  own  trade.  ...  I 
can  find  no  authority  for  the  doc- 
trine that  such  a  commercial  motive 
depriv^es  of  'just  cause  for  excuse' 
acts  clone  in  the  course  of  trade  which 
would  but  for  such  motive  bo  justified. 
So  to  hold  would  be  to  convert  into 
an  illegal  motive  the  instinct  of  self- 
advancement  and  self-protection, 
which  is  the  very  incentive  to  all 
trade.  ...  It  is  urged,  however, 
on  the  part  of  the  plaintiffs,  that 
even  if  the  acts  complained  of  would 
not  be  wrongful  had  they  been  com- 
mitted by  a  single  individual,  they 
become  actionable  when  thoy  arc  the 
result  of  concerted  action  among  sev- 
eral.     In  other  words,  the  plaintiffs,  it 


is   contended,   have   been   injured   by 
an  illegal  conspiracy.     Of  the  general 
proposition,     that     certain     kinds    of 
conduct    not    criminal     in     any    one 
individual    may    become    criminal    if 
done  by  combination  among  several, 
there    can    be    no    doubt.     The    dis- 
tinction  is    based    on   sound    reason, 
for       a      combination      may      make 
oppressive   or  dangerous    that   which 
if    it    proceeded    only  from  a  single 
person  would  be   otherwise,   and   the 
very  fact   of    the    combination    may 
show  that    the    object    is    simply  to 
do    harm,    and    not     exercise     one's 
own   just  rights.   .   .   .      The  question 
to  be   solved    is    whether    there    has 
been    any    such     [illegal]    agreement 
here.      Have     the     defendants     com- 
bined  to   do   an    illegal    act  ?      Have 
they  combined  to    do    a    lawful    act 
by     an     unlawful     means?       A     mo- 
ment's consideration  will  be  sufficient 
to  show   that   this  new  inquiry  only 
drives  us  back  to  the  circle  of  defini- 
tions and  legal  propositions  which   I 
have    already    traversed    in    the    pre- 
\'ious    part    of    this    judgment.     The 
unlawful  act  agreed  to,  if  any,  between 
the   defendants   must   have   been   the 
intentional  doing  of  some  act  to  the 
detriment    of   the    plaintiffs'  business 
without      just      cause      or      excuse. 
Whether  there  was  any  such  justifica- 
tion or  excuse   for  the  defendants  is 
the  old    question   over  again,   which, 
so  far  as  regards  an  indi\idual  trader, 
has   been   already   solved.     The   only 
differentia  that  can  exist  must   ari.se, 
if  at  all,  out  of  the  fact  that  the  acts 
done    are    the    joint    acts    of    several 
capitalists,  and  not  of  one  capitalist 
only." 

r)85 


§327 


INTERCORPORATE    RELATIONS 


[part  V 


person.*  Thus  the  mere  refusal  by  one  person  to  sell  to  an- 
other is  not  actionable  whatever  his  motive  may  be.^ 
But  where  the  wholesale  and  retail  dealers  in  a  commodity  in 
a  given  locality  enter  into  a  combination  not  to  deal  with 
retailers  who  do  not  join  with  them,  the  combination  may 
amount  to  a  conspiracy  and  persons  injured  may  recover 
damages  from  the  conspirators.^ 


'  Hawarden  v.  Youghiogheny,  etc. 
Coal  Co.,  Ill  Wis.  545  (1901),  (87 
N.  W.  Rep.  472,  55  L.  R.  A.  828). 
See  also  extract  from  opinion  in 
Mogul  Steamship  case  in  last  note. 

2  Wills  V.  Central  Ice,  etc.  Co., 
(Tex.  av.  App.  1905),  88  S.  W. 
Rep.  265. 

Brewster  v.  Miller's  Sons  Co.,  101 
Ky.  368  (1897),  (41  S.  W.  Rep.  301)  : 
"It  is  part  of  every  man's  civil  rights 
that  he  be  left  at  liberty  to  refuse 
business  relations  with  any  person 
whomsoever,  whether  the  refusal 
rests  upon  reason,  or  is  the  regult  of 
whim,  caprice,  prejudice,  or  malice. 
With  his  reasons  neither  the  public 
nor  third  persons  have  any  legal  con- 
cern, and  the  exercise  by  him  of 
his  legal  rights  cannot  be  a  legal 
wrong  to  another.  Appellant  brought 
this  action  against  certain  members 
of  the  Funeral  Directors  Association 
to  recover  damage,  alleging  that  they 
and  other  members  of  that  associa- 
tion had  refused  to  furnish  him  the 
articles,  or  render  the  services  neces- 
sary for  the  burial  of  his  ■wife,  said 
refusal  being  based  upon  the  ground 
that  appellant  was  indebted  to  some 
member  of  the  said  association  for 
the  burial  services  of  his  father,  and 
that,  therefore,  under  the  rules  of 
said  association  no  member  thereof 
was  permitted  to  furnish  such  services 
until  said  indebtedness  was  satisfied. 
And  it  is  held  that  while  the  members 
of  the  association  might  be  guilty 
of  a  public  offence,  and  a  violation  of 
the  provisions  of  eh.  101,  of  the  Ken- 
tucky Statutes,  if  proceeded  against 
by     an     indictment,     j^et     appellant 

586 


having  asserted  no  claim  for  damages 
to  personal  character  or  a  business 
reputation  resulting  from  such  al- 
leged acts  of  conspiracy,  cannot  main- 
tain  his  action." 

'  Hawarden  v.  Youghiogheny,  etc. 
Coal  Co.,  Ill  Wis.  545  (1901),  (87 
N.  W.  Rep.  472,  55  L.  R.  A.  828). 

A  combination  between  indepen- 
dent producers  to  regulate  and  fix 
the  price  at  which  coal  should  be  sold 
in  a  certain  territory,  and  to  prevent 
competition  in  its  sale,  amounts  to  a 
common  law  conspiracy. 

Chicago,  etc.  Coal  Co.  v.  People,  214 
111.  421  (1905),  (73  N.  E.  Rep.  770), 
affirming  114  111.  App.  75  (1904). 

Where  wholesale  and  retail  drug- 
gists in  a  city  formed  a  combination 
to  maintain  prices,  and  in  pursuance 
thereof,  refused  to  sell  to  a  retail 
dealer  who  had  declined  to  join  the 
combination,  and  threatened  and 
intimidated  other  wholesale  dealers 
into  refusing  to  deal  with  him,  it  was 
held  that  the  combination  was  a  con- 
spiracy. 

Klingel's  Pharmacy  v.  Sharp,  104 
Md.  218  (1906),  (64  Atl.  Rep.  1029, 
7  L.  R.  A.  (N.  s.)  976). 

See  also  Ferd  Heim  Brewing  Co. 
V.  Belinder,  97  Mo.  App.  64  (1903), 
(71  S.  W.  Rep.  691). 

An  agreement  between  a  brick- 
layers' union,  a  builders'  association 
and  a  brick  manufacturers'  associa- 
tion, that  they  will  not  buy  or  lay 
brick  made  by  any  manufacturer 
not  subscribing  to  the  rules  of  the 
builders'  association,  with  the  object 
of  injuring  the  business  of  such  man- 
ufacturer, is  a  conspiracy  and  unlaw- 


CHAP.    XXXl]        APPLICATION    OF    LAW    OF   CONSPIRACIES 


§327a 


§  327a.  Remedies  and  Procedure  in  Case  of  Conspiracies.  — 
Corporations  and  individuals  entering  into  a  combination 
amounting  to  a  criminal  conspiracy  are  subject  to  indictment 
and  punishment  in  the  same  manner  as  if  guilty  of  other  of- 
fences. The  only  limitation  with  respect  to  corporations  — 
and  this  obviously  applies  to  all  offences  —  is  that  the}'  cannot 
be  imprisoned. 

An  indictment  charging  certain  corporations  with  conspiracy, 
and  alleging  that  its  object  was  unlawful  sufficiently  charges 
a  conspiracy  at  common  law  without  setting  out  the  means  by 
which  the  conspiracy  was  to  have  been  accomplished.' 

In  order  to  establish  a  criminal  conspiracy  to  fix  the  price 
of  a  commodity  it  is  not  necessary  to  show  that  the  combination 
was  formally  entered  into  or  evidenced  by  a  written  agreement. 
An  understanding  among  the  conspirators  to  work  a  common 


fill  and  the  parties  are  liable  for 
all  damages  resulting  therefrom.  And 
it  is  not  necessary  to  show  that  the 
particular  acts  complained  of,  were 
done  directl}'  by  all  the  conspirators. 
If  done  by  some  of  them  after  the 
formation  of  the  combination,  or  by 
agents  in  carrying  out  its  objects, 
all  are  liable. 

Purington  v.  llinchliff,  219  111. 
159  (1905),  (76  N.  E.  Rep.  47), 
affirming  120  111.  App.  523  (1905). 

A  complaint  charging  a  combina- 
tion between  certain  railroad  com- 
panies and  an  association  of  elevator 
owners  in  pursuance  of  which  the 
railroad  companies  refuse  to  carry 
grain  sent  through  the  plaintiff's 
elevator  which  is  well  located  except 
at  an  advance  over  the  rate  charged 
for  grain  sent  through  the  elevators 
of  members  of  the  association,  and 
by  which  certain  shippers  have  been 
prevented  from  shipping  a  certain 
amount  of  grain  through  the  plain- 
tiff's elevator,  states  a  cause  of  action 
for  civil  conspiracy. 

Kellogg  i>.  Lehigh  Valley  R.  Co., 
61  App.  Div.  (N.  Y.)  35  (1901), 
(70  N.  Y.  Supp.  237). 


For  consideration  of  combinations 
of  bitlders  »t  public  sales  amounting 
to  conspiracies  in  restraint  of  trade 
see  In  re  Blake,  150  Fed.   279  (1906). 

For  consideration  of  trade  agree- 
ments amounting  to  conspiracies  see 
National  Fire  Proofing  Co.  v.  Master 
Builders'  Ass'n,  145  Fed.  263  (1906)  ; 
Curran  v.  Galen  152  N.  Y.  33  (1897), 
(46  N.  E.  Rep.  296,  57  Am.  St.  Rep. 
496,  37  L.  R.  A.  802),  and  cases  cited. 

'  Chicago,  etc.  Coal  Co.  v.  People, 
214  111.  421  (1905),  (73  N.  E.  Rep. 
770),  affirming  114  111.  App.  75  (1904). 

An  indictment  for  criminal  con- 
spiracy in  pooling,  and  fixing  the 
price  of  an  article  of  commerce, 
must  state  the  names  of  all  the  parties 
to  such  conspiracy  known  to  the 
prosecution,  but  all  the  parties  need 
not  be  jointh'  indicted. 

State  V.  Dreany,  65  Kan.  292 
(1902),  (69  Pac.  Rep.  182). 

It  must  be  borne  in  mind  in  con- 
sidering this  section  that  the  subject 
under  consideration  is  common  law 
conspiracies  and  that  most  of  the 
recent  prosecutions  for  trade  con- 
sjjiracies  have  been  under  State  anti- 
trust statutes.     See  post,  ch.  XLIII. 

587 


§  327a 


INTERCORPORATE  RELATIONS 


[part  V 


purpose  is  all  that  is  necessary.  And  the  evidence  should  be 
directed  toward  showing  what  has  been  actually  accomplished 
under  the  understanding  rather  than  its  professed  object.' 

The  offence  of  criminal  conspiracy  is  committed  when  the 
unlawful  combination  is  formed,  and  after  it  is  formed  the  acts 
of  the  different  members  which  tend  to  further  its  purposes 
bind  all  the  members.^ 

With  respect  to  civil  conspiracies — "  No  person  or  com- 
bination of  persons  can  legally,  by  direct  or  indirect  means, 
obstruct  or  interfere  with  another  in  the  conduct  of  his  lawful 
business,  and  any  loss  wilfully  caused  by  such  interference  will 
give  the  party  injured  a  right  of  action  for  all  damages  sustained. 
All  parties  to  a  conspiracy  to  ruin  the  business  of  another  because 
of  his  refusal  to  do  some  act  against  his  will  or  judgment  are 
liable  for  all  overt  acts  illegally  done  pursuant  to  such  con- 
spiracy and  for  the  subsequent  loss,  whether  they  were  active 
participants  or  not."  ^ 


'  Chicago,  etc.  Coal  Co.  v.  People, 
214  111.  421  (1905),  (73  N.  E.  Rep. 
770),  affirming  114  111.  App.  75  (1904). 
It  was  also  held  in  this  case  that  the 
common  law  relating  to  criminal 
conspiracies  has  not  been  superseded 
in  Illinois  by  the  statutes  upon  the 
subject.  See  also  Sanford  v.  People, 
121  111.  App.  619  (1905)  ;  People  v. 
Aachen,  etc.  Fire  Ins.  Co.,  126  111. 
App.  640  (1906). 

In  order  to  convict  a  defendant 
upon  a  charge  of  criminal  conspiracy, 
it  must  be  clearly  shown  that  he  knew 
of,  and  participated  in,  the  con- 
spiracy. 

State  V.  Dreany,  65  Kan.  292 
(1902),  (69  Pac.  Rep.  182). 

*  Chicago,  etc.  Coal  Co.  v.  People, 
214  111.  421  (1905),  (73  N.  E.  Rep." 
770),  affirming  114  111.  App.  75  (1904). 

See  also  Ford  v.  Chicago  Milk 
Shippers'  Ass'n,  155  111.  166  (1895), 
(39  N.  E.  Rep.  651,  27  L.  R.  A.  298). 

3  Purington  v.  Hinchliff,  219  111. 
159  (1905),  (76  N.  E.  Rep.  47). 

A  person  who  has  been  a  member 
of    an    illegal    combination    and    has 

588 


participated  in  making  rules  for  carry- 
ing out  its  purposes,  but  who  has  been 
suspended  for  violating  such  rules, 
may  maintain  an  action  against  the 
combination  and  its  members  for 
damages  caused  by  boycotting  him 
after  his  suspension.  It  was  held  that 
he  was  not  in  pari  delicto  because  the 
acts  complained  of  were  committed 
after  his  suspension. 

Ertz  V.  Produce  Exch.  Co.,  82  Minn. 
173  (1901),  (84  N.  W.  Rep.  743). 

Compare  Gladish  v.  Kansas  City 
Live  Stock  Exch.,  113  Mo.  App.  726 
(1905),  (89  S.  W.  Rep.  77)  where  it 
was  held  that  a  member  expelled 
from  an  association  was  not  entitled 
to  an  injunction  to  restrain  the  as- 
sociation from  declining  to  have  any 
further  business  relations  with  him. 
See  also  Froelich  v.  Musicians'  Mut. 
Ben.  Ass'n,  93  Mo.  App  383  (1902; 
O'Brien  v.  Musical,  etc.  Union,  54 
Atl.  Rep.  150  (N.  J.  Ch.  1903). 

Where  wholesale  and  retail  dealers 
in  a  certain  city  formed  a  combina- 
tion to  maintain  prices  and,  in  pur- 
suance of  the  plan,  refused  to  sell  to 


CHAP.   XXXl]        APPLICATION   OF   LAW   OF   CONSPIRACIES 


§  327a 


In  addition  to  an  action  for  the  recovery  of  damages  caused 
by  a  conspiracy  the  corporation  or  person  threatened  with  in- 
jury may  obtain  an  injunction  against  the  members  of  the 
combination  to  restrain  them  from  carr}-ing  into  effect  the 
objects  of  the  conspiracy.* 

These  remedies  which  are  available  to  persons  injured  by  a 
conspiracy  mark  an  important  distinction  between  combi- 
nations which  amount  to  conspiracies  and  those  which  are 
opposed  to  public  policy  only.  As  we  shall  see,  the  courts 
treat  combination  agreements  of  the  latter  class  as  void  and 


the  plaintiff,  a  retailer  who  had 
refused  to  join  the  combination, 
and  coerced  other  dealers  to  refuse  to 
deal  with  him  it  was  held  that  the 
members  of  the  corporation  were 
liable  to  the  plaintiff  for  the  resulting 
injury  to  his  business. 

Klingel's  Pharmacy  v.  Sharp,  104 
Md.  218  (1906),  (64  Atl.  Rep.  1029, 
7  L.  R.  A.  (N.  s.)  976). 

In  Wills  V.  Central  Ice,  etc.  Co.,  88 
S.  W.  Rep.  265  (Tex.  1905)  it  was 
held  that  a  conspiracy  cannot  be  made 
the  subject  of  a  cIntI  action,  notwith- 
standing damages  may  have  resulted, 
unless  some  act  is  done  which,  with- 
out the  conspiracy,  would  give  a 
right  of  action. 

'  Leonard  v.  Abner-Drury  Brewing 
Co.,25  App.  D.  C.  161  (1905)  ;  Brown 
V.  .Jacobs  Pharmacy  Co.,  115  Ga.  429 
(1902),  (41  S.  E.  Rep.  553,  90  Am. 
St.  Rep.  126,  57  L.  R.  A.  547). 

Union  Pressed  Brick  Co.  v.  Chicago 
Hydraulic  Pressed  Brick  Co.,  31 
Chicago  Legal  News  428  (1899)  : 
"A  court  of  equity  ought  not  to  be 
permitted  to  enjoin  crime  as  crime, 
because  it  has  no  criminal  jurisdiction, 
and  because  the  machinery  of  the 
criminal  law  is  supposed  to  be  ade- 
quate to  prevent  the  same.  But  if 
the  commission  of  such  crime  involves 
the  loss  of  private  property,  the  owner 
thereof  should  and  can  obtain  redress 
for  his  loss  in  a  court  of  common 
law  where  that  relief  is  adeciuate. 
Where  the  comniissiou  of  such  crime 


will  entail  property  loss  to  a  pri\ate 
citizen  for  which  he  has  no  adetjuate 
relief  at  common  law,  courts  of  equity 
should  give  redress  to  the  person  who 
may  be  made  to  suffer  such  irrep- 
arable injury." 

Walsh  r.  Ass'n.  of  Master  Plumbers, 
97  Mo.  App  280,  293  (1902),  (71 
S.  W.  Rep.  455)  :  "Apph-ing  the 
doctrine  of  these  cases  to  the  allega- 
tions of  the  petition,  there  can  be  no 
question  that  the  agreement  between 
the  respondents  is  an  illegal  conspir- 
acy and  that  its  effect  is  to  inflict 
a  civil  wrong  upon  appellant,  and  that 
this  wrong  is  a  continuing  one  and, 
according  to  all  authorities,  entitles 
the  appellant  to  injunctive  relief  so 
far  as  a  court  of  e()uity  is  authorized 
to  administer  it  within  the  bounds  of 
equitable  jurisprudence.  We  think 
it  is  competent  for  the  court  to  declare 
the  agreement  complained  of  illegal 
and  void  and  to  restrain  the  parties 
to  the  agreement  from  kee|)ing  its 
terms  or  demanding  that  tliey  be 
kept,  and  thus  leave  the  respondent 
corporations  and  each  of  thom  free 
to  deal  or  not  to  deal  with  appellant 
as  they  may  choose." 

But  it  is  held  that  a  combination 
of  brewers,  forming  an  association, 
fixing  the  price  of  its  products  and 
controlling  their  disposition,  caiuiot 
be  declared  voi<l  in  eiiuity  at  the  suit 
of  retail  dealers  having  no  contract 
with  the  association  and  selling  the 
product  of  a  brewing  company  sought 

589 


§  328 


INTERCORPORATE   RELATIONS 


[part  V 


unenforceable,  but  not  as  illegal,  in  the  sense  of  giving  a  right 
of  action  to  third  persons.^ 

§  328.  Modern  Combinations  of  Capital  seldom  Conspiracies. 
—  A  combination  of  industrial  corporations  for  the  promotion 
of  their  common  interests,  manifestl}^  can  possess  the  element 
of  criminality  only  when  entered  into  in  violation  of  some 
penal  statute,  or  when  criminal  means  are  employed;  and 
such  a  combination  becomes  a  conspiracy,  in  its  civil  aspect, 
only  when  the  element  of  illegality  or  oppression  is  present.^ 


to  be  compelled  to  join  the  association. 
Such  result  can  be  only  obtained 
through   a   suit   by   the   government. 

Leonard  v.  Abner-Drury  Brewing 
Co.,  25  App.  D.  C.  161  (1905). 

In  this  case  it  was  also  held  that 
while  the  federal  anti-trust  statute 
makes  a  conspiracy  in  restraint  of 
trade  a  criminal  offence  and  pres- 
cribes a  punishment  therefor,  it  does 
not  substitute  its  remedy  for  ordinary 
equitable  remedies  where  the  acts 
complained  work  irreparable  property 


1  Brown  v.  Jacob's  Pharmacy  Co., 
115  Ga.  433  (1902),  (41  S.  E.  Rep. 
553,  90  Am.  St.  Rep.  126,  57  L. 
R.  A.  547)  :  "The  next  position 
of  the  defendants,  and  the  one 
which,  on  first  presentation,  seems 
to  be  the  strongest  defence  on 
this  part  of  the  case,  is  that,  at 
common  law,  contracts  or  agreements 
in  general  or  unreasonable  restraint 
of  trade  were  merely  void  and  unen- 
forceable ;  that  either  part}?^  could 
defend  against  an  action  based  on 
them ;  but  that  they  were  not  illegal 
in  such  sense  as  to  give  a  right  of 
action  to  third  parties.  While  there 
may  be  conflict  among  the  author- 
ities, it  seems  to  us  that  some  con- 
fusion might  have  been  avoided  by 
bearing  in  mind  the  distinction  be- 
tween a  contract  or  agreement  merely 
in  restraint  of  trade  as  between  the 
parties,  and  a  combination  or  con- 
tract to  stifle  competition,  or  a  con- 
spiracy to  ruin  a  competitor." 

590 


2  Morris  Run  Coal  Co.  v.  Barclay 
Coal  Co.,  68  Pa.  St.  173  (1871),  (8  Am. 
Rep.  159),  is  the  leading  case  holding 
a  combination  of  corporations  for 
the  suppression  of  competition  a 
conspiracy.  The  reasoning  of  the 
Court,  however,  clearly  places  the 
illegality  of  the  combination  upon 
grounds  of  public  policy  rather  than 
upon  principles  of  the  law  of  con- 
spiracies. 

In  this  case  five  Pennsylvania  coal 
companies,  which  controlled  the 
entire  production  of  two  mining 
regions,  entered  into  an  agreement 
relating  to  production  and  prices 
and  appointed  a  super\dsing  com- 
mittee and  a  common  sales  agent. 
The  committee  had  power  to  adjust 
prices  and  the  amount  of  production 
of  each  company  was  limited.  The 
Court  held  that  the  agreement  was 
invalid  and  amounted  to  a  conspiracj', 
sav-ing  (p.  186)  :  "The  effects  pro- 
duced on  the  public  interests  lead  to 
the  consideration  of  another  feature 
of  great  weight  in  determining  the 
illegality  of  the  contract,  to  wit : 
the  combination  resorted  to  by  these 
five  companies.  Singly,  each  might 
have  suspended  deliveries  and  sales 
of  coal  to  suit  its  own  interests,  and 
might  have  raised  the  price,  even 
though  this  might  have  been  detri- 
mental to  the  public  interest.  There 
is  a  certain  freedom  which  must  be 
allowed  to  everj^  one  in  the  manage- 
ment of  his  own  affairs.  When  com- 
jjetition  is  left  free,  indi\idual  error 


CHAP.    XXXl]        APPLICATION    OF   LAW    OF   CONSPIRACIES 


§   328 


A  combination  of  corporations  may  have  for  its  ultimate  or 
immediate  object  injury  to  the  business  of  a  competitor,  or  it 
may  be  brought  about  by  fraudulent  or  deceitful  means  injuri- 
ously affecting  the  public*  Such  a  combination  may  be  a 
conspiracy,  but  such  combinations  have  little  place  in  modern 
business  life. 

Combinations  of  capital  —  whether  in  the  form  of  associa- 
tions, trusts  or  corporate  combinations  —  are  formed  for  the 
supposed  advantage  of  the  associates.  The  object  of  the 
parties  is  to  benefit  themselves,  not  to  injure  others.  The 
attainment  of  this  object  may  injuriously  affect  competitors, 
but  the  combination  does  not,  for  that  reason,  become  a  con- 
spiracy. "  The  truth  is,"  said  Lord  Justice  Bowen  in  the 
Mogul  Steamship  Casej^  "  that  the  combination  of  capital  for 


or  folly  will  generally  find  a  correction 
in  the  conduct  of  others.  .  .  .  This 
combination  has  a  power  in  its  con- 
federated form  which  no  individual 
action  can  confer.  The  public  inter- 
est must  succumb  to  it,  for  it  has  left 
no  competition  free  to  correct  its 
baleful  influence.  When  the  supply 
of  coal  is  suspended  the  demand  for 
it  becomes  importunate,  and  prices 
must  rise.  Or,  if  the  supply  goes 
forward,  the  price  fixed  by  the  con- 
federates must  accompany  it.  The 
domestic  hearth,  the  furnaces  of  the 
ironmaster,  and  the  fires  of  the  manu- 
facturer, all  feel  the  restraint,  while 
many  dependent  hands  are  paralyzed, 
and  hungry  mouths  are  stinted.  The 
influence  of  a  lack  of  supply  or  a  rise 
in  the  price  of  an  article  of  such  prime 
necessity  cannot  be  measured.  It 
permeates  the  entire  mass  of  the  com- 
munity, and  leaves  few  of  its  members 
untouched  by  its  withering  blight. 
Such  a  combination  is  more  than  a 
contract,  it  is  an  offence.  ...  In 
all  such  combinations,  where  the  pur- 
pose is  injurious  or  unlawful,  the 
gist  of  the  offence  is  the  conspiracy. 
Men  can  often  do  by  the  combina- 
tion of  many  what  severally  no 
one     could     accomplish,     and      even 


what,  when  done  by  one,  woidd  be 
innocent." 

See  also  People  v.  Sheldon,  139 
N.  Y.  251  (1893),  (34  N.  E.  Rep.  785, 
36  Am.  St.  Rep.  690,  23  L.  R.  A.  221). 

'  Fairbanks  v.  Learj%  40  Wis.  (643) 
(1876)  :  "The  law  does  not  and  did 
not  require  that  these  parties  should 
compete  in  the  purchase  of  produce. 
Individually  each  had  an  undoubted 
right  to  bid  therefor  as  low  as  he 
pleased.  Collectively,  they  had  the 
same  right,  unless  deception  was  prac- 
tised on  the  public.  But  if  thej-  held 
themselves  out  as  competing  pur- 
chasers, and  knew  that  the  people  who 
sold  in  the  market  where  they  oper- 
ated relied  upon  such  competition 
(as  well  they  might),  as  a  guaranty 
that  they  were  obtaining  the  full 
market  value  of  their  produce,  while, 
at  the  same  time,  the  purchasers  were 
not  in  competition,  but  in  a  secret 
league  to  depress  the  market,  the 
agreement  under  which  the  latter 
operated  is  illegal  and  void,  and  no 
court  will  lend  its  aid  to  enforce  any  of 
its  stipulations."  See  also  Craft  v. 
McConoughy,  79  111.  346  (1875), 
(22  Am.   Rep.  171). 

2  Mogul  Steamship  Co.  1'.  McGregor, 
L.  R.  23  Q.  B.  617  (1889). 

591 


§   328  *  INTERCORPORATE    RELATIONS  [PART   V 

purposes  of  trade  and  competition,  is  a  very  different  thing  from 
sucii  a  combination  of  several  persons  against  one,  with  a  view 
to  harm  him,  as  falls  under  the  head  of  an  indictable  con- 
spiracy. There  is  no  just  cause  or  excuse  in  the  latter  class 
of  cases.  There  is  such  a  just  cause  or  excuse  in  the  former. 
There  are  cases  in  which  the  very  fact  of  a  combination  is  evi- 
dence of  a  design  to  do  that  which  is  hurtful,  without  just 
cause,  —  is  evidence  —  to  use  a  technical  expression  —  of 
malice.  But  it  is  perfectly  legitimate,  as  it  seems  to  me,  to 
combine  capital  for  all  the  mere  purposes  of  trade  for  which 
capital  may,  apart  from  combination,  be  legitimately  used  in 
trade.  To  limit  combinations  of  capital,  when  used  for  pur- 
poses of  competition,  in  the  manner  proposed  by  the  argument 
of  the  plaintiffs,  would,  in  the  present  day,  be  impossible  — 
would  be  only  another  method  of  attempting  to  set  boundaries 
to  the  tides." 

The  fact  that  a  combination,  after  its  formation,  may  become 
a  party  to  a  conspiracy  —  may  intentionally  injure  or  oppress 
others  —  does  not  relate  back  to  and  invalidate  the  original 
combination  agreement.  The  combination  will  be  liable  for 
the  subsequent  conspiracy,  but  the  validity  of  its  organization 
will  depend  solely  upon  the  contract  as  made,  and  the  facts 
and  circumstances  attending  its  execution. 

The  fact  that  a  combination  is  against  public  policy  does 
not  make  it  a  conspiracy.  If  contravening  the  rules  of  public 
policy  it  is  invalid,  and  it  is  made  no  more  invalid  by  desig- 
nating it  a  conspiracy.  The  inexact  use  of  terms  in  judicial 
decisions  has  occasioned  much  of  the  confusion  attending  the 
law  of  combinations. 


592 


CHAP.    XXXIl]        APPLICATION    OF   LAW    OF    MONOPOLIES  §   330 


CHAPTER   XXXII 


APPLICATION    OF    LAW   OF   MONOPOLIES 

§  329.    Primary  Meaning  of  Term  "  Monopoly." 

§  330.    Growth  of  Monopolies  —  Their  IllegaUty. 

§  331.    No  True   Monopolies   in  United    States.     Patents   and  Other  Quagi- 

monopolies. 
§  332.    Modern  Use  of  Term  "  Monopoly." 
§  333.    Direct     Test    of    Validity    of    Combination    not    whether    it    is    a 

Monopoly. 

§  329.  Primary  Meaning  of  Term  "  Monopoly."  —  The  mean- 
ing of  the  term  "  monopoly,"  used  in  a  historic  and  exact 
sense,  is  best  expressed  in  the  early  definition  of  Lord  Coke: 
"  A  monopoly  is  an  institution,  or  allowance  by  the  king  by 
his  grant,  commission,  or  otherwise,  to  any  person  or  persons, 
bodies  politicque,  or  corporate,  of,  or  for,  the  sole  buying, 
selling,  making,  working,  or  using  of  anything,  whereby  any 
person  or  persons,  bodies  politicque  or  corporate,  are  sought 
to  be  restrained  of  any  freedome,  or  liberty  that  they  had 
before,  or  hindred  in  their  lawful  trade."  ^ 

§  330.  Growth  of  Monopolies — Their  Illegality.  — Monopo- 
lies of  the  character  described  by  Lord  Coke  were  grants  from 
the  crown  of  exclusive  rights  to  control  the  manufacture  or  sale 
of  commodities  and,  while  employed  by  earlier  English  sov- 
ereigns, reached  their  extreme  development  in  the  reign  of  Queen 
Elizabeth.     She  husbanded  her  own  resources  at  the  expense 

'  3  Coke's  Inst.   181.     This  defini-  ledge  allowed  by  the  king  for  the  sole 

tion  of  Lord  Coke  was  quoted  with  buying  and  selling,  making,  working, 

approval    by    Justice    Story    in    his  or    using    of    anything    whatsoever ; 

dissenting     opinion     in     the     Charlc3  whereby    the    subject    in    general    is 

River    Bridge   Case,    11    Pet.    (U.    S.)  restrained  from  that  liberty  of  nianu- 

606   (1837),  and  by  Justice   Field  in  facturing    or    trading    which    he    had 

his  dissenting  opinion  in  the  Slaughter  before."     4  Blackst.  Com.  1.59. 
House    Cases,    16    Wall.    102    (1872).  Leeper    v.    State,    103    Tenn.    500 

See  also  arguments  of  Holt  and  Treby,  (1899),    (53     S.    W.     Rep.     962,     48 

afterwards  Chief  Justices  of  the  King's  L.   R.   A.    170):    "A  'monopoly'   has 

Bench,  as  counsel,  in  the  celebrated  been  defined  to  be  an  exclusive  right 

case  of  East  India  Co.  v.  Sandys,   10  granted  to  a  few  of  something  whi<h 

How.  State  Tr.  371  (1684).  was  before  a  common  right." 

A  monopoly  is  "a  license  or  privi- 

593 


330 


INTERCORPORATE    RELATIONS 


[part  V 


of  her  people,  and  rewarded  her  favorites  by  grants  of  innumer- 
able patents  for  monopolies.  The  natural  result  was  an 
increase  in  price  of  the  necessaries  of  life.  "  There  was  scarcely 
a  family  in  the  realm,"  says  Lord  Macaulay,^  "  that  did  not 
feel  itself  aggrieved  by  the  oppression  and  extortion  which  the 
abuse  naturally  caused.  Iron,  oil,  vinegar,  coal,  lard,  starch, 
yarn,  leather,  glass,  could  be  bought  only  at  exorbitant  prices." 

Relief  first  came  from  the  courts,  and  in  the  great  Case  of 
the  Monopolies,'^  decided  during  the  reign  of  Queen  Elizabeth, 
grants  of  monopohes  were  held  to  be  void.  The  common  law 
against  monopolies,  thus  established,  was  reenforced,  after  the 
death  of  Elizabeth,  by  the  Statute  21  James  I.  ch.  3,  which 
provided  that  all  grants  of  monopolies,  with  a  few  exceptions, 
were  "  altogether  contrary  to  the  laws  of  this  realm  and  so  are 
and  shall  be  utterly  void  and  of  none  effect  and  in  no  wise  to 
be  put  in  use  or  execution." 

The  English  common  law,  including  the  Statute  of  James  I. 
against  monopolies,  is  the  basis  of  American   jurisprudence,' 


*  Macaulay's  History  of  England, 
vol.  1,  p.  58. 

*  Darcy  v.  AUein,  Coke,  Part  11, 
86b  (1602),  (Noy,  173).  In  this  case 
it  was  declared  that  a  patent  from 
Queen  Elizabeth  conferring  upon 
Darcy  the  exclusive  privilege  of  manu- 
facturing playing  cards  for  twenty- 
one  years  was  a  monopoly  and  void, 
as  being  against  public  policy.  The 
Court  stated  the  following  incidents 
of  monopolies  : 

(a)  "The  price  of  the  same  com- 
modity will  be  raised,  for  he  who  has 
the  sole  selling  of  any  commodity, 
may  and  will  make  the  prices  as  he 
pleases.  .  .  . 

(b)  "The  second  incident  to  a 
monopoly  is  that,  after  the  monopoly 
is  granted,  the  commodity  is  not  so 
good  and  merchantable  as  it  was 
before  :  for  the  patentee  ha^^ng  the 
sole  trade,  regards  only  his  private 
benefit,  and  not  the  common- 
wealth. 

(c)  "It  tends  to  the  impoverish- 
ment of  divers  artificers  and  others, 

594 


who,  before,  by  the  labor  of  their 
hands,  in  their  art  or  trade,  had 
maintained  themselves  and  their 
families,  who  now  will  of  necessity 
be  constrained  to  live  in  idleness  and 
beggary. " 

^  Justice  Field,  in  his  dissenting 
opinion  in  the  Slaughter  House  Cases, 
16  Wall.  (U.  S.)  104  (1872),  said: 
"The  common  law  of  England  is  the 
basis  of  the  jurisprudence  of  the 
United  States.  It  was  brought  to 
this  country  by  the  colonists,  together 
with  the  English  statutes,  and  was 
established  here  so  far  as  it  was  ap- 
plicable to  their  condition.  The  law 
and  the  benefit  of  such  of  the  English 
statutes  as  existed  at  the  time  of 
their  colonization,  and  which  they 
had  by  experience  found  to  be  ap- 
plicable to  their  circumstances,  were 
claimed  by  the  Congress  of  the  United 
Colonies  in  1774  as  a  part  of  their 
'indubitable  rights  and  liberties.' 
Of  the  statutes,  the  benefits  of  which 
were  thus  claimed,  the  statute  of 
James  I.  against  monopolies  was  one 


CHAP.    XXXIl]        APPUCATION    OF    LAW    OF    MONOPOLIES  §   331 

and  a  monopoly,  in  the  sense  in  whicii  the  term  has  been  used 
—  if  ever  granted  — would  be  illegal  and  void  in  this  country, 
independent  of  statutory  enactment. 

§  331.  No  true  Monopolies  in  United  States.  Patents  and 
other  Quasi-Monopolies.  —  A  monopoly  in  its  primary  sense  is, 
stating  essential  elements,  (a)  a  grant  from  the  State  ol 
(6)  an  exclusive  privilege  whereby  (c)  a  class  of  persons  are  de- 
prived of  privileges  previously  enjoyed. 

There  are  no  monopolies  of  this  character  in  the  United 
States.  Combinations  of  corporations  for  the  purpose  of 
suppressing  competition  may  possess  the  last  two  elements. 
They  may  obtain  for  themselves  the  absolute  control  of  the 
market  for  an  article  of  necessity,  and  thus  restrain  others 
"  from  that  liberty  of  manufacturing  and  selling  which  they 
had  before."  Such  combinations  may  be  against  public 
policy  and  illegal,  but  they  are  not  monopolies,  strictly  speaking, 
because  the  essential  element  —  a  legislative  grant  —  is  lacking. 

Patents,  copyrights  and  grants  of  exclusive  franchises  are 
denominated  monopolies,  and  a  patent  is  sometimes  selected 
as  an  illustration  of  a  true  monopoly.^  They  have  the  first 
two  elements  of  a  monopoly,  but  not  the  last.  They  are 
legislative   grants   of   exclusive   privileges,   but   they    do    not 


of  the  most  important.  And  when  the  '  Edison  Electric  Light  Co.  v.  Saw- 
Colonies  separated  from  the  mother  yer-Man  Electric  Co.,  53  Fed.  598 
country  no  privilege  was  more  fully  (1892)  :  "The  present  complainants 
recognized  or  more  completely  in-  are  entitled,  by  the  patent  laws,  to  a 
corporatcd  into  the  fvmdamental  monopoly,  for  the  term  of  the  patent, 
law  of  the  country  than  that  every  of  the  manufacture  and  sale  of  the 
free  subject  in  the  British  empire  was  lamjis  made  under  it.  The  right  to 
entitled  to  pursue  his  happiness  by  this  monopoly  is  the  very  foundation 
following  any  of  the  known  established  of  the  patent  system." 
trades  and  occupations  of  the  country.  Letters  patent  for  new  inventions 
subject  only  to  such  restraint  as  for  limited  periods  were  exjiressly 
equally  affected  all  others.  The  excepted  from  the  operation  of  the 
immortal  document  which  proclaimed  statute  against  monopolies.  21  James 
the     independence     of     the     country  I.,  eh.  3  (1024). 

declared    as    self-c\ddent    truths   that  For    consideration      of      the      ai>- 

the    Creator    had    endowed    all    men  plication    of    the     federal     anti-trust 

'with   certain   inalienable   rights,   and  statute    to   combinations    in    respect 

that  among  these  are  life,  liberty,  and  of   patents  and  copyrights    see    post, 

the  pursuit  of  hajipiness,  and  that  to  eh.  XXXIX. 
secure   these   rights   governments  are 
instituted  among  men."' 

595 


§331 


INTERCORPORATE    RELATIONS 


[part  V 


necessarily  encroach  upon  existing  rights.  Patents  are  granted 
for  new  inventions,  and  copyrights  for  new  books.  Grants 
of  exclusive  franchises  for  the  operation  of  pubUc  utilities  not 
previously  existing,  do  not  deprive  any  class  of  persons  of 
privileges  possessed.  Patents,  copyrights  and  exclusive  fran- 
chises are,  however,  in  the  nature  of  monopohes,  and  may 
properly  be  designated  gwasi-monopolies.^ 


'  Grants  of  Exclusive  Privi- 
leges AS  Constituting  Monopolies. 

The  term  "monopoly"  as  applied 
to  grants  of  exclusive  prvileges  is, 
in  a  sense,  the  antithesis  of  the  term 
as  applied  to  combinations.  A  cor- 
poration enjojdng  a  grant  of  exclusive 
priAnleges  is  a  monopoly  within  itself. 
A  number  of  corporations  uniting 
for  the  elimination  of  competition 
become  a  monopoly  only  through  the 
act  of  combining.  The  term  "  monop- 
oly" as  applied  to  the  combination 
—  its  modern  use  —  relates  to  inter- 
corporate relations,  and  combina- 
tions amounting  to  monopolies  are 
considered  at  length  in  this  treatise. 
On  the  other  hand,  grants  of  exclusive 
pri\-ileges  involve  no  such  relations 
and  their  consideration  is,  strictly 
speaking,  outside  the  scope  of  this 
work.  The  subject,  however,  being 
necessarily  opened  up,  it  is  thought 
desirable  to  extend  the  examination 
slightly  farther. 

As  shown  in  the  text  monopolies 
in  the  original  sense  were  illegal  at 
common  law  and  are  unlawful  and 
void  in  this  country  without  con- 
stitutional or  statutory  enactment. 
Constitutional  pro\'isions  have,  how- 
ever, been  adopted  in  a  number  of 
States  similar  to  that  of  Arkansas 
which  provides  that,  "Perpetuities 
and  monopolies  are  contrary  to  the 
genius  of  a  republic,  and  shall  not  be 
allowed."  (See  constitutional  pro- 
visions in  ch.  XLI.,  post).  In  con- 
struing these  provisions  as  well  as  in 
apphing  the  common  law  with  re- 
spect to  grants  of  exclusive  privileges 
the  term  "monopoly"  has  not  been 

596 


used  in  its  original  sense  which,  as 
shown  in  the  text,  would  have  ex- 
cluded altogether  grants  of  exclu- 
sive privileges  for  the  operation  of 
public  utilities  not  previously  exist- 
ing. The  broader  meaning  given  to 
the  term  in  construing  such  grants 
is  indicated  by  the  following  illustra- 
tive cases ;  the  majority  of  which 
relate  to  municipal,  rather  than  to 
legislative,  grants : 


Cases  holding  grants  of  exclusive 
privileges  invalid  as  creating  or  tend- 
ing to  create  monopolies. 

An  ordinance  granting  an  exclu- 
sive privilege  for  the  construction 
of  water  works  and  the  use  of  city 
streets  comes  within  the  North  Caro- 
lina constitutional  prohibition  against 
monopolies,  notwithstanding  such  ex- 
clusive grant  is  made  as  an  inducement 
to  the  establishment  of  such  works. 

Thrift  V.  Elizabeth  City,  122  N.  C. 
31  (1898),  (30  S.  E.  Rep.  349,  44 
L.  R.  A.  427). 

A  grant  by  a  county  of  an  exclu- 
sive right  of  way  to  lay  piping  for 
suppljing  a  town  with  water  has  been 
held  to  tend  to  create  a  monopoly 
in  violation  of  the  Texas  constitu- 
tional provision. 

Edwards  County  v.  Jennings,  89 
Tex.  618  (1896),  (35  S.  W.  Rep.  1053). 
See  also  Brenham  v.  Water  Co.  67 
Tex.  542  (1887),  (4  S.  W.  Rep.  143). 

An  ordinance  granting  a  franchise 
to  an  electric  light  company  coupled 
with  a  street  lighting  contract  con- 
taining a  condition  that  it  should  not 
be  binding  unless  the  grantee  obtained 


CHAP.    XXXIl]        APPLICATION    OF    LAW    OF   MONOPOLIES 


§  332 


§  332.    Modern  Use   of  Term  "  Monopoly." —The  principal 
injury  to  the  public  resulting  from  the  grant  of  monopolies 


the  exclusive  right  to  use  the  streets 
for  lighting  purposes  has  been  held 
invalid  as  constituting  an  attempt 
to  create  a  monopoly. 

Monroe  County  111.  Co.  v.  Village  of 
Mt.  Gilead,  10  Ohio  S.  &  C.  P.  Dec. 
235  (1900). 

A  grant  of  an  exclusive  pri\Tlege 
to  operate  gas  and  electric  light 
plants  in  a  city  for  a  limited  time  con- 
fers a  practical  monopoly  and  must  be 
strictlj'  construed  against  the  grantee. 

Capital  City  Light,  etc.  Co.  v.  City 
of  Tallahassee,  42  Fla.  462  (1900), 
(28  So.  Rep.  810). 

An  ordinance  granting  pri\dleges 
to  some  persons  and  refusing  them 
on  the  same  terms  to  others  is  void  as 
tending  to  create  a  monopoly  as  well 
as  being  oppressive  and  unreasonable. 

City  of  Dan^^lle  v.  Noone,  103  111. 
App.  290  (1902). 

A  statute  authorizing  a  residence 
park  association  to  make  regulations 
regarding  tlie  pursuits  to  be  carried  on 
in  its  park  does  not  authorize  the 
creation  of  a  monopoly. 

Thousand  Island  Park  Ass'n  v. 
Tucker,  173  N.  Y.  203  (1903),  (65 
N.  E.  Rep.  975). 

An  ordinance  making  the  use  of  an 
article  within  the  control  of  a  single 
corporation  an  essential  to  the  per- 
formance of  a  city  contract  tends  to 
create  a  monopoly  in  favor  of  such 
corporation  and  is  void. 

Fishburn  v.  City  of  Chicago,  171 
111.  338  (1898),  (49  N.  E.  Rep.  532; 
39  L.  R.  A.  482).  See  also  Boon  v. 
City  of  Utica,  5  Mi.sc.  Rep.  391  (1893), 
(36  N.  Y.  Supp.  932).  Compare 
Field  V.  Barber  Asphalt  Co.,  194  U.  S. 
618  (1904),  (24    Sup.  Ct.  Rep.   784). 

II 

Cases  holding  grants  of  prii'ilcges 
not  invalid  as  creating  or  tending  to 
create  monopolies. 


An  ordinance  granting  to  a  water 
company,  for  a  certain  period,  the 
pri\Tlege  of  establishing  and  oper- 
ating a  sj'stem  of  waterworks  in  a 
city,  but  not  granting  it  in  terms  the 
exclusive  privilege,  does  not  create 
a  monopoly  in  violation  of  the  Tcxa.s 
constitvitional  provision. 

Bartholcmew  v.  City  of  Austin, 
85  Fed.  359  (1898).  See  also  Waco 
Water,  etc.  Co.  v.  City  of  Wacc,  (Te.\. 
Civ.  App.  1894),  (27  S.  W.  Rep. 
675). 

The  grant  of  an  exchisive  privilege 
to  a  municipality  to  establish  and  op- 
erate water  works  does  not  constitute 
a  monopoly  in  violation  of  the  Ten- 
nessee constitutional  provision.  An 
exclusive  right  in  a  municipal  cor- 
poration is  distinguished  from  such 
a  right  in  a  private  corporation  in 
that  in  the  one  ca.se  it  is  held  for  the 
pviblic  benefit  and  in  the  other  for 
private  gain. 

City  of  Memphis  v.  Memphis  Water 
Co.,  5  Heisk  (Tenn.)  495  (1871). 
See  also  Brenham  v.  Water  Co.  67 
Tex.  542  (1887),  (4  S.  W.  Rep.  143). 

The  lea.se  by  a  city  of  its  gas  works 
coupled  with  an  agreement  to  do 
nothing  by  way  of  ordinance  or  other- 
wise to  interfere  with  the  exclusive 
right  of  the  lessee  does  not  confer  a 
monopoly  upon  the  lessee. 

Bailey  v.  Philadelphia,  184  Pa.  St. 
594  (1898),  (39  Atl.  Rep.  494). 

The  grant  by  harbor  commi.'^sioners 
for  a  term  of  j-ears  of  the  exclusive 
u.se  of  certain  wharves,  for  the  purpose 
of  erecting  grain  elevators  thereon, 
and  providing  for  equal  facilities 
to  the  public  in  the  use  of  such  ele- 
vators, does  not  create  an  unlawful 
monopoly. 

Taylor  v.  Montreal  Harbor  Com- 
mrs,  17  Rep.  Jud.  Que.  C.  S.  275 
( 1 899) .  See  also  Northwestern  Ware- 
house Co.   V.  Oregon   R.,  etc.   Co.,  32 

597 


§  332 


INTERCORPORATE    RELATIONS 


[part  V 


arose  from  the  exercise  of  the  ])o\ver  to  control  and,  conse- 
quently, to  enhance  the  prices  of  commodities  of  commerce  — 
especially,  of  the  necessaries  of  life.  This  power,  however, 
may  be  practically  acquired  by  agreement,  as  well  as  by  grant. 
When,  by  a  combination  between  manufacturers  or  traders, 
the  control  of  the  market  for  a  commodity  is  concentrated  in 
the  hands  of  a  single  company  or  association  of  companies,  the 
evils  attending  the  unrestrained  control  of  prices  may  result. 
The  possible  effect  of  combinations  being,  therefore,  the 
same  as  the  effect  of  the  early  monopolies,  the  term  "  monop- 
oly," in  modern  times,  is  used  to  describe  such  combinations, 
and  has  acquired  a  much  broader  meaning  than  that  origi- 
nally attaching  to  it.^     As  so  used,  it  may  be  broadly  defined 


Wash.  218  (1903),  (73  Pac.  Rep. 
388). 

The  legislature  has  the  right  to 
grant  exclusive  privileges  in  the 
charter  of  a  turnpike  company  and 
such  charter,  when  accepted  by  the 
company,  becomes  a  contract  with 
the  State,  the  obligation  of  which 
cannot  be  impaired. 

Nash^^lle  etc.  Turnpike  Co.  v. 
Da\ddson  County,  106  Tenn.  258 
(1901),  (61  S.  W.  Rep.  68).  See  also 
St.  Joseph  Plank  Road  Co.  v.  KUne, 
106  La.  Ann.  325  (1901),  (30  So. 
Rep.  854). 

The  constitution  of  Alabama  pro- 
vides that  the  legislature  shall  pass 
no  act  "making  any  irrevocable 
grants  of  special  privileges  or  im- 
munities "  and,  consequently,  the 
legislature  may  revoke  such  grants  at 
its  pleasure. 

Bien\-ille  Water  Supply  Co.  v. 
City  of  Mobile,  186  U.  S.  212  (1902), 
(22  Sup.  Ct.  Rep.  820). 

A  municipal  ordinance  gi^^ng  the 
exclusive  privilege  of  collecting  all 
refuse  within  a  city  to  a  particular 
person  and  prohibiting  all  other 
persons  from  engaging  in  that  busi- 
ness, is  not  void  as  creating  a  mo- 
nopoly. 

State  V.  Robb,  100  Me.  180  (1905), 
(60  Atl.  Rep.  874). 

598 


A  .statute  authorizing  a  railroad 
company  owning  more  than  three- 
fourths  of  the  stock  of  another  rail- 
road company  to  condemn  outstand- 
ing stock  interests  does  not  confer 
exclusive  privileges  in  violation  of  the 
Connecticut  constitutional  provision 
that  ' '  no  man  or  set  of  men  are  en- 
titled to  exclusive  public  emoluments 
or  privileges  from  the  community." 

New  York,  etc.  R.  Co.  v.  Offield, 
77  Conn.  417  (1904),  (59  Atl.  Rep. 
510).  See  ante,  §  51:  "The  Right 
to  condemn  Stock." 

For  consideration  of  other  ordi- 
nances and  municipal  contracts  held 
not  to  grant  exclusive  privileges 
tending  to  create  monopoUes,  see 
Vincennes  v.  Gas  Light  Co.,  132  Ind. 

114  (1892);  (31  N.  E.  Rep.  573, 
16  L.  R.  A.  485) ;  aty  of  Denver  v. 
Hubbard  17  Colo.  App.  346  (1902), 
(68  Pac.  Rep.  993);  Reid  v.  Trow- 
bridge, 78  MLss.  542  (1901),  (29 
So.   Rep.    167). 

1  The  meaning  now  attached  to  the 
word  "monopoly"  is  indicated  by  the 
following  extracts  from  judicial  deci- 
sions in  different  States  : 

California.     Herriman   v.  Menzies, 

115  Cal.  16  (1896),  (44  Pac.  Rep.  660, 
56  Am.  St.  Rep.  82,  35  L.  R.  A.  319)  : 
"A  monopoly  exists  where  all,  or 
nearly  all,  of  an  article  of  trade  or 


CHAP.   XXXIl]        APPLICATION   OF   L.iW   OF   MONOPOLIES 


§  332 


as  the  concentration  of  business  in  the  hands  of  a  few.     In  the 
initial  decision  in  the  Sugar  Trust  Case,^  Judge  Barrett  said: 


commerce  within  a  community  or 
district  is  brought  within  the  hands 
of  one  man  or  set  of  men  so  as  to 
practically  bring  the  handling  or 
production  of  the  commodity  or  thing 
within  such  single  control,  to  the 
exclusion  of  competition  or  free 
traffic  therein.  Anything  less  than 
this  is  not  monopoly.  Webster  de- 
fines it  as  the  sole  power  of  dealing  in 
any  species  of  goods,  and  Bouxner  as 
the  abuse  of  free  commerce,  by  which 
one  or  more  individuals  have  procured 
the  advantage  of  selling  all  of  a  par- 
ticular kind  of  merchandise.  And 
these  definitions  accord  with  that 
given  by  later  writers.  Spelling, 
Trusts,  §  133.  An  agreement,  the 
purpose  or  effect  of  which  is  to  create 
a  monopoly,  is  unlawful  if  it  relate 
to  some  staple  commodity,  or  thing 
of  general  requirement  and  use  or  of 
necessity,  and  not  some  thing  of  mere 
luxury  or  convenience. " 

Illinois.  People  v.  Chicago  Gas 
Trast  Co.,  130  111.  294  (1889),  (22 
N.  E.  Rep.  798,  17  Am.  St.  Rep.  319, 
8  L.  R.  A.  497)  :  "Contracts  creating 
monopolies  are  null  and  void  as  being 
contrary  to  public  policy."  (Quot- 
ing from  2  Addison  on  Cont.  743.) 

Craft  V.  McConoughy,  79  111.  349 
(1875),  (22  Am.  Rep.  171)  :  "In  other 
words,  the  four  firms,  by  a  shrewd, 
deep  laid,  secret  combination,  at- 
tempted to  control  and  monopolize 
the  entire  grain  trade  of  the  town 
and  surrounding  country." 

Iowa.  Chapin  v.  Brown,  83  Iowa, 
162  (1891),  (48  N.  W.  Rep.  1074, 
12  L.  R.  A.  428)  :  "The  agreement  is 
against  public  policy.  It  plainly 
tends  to  monopolize  the  butter  trade 
at  Storm  Lake  and  destroy  competi- 
tion in  that  business." 

Michiqan.  Richardson  v.  Buhl,  77 
Mich.    658   (1889),    (43    N.   W.    Rep. 


1102,  6  L.  R.  A.  457),  ("Diamond 
Match  Case"):  "All  combinations 
among  persons  or  corporations  for 
the  purpose  of  raising  or  controlling 
the  prices  of  merchandise,  or  any  of 
the  necessaries  of  Ufe,  are  monopolies 
and  intolerable,  and  ought  to  receive 
the  condemnation  of  all  courts." 

New  York.  Lough  v.  Outen- 
bridge,  143  N.  Y.  271,  282  (1894), 
(38  N.  E.  Rep.  292,  42  Am.  St.  Rep. 
712,  25  L.  R.  A.  674)  :  "The  mo- 
nopoly which  the  law  views  with 
disfavor  is  the  manipulation  of  a 
business  in  which  the  public  are 
interested,  in  such  a  way  as  to  enable 
one  or  a  few  to  regulate  it  in  their 
own  intere.st,  and  to  the  detriment 
of  the  public  by  exacting  unreason- 
able charges." 

De  Witt  Wire  Cloth  Co.  v.  New 
Jersey  Wire  Cloth  Co.,  16  Daly,  529 
(1891),  (14  N.  Y.  Supp.  279)  : 
"Neither  need  the  agreement  or  com- 
bination, in  order  to  expose  it  to  the 
denunciation  of  the  law,  constitute  a 
complete  monopoly  or  effect  a  total 
suppression  of  competition." 

Ohio.  Central  Ohio  Salt  Co.  v.  Guth- 
rie, 35  Ohio  St.  672  (1880):  "The 
clear  tendency  of  such  an  agreement 
is  to  establish  a  monopoly,  and  to 
destroy  competition  in  trade,  and  for 
that  reason,  on  groimds  of  ])ublir 
policy,  courts  will  not  aid  in  its  en- 
forcement." 

Pcnn.s>/lvania.  Nester  v.  Conti- 
nental lirewing  Co.,  2  Dist.  R.  177 
(1894):  "Where  a  pool  or  combina- 
tion reserves  the  right  to  regulate 
prices,  they  can,  by  the  manipulation 
of  prices,  drive  their  comi)ctitors  out 
of  business,  create  a  monopoly,  and 
enhance  at  their  pleasure  the  prices 
to  consumers." 

Texas.  The  constitution  of  Texas 
declares:    "Perpetuities   and   monoj)- 


'  People  V.  North  River  Sugar  Ref. 


Co.,  54  Hun  (N.Y.),  377  (1889),  note. 

599 


§  332 


INTERCORPORATE    RELATIONS 


[part  V 


"  The  monopoly  with  which  the  law  deals  is  not  limited  to 
the  strict  equivalent  of  royal  grants  or  people's  patents.  Any 
combination,  the  tendency  of  which  is  to  prevent  competition 
in  its  broad  and  general  sense  and  to  control,  and  thus  it  will 
enhance,  prices  to  the  detriment  of  the  public,  is  a  monop- 
oly." 


olies  are  contrary  to  the  genius  of  a 
free  government,  and  shall  never  be 
allowed."  Const.  1876,  Art.  I.  §  26. 
In  construing  this  provision  it  was 
said  by  a  federal  court  (Laredo  v. 
International  Bridge,  etc.  Co.,  66 
Fed.  246)  (1895)  :  "There  are  classes 
of  exclusive  pri\'ileges  which  certainly 
do  not  amount  to  '  monopolies,' 
within  the  meaning  of  the  common 
law  or  of  the  Texas  constitution. 
Courts  of  last  resort  have  generally 
refrained  from  propounding  an  au- 
thoritative affirmative  definition  of  the 
'  monopoly '  so  odious  to  the  com- 
mon law  and  to  the  genius  of  a  free 
government.  It  would  try  the  power 
of  expression  of  most  judges,  if  not 
of  human  speech,  to  frame  such  a 
definition,  outside  of  which  a  grant 
or  contract  must  wholly  and  clearly 
rest  to  escape  the  stroke  of  nullity." 
And  in  construing  the  same  pro\'i- 
sion  the  Texas  Court  of  Civil  Appeals 
in  Jones  v.  Carter  (Tex.  Civ.  App.  1907), 
101  S.  W.  Rep.  515,  said:  "Plaintiff 
advances  the  proposition  that  the 
term  '  monopoly '  as  used  in  the  con- 
stitution of  this  State  means  a  license 
or  pri\'ilege  allowed  by  some  sover- 
eign authority  for  the  sale,  bujing, 
selling  or  manufacture  of  some  article 
or  commodity  whereby  the  subjects 
are  restrained  of  a  libertj'  thej^  there- 
tofore had  with  respect  to  the  matter 
affected  by  the  franchise.  This  defi- 
nition is  technically  correct.  .  . 
But  the  term  as  now  understood  is 
not  confined  to  the  above  narrow 
limits.  It  embraces  any  combina- 
tion or  contract,  the  tendency  of 
which  is  to  prevent  competition  in 
its  broad   and   general   sense   and  to 

600 


control  prices  to  the  detriment  of  the 
public,  and  the  form  assumed  is 
immaterial." 

The  Texas  anti-trust  statute  of 
1903  contains  a  definition  of  the 
"monopoly"  therein  prohibited. 

West  Virginia.  Pocahontas  Coke 
Co.  V.  Powhatan  Coal,  etc.  Co.,  60  W. 
Va.  508  (1907),  (56  S.  E.  Rep.  269,  116 
Am.  St.  Rep.  901,  10  L.  A.  R.  (,n.  s.) 
268):  "Monopoly  in  its  original  .sense 
was  an  exclusive  right  granted  by  the 
State  to  one  or  a  few  which  was  before 
of  common  right.  As  now  used  and 
understood  monopoly  embraces  any 
combination  the  tendency  of  which 
is  to  prevent  competition  in  its  broad 
and  general  sense  and  to  control 
prices  to  the  detriment  of  the 
public." 

In  this  case  the  Court  quoted  with 
approval  the  following  extract  from 
Pingrey  on  Industrial  and  Interstate 
Contracts  (§  320)  :  "MonopoUes  may 
be  divided  into  three  classes  :  (1)  All 
sources  of  supply  may  be  put  into 
the  hands  of  one  company,  so  no  other 
source  of  supply  is  available.  Such 
a  monopoly  is  absolute  and  can  sell 
its  products  at  any  price  limited  to 
the  necessities  of  commerce.  (2)  The 
monopoly  may  have  the  best  and 
most  economical  source  of  supply 
but  competition  still  be  possible,  when 
competition  can  be  suppressed  by 
selling  so  low  by  the  monopoly  that 
competition  is  impossible.  (3)  The 
monopoly  may  use  its  general  control 
of  the  market  to  require  all  parties 
to  buy  of  it  alone,  under  penalty  of 
being  denied  further  supplies.  This 
method  is  generally  practised  by  the 
monopoly. " 


CHAP.    XXXIl]        APPLICATION    OF    LAW    OF   MONOPOLIES  §    333 

§  333.  Direct  Test  of  Validity  of  Combination  not  whether  it 
is  a  Monopoly.  —  As  already  shown,  grants  of  monopolies 
were  invalid  at  common  law  even  before  the  enactment  of 
the  Statute  21  James  I.,  and — the  common  law  being  the 
basis  of  American  law  —  such  monopolies  are  illegal  and  void 
in  the  United  States. 

A  modern  combination  of  capital,  however,  for  the  purpose 
of  controlling  the  market  for  a  commodity,  is  not  founded  upon 
legislative  concession  and  does  not  amount  to  a  monopoly, 
according  to  the  common  law  use  of  that  term.  It  may,  how- 
ever, fall  within  the  broad  definition  of  a  monopoly  alrcidy 
stated;  but  in  that  case  the  test  of  its  validity  is  a  nde  of  pul)lic 
policy,  rather  than  common  law  principles  applicable  to  monop- 
olies of  an  essentially  different  nature.  Such  a  combination 
is  invalid,  not  because  it  is  a  monopoly  but  because  it  is  against 
public  policy.  The  statement  in  judicial  decisions  that  "  what- 
ever tends  to  create  a  monopoly  is  unlawful  as  being  con- 
trary to  public  policy,"  ^  merely  states  an  intermediate  and 
unnecessary  standard  of  validity.  The  essential  question  is 
whether  a  combination  —  the  result  of  certain  agreements 
and  acts  — is  against  public  policy;  and  no  useful  purpose  is 
served  in  determining  whether  it  may  not  also  properly  be 
denominated  a  monopoly,  according  to  the  modern  use  of  that 
term. 

In  view  of  the  confused  state  of  the  law  upon  the  question 
of  the  validity  of  combinations,  it  is  necessar}^  in  formulating 
any  rule  to  reduce  the  legal  principles  involved  to  their  simi)lest 
and  most  exact  terms,  and  in  so  doing  the  use  of  the  term 
"  monopoly,"  although  commonly  employed  in  modern  deci- 
sions, seems  undesirable. 

*  People  V.  Chicago  Gas  Trust  Co.,       497) ;     Stanton    v.    Allen,    5    Denio 
130  111.  293  (1889),  (22  N.  E.  Rep.  798,       (N.  Y.),  434  (1848). 
17  Am.  St.    Rep.    319,    8    L.  R.  A. 


601 


§   334  INTERCORPORATE    RELATIONS  [PART    V 


CHAPTER    XXXIII 


APPLICATION  OF   LAW   OF   CONTRACTS    IN    RESTRAINT    OF    TRADE 

§  334.     Definition  and  Nature  of  "Contract  in  Restraint  of  Trade." 

§  335.     Connection  between  Contracts  in  Restraint  of  Trade  and  Corporate 

Combinations. 
§  336.     Modern  Use  of  Plirase  "Contract  in  Restraint  of  Trade." 
§  337.     Direct  Test  of  Validity  of  Combination  not  whether  it  is  in  Restraint  of 

Trade. 

§  334.  Definition  and  Nature  of  "  Contract  in  Restraint  of 
Trade." — The  phrase  "contract  in  restraint  of  trade,"  ac- 
cording to  its  primary  and  historic  meaning,  may  be  defined 
as  a  contract  entered  into  by  a  person,  —  ancillary  to  a  prin- 
cipal contract  to  which  he  is  a  party ,^  —  wherein  he  binds 
himself,  for  a  consideration,  not  to  engage  in  a  particular 
trade,  business  or  occupation,  for  a  stated  term,  within  a 
prescribed  territory.^ 

Contracts  of  this  nature  are  usually  entered  into  by  vendors 
upon  the  sale  of  a  business,  property  or  practice,  with  the  good- 
will attaching  thereto,  and  are  necessary  in  order  to  make 
the  transfer  of  the  good-will  effective.  They  may,  however, 
when  conformable  to  governing  principles,  lawfully  be  entered 
into  as  ancillary  to  various  other  contracts. 

In  United  States  v.  Addyston  Pipe,  etc.  Co.^  Judge  Taft, 
speaking  for  the  Circuit  Court  of  Appeals,  said:  "  Covenants 
in  partial  restraint  of  trade  are  generally  upheld  as  valid  when 
they  are  agreements  (1)  by  the  seller  of  property  or  business, 
not  to  compete  with  the  buyer  in  such  a  way  as  to  derogate 

*  Chappell  V.  Brockway,  21  Wend.  ^  "  Strictly  speaking,  a  contract  in 

(N.  Y.)  162  (1839)  :    "A  man  cannot  restraint    of    trade    is    any    contract 

for   money   alone,    where    he    has    no  whereby  anj^  party  binds  himself  not 

other  interest  in  the  matter,  purchase  to  follow  some  particular  occupation, 

a  valid  contract  in  restraint  of  trade,  trade,  calling  or  profession,  or  engage 

however   limited    may    be    the    circle  in  some  particular  business  or  enter- 

of  its  operation."  prise  for  a  period  within  a  particvilar 

See    also    Fox,    etc.    Steel    Co.    v.  territory."     2     Eddy     on     Combina- 

Schoen,   77   Fed.   29   (1896)  ;    United  tions,  §  688. 

States    V.    Addyston     Pipe,    etc.  Co.,  ^  United  States  r.  Addj-ston  Pipe, 

85  Fed.    271    (1898),    (46    L.    R.    A.  etc.    Co.,    85    Fed.    281    (1898),    (46 

122).  ^  L.  R.  A.  122). 

602 


CHAP.    XXXIIl]        CONTRACTS    IN   RESTRAINT    OF   TRADE  §   335 

from  the  value  of  the  property  or  business  sold;  (2)  by  a  retiring 
partner  not  to  compete  with  the  firm;  (3)  by  a  partner,  pending 
the  partnership,  not  to  do  anything  to  interfere,  by  competi- 
tion or  otherwise,  with  the  business  of  the  firm;  (4)  by  the  buyer 
of  property  not  to  use  the  same  in  connection  with  the  business 
retained  by  the  seller;  and  (5)  by  an  assistant,  servant,  or 
agent  not  to  compete  with  his  master  or  employer  after  the 
expiration  of  his  time  of  serA'ice." 

§  335.  Connection  between  Contracts  in  Restraint  of  Trade 
and  Corporate  Combinations.  —  Contracts  in  restraint  of  trade, 
as  defined  in  the  preceding  section,  have  but  an  incidental 
connection  with  combinations  of  corporations.  A  vendor 
corporation,  and  the  persons  interested  in  it,  as  ancillary  to 
the  contract  of  sale,  might  agree  with  the  purchasing  corpo- 
ration, in  the  formation  of  a  corporate  combination,  not  to 
engage  in  the  same  business  again.  Such  an  agreement,  if 
within  the  limitations  applicable  to  such  contracts,  would 
be,  strictly,  a  contract  in  restraint  of  trade.  But  the  prin- 
cipal contract  between  the  corporations  —  even  though  de- 
signed to  suppress  competition  —  could  only  be  referred  to  as 
a  contract  in  restraint  of  trade  by  ignoring  the  meaning  origi- 
nally attaching  to  that  phrase. 

While  conventional  contracts  in  restraint  of  trade  are  only 
of  adventitious  interest  in  considering  the  legal  principles 
governing  combinations  of  corporations,  it  may  be  noted  that 
the  law  concerning  such  contracts,  as  laid  down  by  the  courts, 
has  undergone  a  process  of  relaxation  —  from  strict  disapproval 
to  liberal  eilforcement.  As  said  by  Lord  Macnaghten  in  the 
leading  case  of  Nordenfelt  v.  Maxim-Nordcnfdt  Co.:^  "In  the 
age  of  Queen  Elizabeth,  all  restraints  of  trade,  whatever  they 
were,  general  or  partial,  were  thought  to  be  contran-  to  public 
policy,  and  therefore  void. ^  Tn  time,  however,  it  was  found  that 
a  rule  so  rigid  and  far-reaching  must  seriously  interfere  with 
transactions  of  every-day  occurrence.  Traders  couhl  hardly 
venture  to  let  their  shops  out  of  their  own  hands;  the  purchaser 

'  Nordenfelt    r.    Maxim-Nordenfelt  '  Citing    Colgate     v.     Bachclcr,     1 

Co.,  App.  Cas.  (1894),  564  (63  L.  .1.       Croke,  872  (1G02). 
Ch.  923).     See  also  Wright  v.  Rider, 
36  Cal.  342  (1868),  (95  Am.  Dec.  186). 

603 


§  335 


INTERCORPORATE    RELATIONS 


[part  V 


of  a  business  was  at  the  mercy  of  the  seller;  every  apprentice 
was  a  possible  rival.  So  the  rule  was  relaxed.  It  was  relaxed 
as  far  as  the  exigencies  of  trade  for  the  time  being  required, 
gradually  and  not  without  difficulty,  until  it  came  to  be  recog- 
nized that  all  partial  restraints  might  be  good,  though  it  was 
thought  that  general  restraints,  that  is,  restraints  of  general 
application  extending  throughout  the  kingdom,  must  be  bad." 
There  has  never  been  a  departure  from  the  principle  that 
contracts  restraining  a  person  from  engaging  in  any  business 
or  occupation  are  absolutely  void.  In  other  directions,  how- 
ever, the  early  rule  has  been  modified,  and  the  courts  have 
uniformly  enforced  contracts  in  partial  restraint  of  trade, 
limited  as  to  duration  and  the  territory  embraced,  and  have 
stated  various  arbitrary  rules  for  determining  what  limita- 
tions of  time  and  place  are  required  by  considerations  of  public 
policy.^     While  the  American  courts  have  not  followed  the  most 


'  The  development  of  the  law  con- 
cerning contracts  in  restraint  of  trade, 
in  their  primary  sense,  is  illustrated  in 
the  following  list  of  early  and  recent 
cases,  selected  with  reference  to  such 
contracts  in  restraint  of  trade  as  might 
naturally  be  incidental  to  the  transfer 
of  a  business  in  the  formation  of  a  cor- 
porate combination  : 

United  States :  Navigation  Co.  v. 
Winsor,  20  Wall.  64  (1873)  ;  Fowle  v. 
Parke,  131  U.  S.  88  (1889),  (9  Sup.  Ct. 
Rep.  658)  ;  Chicago,  etc.  R.  Co.  v. 
Pullman  Southern  Car  Co.,  139  U.  S. 
79  (1891),  (11  Sup.  Ct.  Rep.  490); 
United  States  v.  Addyston  Pipe,  etc. 
Co.,  85  Fed.  271  (1898),  affirmed  175 
U.  S.  211  (1899),  (20  Sup.  Ct.  Rep. 
96)  ;  United  States  Chemical  Co.  v. 
Pro\'ident  Chemical  Co.,  64  Fed.  946 
(1894)  ;  Harrison  v.  Glucose  Sugar 
Refining  Co.,  116  Fed.  304  (1902), 
(58  L.  R.  A.  915)  ;  National  Enamel- 
ing, etc.  Co.  V.  Haberman,  120  Fed. 
415  (1903). 

An  agreement  by  a  patentee  in 
connection  with  the  sale  of  a  patent 
that  he  will  not,  during  the  life  of  the 
patent,  become  connected  with  any 
corporation     manufacturing     articles 

604 


similar  to  those  covered  by  the  patent 
is  not  a  contract  in  restraint  of  trade 
and  competition  and  is  valid. 

American  Brake  Beam  Co.  v. 
Pungs,  141  Fed.  923  (1905). 

California:  Wright  v.  Rider,  36 
Cal.  342  (1868),  (95  Am.  Dec.  186); 
Callahan  v.  DonnoUy,  45  Cal.  152 
(1872),  (13  Am.  Dec.  172). 

Indiana:  Beard  v.  Dennis,  6  Ind. 
200  (1855),  (63  Am.  Dec.  380)  ;  Eisel 
V.  Hayes,  141  Ind.  41  (1895),  (40 
N.  E.  Rep.  119). 

Maine:  Whitney  v.  Slayton,  40 
Me.  224  (1855). 

Massachtisetts :  Pierce  v.  Fuller, 
8  Mass.  223  (1811),  (5  Am.  Dec.  102) ; 
Alger  V.  Thacher,  19  Pick.  51  (1837), 
(31  Am.  Dec.  119);  Taylor  v.  Blan- 
chard,  13  .411en,  370  (1866);  Game- 
well  Fire  Alarm  Tel.  Co.  v.  Crane,  160 
Mass.  50  (1893),  (35  N.  E.  Rep.  98, 
39  Am.  St.  Rep.  458,  22  L.  R.  A.  673)  ; 
Anchor,  etc.  Mfg.  Co.  v.  Hawkes,  171 
Mass.  101  (1898),  (50  N.  E.  Rep.  509, 
68  Am.  St.  Rep.  403,  41  L.  R.  A. 
189). 

Michigan:  Hubbard  v.  Miller,  27 
Mich.  15  (1873),  (15  Am.  Dec.  153); 
Beal  V.  Chase,  31  Mich.  490  (1875). 


CHAP.    XXXIIl]        CONTRACTS   IN    RESTRAINT    OF   TRADE 


336 


recent  English  decisions  '  in  holding  that  a  contract  in  restraint 
of  trade  may,  under  certain  circumstances,  be  enforced,  although 
unlimited  both  in  regard  to  time  and  territory,  there  is  a  ten- 
dency both  in  England  and  America,  in  determining  the  validity 
of  such  a  contract,  to  apply  the  reasonable  test  stated  by  Lord 
Chief  Justice  Tindall  in  Horner  v.  Graves:  ^  "  We  do  not  see 
how  a  better  test  can  be  applied  to  the  question,  whether 
reasonable  or  not,  than  by  considering  whether  the  restraint 
is  such  only  as  to  afford  a  fair  protection  to  the  interests  of  the 
party  in  favour  of  whom  it  is  given,  and  not  so  large  as  to  inter- 
fere with  the  interests  of  the  public.  Whatever  restraint  is 
larger  than  the  necessary  protection  of  the  party,  can  be  of  no 
benefit  to  either,  it  can  only  be  oppressive;  and  if  oppressive, 
it  is,  in  the  eye  of  the  law,  unreasonable." 

§  336.  Modern  Use  of  Phrase  "  Contract  in  Restraint  of 
Trade."  — The  phrase  "  contract  in  restraint  of  trade."  in  the 
absence  of  an  acquired  meaning,  would  have  a  broad  applica- 
tion. "  Competition  is  the  life  of  trade,"  and  any  contract 
having  for  its  object  the  restriction  of  competition  might  ap- 
propriately be  described  as  a  contract  in  restraint  of  trade.' 


New  Jersey:  Trenton  Potteries 
Co.  V.  Olyphant,  58  N.  J.  Eq.  507 
(1899),  (43  Atl.  Rep.  723,  78  Am.  St. 
Rep.  612,  4G  L.  R.  A.  255). 

New  York  :  Lawrence  v.  Kidder,  10 
Barb.  641  (1851)  ;  Diamond  Match 
Co.  V.  Roeber,  lOG  N.  Y.  473  (1887), 
(60  Am.  Rep.  464,  13  X.  E.  Rep.  419) ; 
Tode  V.  Gro.s.s,  127  N.  Y.  480  (1891), 
(28  N.  E.  Rep.  469,  24  Am.  St.  Rep. 
475,  13  L.  R.  A.  652)  ;  Leslie  v. 
Lorillard,  110  N.  Y.  519  (1888),  (18 
N.  E.  Rep.  363,  1  L.  R.  A.  456); 
Wood  V.  Whitehead  Bros.  Co.,  165 
N.  Y.  545  (1901),  (59  N.  E.  Rep. 
357)  ;  Brett  v.  Ebel,  29  App.  Div. 
2.56  (1898),  (51  N.  Y.  Supp.  573). 

Ohu) :  Lange  v.  Wcrk,  2  Ohio  St. 
519  (1853). 

Wisconsin :  Berlin  Machine  Works 
V.  Perry,  71  Wis.  495  (1888),  (.38 
N.  W.  Rep.  82,  5  Am.  St.  Rep.  236). 

Enqland:  Mitchel  v.  Reynolds, 
1  P.  Wms.  181  (1711),  (Smith's  Lead- 


ing Cases,  7  Eng.  Ed.  407,  8  Am.  Ed. 
756) ;  Ward  v.  B>Tne,  5  M.  &  W.  548 
(1839)  ;  Whittaker  v.  Howe,  3  Beav. 
383  (1841) ;  Jones  v.  Lees,  1  H.  &  N. 
189  (18.56);  Leather  Cloth  Co.  v. 
Lorsont,  L.  R.  9  Eq.  345  (1869); 
Rousillon  V.  Rousillon,  L.  R.  14  Ch. 
Div.  351 ;  Nordenfelt  v.  Maxim- 
Nordenfelt  Co.,  App.  Cas.  (1894)  535 
(63  L.  J.  Ch.  908). 

'  Nordenfelt  v.  Maxim-Nordenfelt 
Co.,  App.  Cas.  (1894)  .5.35  (63  L.  J.  Ch. 
908) ;  Badische  Anilin  und  Soda 
Fabrik  v.  Schott,  61  L.  .1.  Ch.  698 
(1892);  Underwood  v.  Barker,  1  Ch. 
300  (1899),  (68  L.  J.  Ch.  201). 

2  Horner  v.  Graves,  7  Bing.  743 
(1831). 

^  Ford.  Heim  Brewing  Co.  v. 
Bclinder,  97  Mo.  App.  64  (1903), 
(71  S.  W.  Rep.  691)  :  "'Competition' 
is  the  struggle  between  rivals  for  the 
same  trade  at  the  same  time.  It 
is  self-c%-ident  that  there  can  not  be 

605 


§  336 


INTERCORPORATE    RELATIONS 


[part  V 


In  this  sense,  the  phrase  is  used  in  many  modern  statutes  and 
judicial  decisions.^ 


competition  unless  there  is  trade, 
and  so,  though  the  popular  saying  is 
that  '  competition  is  the  life  of  trade,' 
yet  it  is  cjuite  certain  that  trade  is 
the  mother  of  competition,  for  the 
latter  springs  from  the  former,  so, 
therefore,  whatever  restrains  trade 
restrains  competition  in  exact  degree. " 
*  In  Anderson  v.  Shawnee  Com- 
press Co.,  17  Akl.  231  (1906),  (87  Pac. 
Rep.  315)  (affirmed  sub  nom.  Shawnee 
Compress  Co.  v.  Anderson  by  the 
U.  S.  Supreme  Court,  April  13,  1908) 
the  Court  said  :  "The  public  welfare 
is  the  first  consideration  to  which  the 
courts  will  look,  and  then  the  question 
of  whether  the  restraint  upon  the 
one  party  is  or  is  not  greater  than  the 
protection  of  the  other  requires.  It 
is  now  the  general  holding  that  when 
one  engaged  in  any  business  or  occu- 
pation sells  out  his  stock  in  trade  and 
good-will,  he  may  make  a  valid  con- 
tract with  the  purchaser  binding 
himself  not  to  engage  in  the  same 
business  in  the  same  place  for  a  time 
named,  and  this  is  about  as  far  as  con- 
tracts in  restraint  of  trade  have  been 
upheld  by  the  courts  in  this  country 
or  in  England.  But  when,  by  the 
principal  operation  of  any  contract, 
it  encroaches  upon  the  rights  of  the 
public  and  transgresses  the  liberty 
of  free  competition,  consideration 
then  for  the  public  welfare  and  for 
society  becomes  paramount,  and 
must  predominate  over  any  indi\'idual 
right  to  contract.  It  is  immaterial 
in  determining  the  legality  of  such 
contracts  whether  or  not  it  was  en- 
tered into  with  any  e\\\  intent,  but 
the  material  consideration  is  its  in- 
jurious tendenc}-,  and  the  power 
thereby  given  to  control  prices.  Nor, 
in  order  to  \atiate  a  contract,  is  it 
essential  that  its  result  should  be  a 
complete  monopoly.  It  is  sufficient 
if  it  really  tends  to  that  end,  and  to 

606 


deprive  the  public  of  the  advantages 
derived   from   free  competition." 

In  Addyston  Pipe,  etc.  Co.  v. 
United  States,  175  U.  S.  244  (1899), 
(20  Sup.  Ct.  Rep.  96),  Mr.  Justice 
Peckham  said:  "We  have  no  doubt 
that  where  the  direct  and  immediate 
effect  of  a  contract  or  combination 
among  particular  dealers  in  a  com- 
modity is  to  destroy  competition 
between  them  and  others,  so  that  the 
parties  to  the  contract  or  combination 
may  obtain  increased  prices  for  them- 
selves, such  contract  or  combination 
amounts  to  a  restraint  of  trade  in  tlie 
commodity,  even  though  contracts 
to  buy  such  commodity  at  the  en- 
hanced price  are  continually  being 
made." 

In  Nester  v.  Continental  Brewing 
Co.,  161  Pa.  St.  481  (1894),  (29  Atl. 
Rep.  102,  41  Am.  St.  Rep.  894),  the 
Supreme  Court  of  Pennsylvania  said 
of  an  agreement  among  brewers  to 
regulate  the  price  of  beer:  "The 
test  question,  in  every  case  like  the 
present,  is  whether  or  not  a  contract 
in  restraint  of  trade  exists  which  is 
injurious  to  the  public  interests. 
If  injurious,  it  is  void  as  against 
public    policy." 

State  V.  Smiley,  65  Kan.  240,  257 
(1902),  (69  Pac.  Rep.  199,  67  L.  R. 
A.  903),  affirmed  196  U.  S.  447  (1905), 
(25  Sup.  Ct.  Rep.  289)  :  "  From 
very  early  times  it  was  the  policj'  of 
the  common  law  to  encourage  com- 
petitive trade,  and  to  discourage 
contract  restraints  upon  it.  The 
courts  refused  to  enforce  stipulations 
between  parties  looking  to  the  im- 
position of  such  restraints.  The 
rule  of  policy  remains  to  this  day, 
and  to  this  day  the  courts  continue 
their  refusal  to  countenance  con- 
tracts of  the  character  mentioned.  .  .  . 
A  great  array  of  deci-sions,  Eng- 
lish   and    American,    will    be    found 


CHAP.    XXXIIl]        CONTRACTS    IN    RESTRAINT    OF   TRADE 


§  336 


Such  use  of  the  phrase  should  be  condemned.  The  phrase 
has  acquired  a  well-defined  meaning.  As  already  shown,  for 
three  hundred  years  it  has  been  applied  to  ancillary  con- 
tracts to  refrain  from  engaging  in  a  particular  business,  and 
other  contracts  of  that  nature;  and  there  is  no  apparent  rea- 
son why  confusion  should  be  occasioned  by  its  use,  at  the 
present  time,  to  dascribe  contracts  of  an  essentially  different 
nature,  however  appropriate  in  the  choice  of  words  such  use 
may  be.  But  the  more  serious  objection  to  the  modern  use 
of  the  phrase  is  that  it  offers  a  false  standard  for  determining 


...  all  tending  to  the  establishment 
of  the  proposition  that  combinations 
having  for  their  object  the  restraint 
of  trade  by  the  prevention  of  com- 
petition are  inimical  to  public  policy, 
their  contracts  in  furtherance  of  their 
object  non-enforceable,  and  their 
agreements  of  confederacy,  followed 
by  acts  in  prosecution  of  their  pur- 
pose, rightful  subjects  of  restrictive 
and  penal  legislation." 

American  Biscuit,  etc.  Co.  v. 
Klotz,  44  Fed.  725  (1891) :  "So  far, 
therefore,  as  the  complainant's  busi- 
ne.ss  is  a  combination  in  restraint  of 
trade,  .  .  .  the  law  stamps  it  as 
unlawful,  and  the  courts  should  not 
encourage  it." 

John  D.  Park  &  Sons  Co.  v.  Nat. 
Wholesale  Druggists  Ass'n,  50  N.  Y. 
Supp.  1665  (1896)  :  "It  is  in  restraint 
of  trade  and  unlawful  for  siich  manu- 
facturer to  become  a  party  to  a  com- 
bination which  .shall  prevent  any  of 
his  customers  from  obtaining  other 
goods   of   other   manufacturers,"  etc. 

India  Bagging  Ass'n  v.  Kock,  14 
La.  Ann.  164  (1849):  "The  agree- 
ment between  the  parties  [not  to  .sell 
cotton  bagging  except  mider  certain 
conditions]  was  palpably  and  vmetiuiv- 
ocally  a  combination  in  restraint  of 
trade,  and  to  enhance  in  the  market 
an  article  of  ordinary  necessity  to 
cotton  planters." 

Distilling,  etc.  Co.  v.  People,  156 
111.  486  (1895),  (41  N.  E.  Rep.  188)  : 


"No  one  .  .  .  can  .  .  .  doubt  that  it 
was  designed  to  be,  and  was  in  fact, 
a  combination  in  restraint  of  trade, 
and  that  it  was  organized  for  the 
purpose  of  getting  control  of  the 
manufacture  and  sale  of  all  distillery 
products,  so  as  to  stifle  competition." 
See  also  State  v.  Nebraska  Distilling 
Co.,  29  Neb.  700  (1890),  (46  N.  W. 
Rep.  155). 

Klingel's  Pharmacy  v.  Sharp,  104 
Md.  230  (1906),  (64  Atl.  Rep.  1029): 
"Where  the  direct  and  immediate 
effects  of  a  contract  or  combination 
among  particular  dealers  in  a  com- 
modity is  to  destroy  competition 
between  them  and  others,  so  that  the 
parties  to  the  contract  or  combina- 
tion may  obtain  increased  prices  for 
themselves,  such  contract  or  com- 
bination amounts  to  a  restraint  in 
trade  of  the  commodity,  even  thougli 
contracts  to  buy  such  commodity 
at  the  enhanced  price  are  constantly 
being  made.  Total  suppression  of 
trade  in  the  commodity  is  not  neces- 
sary in  ortler  to  make  the  contract 
one  in  restraint  of  trade." 

The  federal  anti-trust  statute 
also  uses  the  phra.se  "contract  in 
restraint  of  trade"  in  the  broa<l 
sense  and  its  meaning  is  more  fully 
examined  in  connection  with  the 
construction  of  that  statute.  See 
post,  §  387,  "Use  of  Phrase  'Con- 
tract in  Restraint  of  Trade. '  " 

607 


§  337 


INTERCORPORATE    RELATIONS 


[part  V 


the  validity  of  industrial  combinations.  The  validity  of  a 
combination  for  the  suppression  of  competition  depends  upon 
rules  of  public  policy  relating  to  the  control  of  markets.  The 
well  established  principles  governing  conventional  contracts  in 
restraint  of  trade,  although  likewise  founded  upon  considera- 
tions of  public  policy,  have  little  application.  And  yet,  an 
examination  of  reported  cases  will  show  that  the  courts,  in  de- 
termining the  validity  of  such  combinations,  repeatedly  refer 
to  those  principles,  and,  in  some  cases,  that  contracts  manifestly 
against  such  rules  of  public  policy  have  been  declared  lawful  be- 
cause limitations  in  regard  to  time  and  space  were  reasonable.^ 
§  337.  Direct  Test  of  Validity  of  Combination  not  whether  it 
is  in  Restraint  of  Trade.  —  Even  if  the  modern  use  of  the  phrase 
"  contract  in  restraint  of  trade  "  were  unobjectionable,  it  is 
unnecessary. 


'  "The  \itter  inadequacy  of  the 
doctrine  condemning  contracts  in 
restraint  of  trade,  as  a  basis  to  which 
to  refer  tliat  against  restrictions 
upon  competition  seems  to  us  to 
be  made  clear  by  illustration.  At 
least  until  very  recently,  the  doc- 
trine against  contracts  in  restraint 
of  trade  would  have  been  so  applied 
as  to  hold  illegal  the  withdrawal 
(without  limit  as  to  time  or  space) 
of  one  out  of  a  thousand  trade  com- 
petitors in  a  given  city,  notwith- 
standing that  the  continuance  of 
the  other  nine  hundred  and  ninety- 
nine  would  have  effectually  pre- 
vented the  danger  of  a  monopoly. 
On  the  other  hand,  the  same  doc- 
trine would  (as  modified  as  to  space) 
have  been  ordinarily  so  applied 
as  to  hold  legal  the  withdrawal, 
by  agreement,  of  the  nine  hundred 
and  ninety-nine,  though  such  with- 
drawal would  seem  to  be  ordinarily 
within  the  condemnation  of  the  pres- 
ent doctrine  against  restriction  upon 
competition."  Article  in  33  Am. 
Law  Rev.  68,  entitled  "Anti- 
Trust  Legislation  and  the  Doc- 
trine against  Contracts  in  Restraint 
of      Trade."       See      also      note       to 

608 


Harding  v.  American  Glucose  Co.,  74 
Am.  St.  Rep.  235. 

Pocahontas  Coke  Co.  v.  Powhatan 
Coal,  etc.  Co.,  60  W.  Va.  508  (1907), 
(.56  S.  E.  Rep.  271,  116  Am.  St.  Rep. 
901,  10  L.  R.  A.  (N.s.)  268):  "Many 
of  the  late  authorities  draw  a  distinc- 
tion between  contracts  which  were  in 
'restraint  of  trade'  as  that  phrase 
was  understood  in  the  early  history 
of  the  comnaon  law,  and  contracts 
which  are  in  'restraint  of  competi- 
tion' and  which  are  also  in  restraint 
of  trade  as  understood  in  niodern 
times.  Both  classes  of  contracts 
when  unreasonable  and  to  the  injury 
of  the  public  are  alike  illegal  and 
against  public  policy.  The  illegality 
of  a  contract  or  combination  for  the 
restraint  of  competition  does  not  lie 
in  the  agreement  not  to  compete  but 
in  its  reflex  injury  to  the  public. 
One  way  to  control  prices  is  to  destroy 
or  restrain  competition.  It  has  been 
said  that  many  of  the  cases  decided 
in  America  holding  contracts  valid 
as  not  being  in  unreasonable  restraint 
of  trade  would  have  been  held  other- 
wise if  the  modern  doctrine  as  to 
restraint  of  competition  had  been 
properly  appUed." 


CHAP.   XXXIV]  FORMULATION   OF   RULES  §  338 

Contracts  and  combinations  in  restraint  of  trade  are  de- 
clared to  be  contrary  to  public  policy  and,  therefore,  invalid. 
But  the  test  of  the  validity  of  a  combination,  as  pointed  out 
in  reference  to  monopolies,*  is  whether  the  particular  acts 
and  agreements  of  the  parties  in  forming  it  are  of  such  a  nature, 
and  for  such  a  purpose,  as  to  be  against  public  poHcy.  If  so, 
the  combination  is  invahd;  and,  if  not  against  public  policy, 
it  is  immaterial  whether  it  is  in  restraint  of  trade. 

The  syllogism:  All  contracts  in  restraint  of  trade  are  against 
public  policy;  this  combination  is  a  contract  in  restraint  of 
trade;  therefore,  it  is  against  public  policy,  formulates  the 
reasoning  in  many  decisions.  This  reasoning,  while  logical, 
is  circuitous.  The  essential  question  is  whether  the  combina- 
tion, itself,  is  opposed  to  public  policy.  The  determination  of 
this  question  is  not  promoted  by  the  intervention  of  another 
standard. 


CHAPTER    XXXIV 


FORMULATION    OF    RULES    OF    PUBLIC    POLICY 

§  338.  Definition  and  Nature  of  Public  Policy. 

§  339.  Necessity  for  Rules  of  Public  Policy. 

§  340.  Difficulty  of  formulating   Rules  of  Public   Policy  concerning  Combi- 
nations. 

§  341.  Formulation  of  Rules.     Basis  in  Judicial  Decisions. 

§  342.  Basis  of  Rules  —  (A)  Case  of  the  Sugar  Trust. 

§  343.  Basis  of  Rules  —  (B)  Case  of  the  Standard  Oil  Trust. 

§  344.  Basis  of  Rules  —  (C)  Whiskey  Trust  Cases. 

§  345.  Basis  of  Rules  —  (D)  Case  of  the  Preservers  Trust. 

§  346.  Basis  of  Rules  —  (E)  Case  of  the  Chicago  Gas  Trust. 

§  347.  Basis  of  Rules  —  (F)  Case  of  the  Diamond  Match  Company. 

§  348.  Basis  of  Rules  —  (G)  Case  of  the  Glucose  Combination. 

§  348a.  Basis  of  Rules  —  (H)   Ca-se   of  the    Pocahontas    Coke  Company. 

§  349.  Basis  of  Rules  —  (1)  Miscellaneous  Cases. 

§338.    Definition    and    Nature   of  Public   Policy. —"  Public 

policy,"  said  Lord  Brougham,  "  is  that  principle  of  the  law 

'  Ante,  §  333:   "Direct  Test  of  Validity  of  Combination  not  whether  it  is  a 
Monopoly. " 

609 


338 


INTERCORPORATE   RELATIONS 


[part  V 


which  holds  that  no  subject  can  lawfully  do  that  which  has  a 
tendency  to  be  injurious  to  the  pubUc,  or  against  the  public 
good."  ^  A  more  precise  definition  cannot  well  be  stated. 
Although  the  fundamental  principles  are  unchangeable,^ 
public  policy,  in  its  very  nature,  is  uncertain  and  fluctuating.' 
It  varies  with  the  times. ^     The  growth  of  trade  and  commerce 


*  Egerton  v.  Brownlow,  4  H.  L. 
Cas.  196  (1853).  See  also  People  v. 
Chicago  Gas  Trust  Co.,  130  111.  268 
(1889),  (22  N.  E.  Rep.  798,  17  Am.  St. 
Rep.  319,  8  L.  R.  A.  497). 

2  Brooks  V.  Cooper,  50  N.  J.  Eq.  769 
(1893),  (26  Atl.  Rep.  981,  35  Am.  St. 
Rep.  793,  21  L.  R.  A.  617),  per  Lippin- 
cott,  J.:  "It  has  been  declared  that 
public  policy  is  a  variable  quality, 
but  the  principles  to  be  applied  have 
always  remained  unchanged  and  un- 
changeable, and  public  policy  is  only 
variable  in  so  far  as  the  habits,  capaci- 
ties and  opportunities  of  the  public 
have  become  more  varied  and  com- 
plex. The  relations  of  society  become 
from  time  to  time  more  complex ; 
statutes  defining  and  declaring  public 
and  private  rights  multiply  rapidly, 
and  public  policy  often  changes  as 
the  laws  change,  and  therefore  new 
applications  of  old  principles  are 
required.  Whatever  tends  to  in- 
justice and  oppression,  restraint  of 
liberty,  restraint  of  legal  right ;  what- 
ever tends  to  the  obstruction  of 
justice,  a  violation  of  a  statute,  or 
the  obstruction  or  perversion  of  the 
administration  of  the  law ;  whatever 
tends  to  interfere  with  or  control 
the  administration  of  the  law,  as  to 
executive,  legislative  or  other  official 
action,  whenever  embodied  in  and 
made  the  subject  of  a  contract,  the 
contract  is  against  public  policy, 
and  therefore  void,  and  not  susceptible 
of  enforcement.  All  contracts  preju- 
dicial to  the  interests  of  the  public, 
such  as  contracts  tending  to  prevent 
competition,  whenever  the  statute 
or  any  known  rule  of  law  require  it, 
are  void." 

610 


^  In  Richardson  v.  Melli-sh,  2  Bing. 
252  (1824),  Mr.  Justice  Burrough  said  : 
"I,  for  one,  protest,  as  my  Lord  has 
done,  against  arguing  too  strongly 
upon  public  policy  ;  it  is  a  very  unruly 
horse,  and  when  once  you  get  astride 
it  you  never  know  where  it  will  carry 
you." 

*  In  Koehler  v.  Feurbach,  2 
Mo.  App.  14  (1876),  the  Court 
said:  "What  constitutes  public 
policy  is  not,  perhaps,  e.xactly  de- 
terminable; it  is  indefinite  in  its 
nature,  changing  with  the  habits, 
wants,  and  opinions  of  society.  Fore- 
stalling, regrating,  and  engrossing 
were  prohibited  by  statute  in  Eng- 
land three  hundred  years  ago,  and 
were  considered  to  be  against  public 
policy  so  late  as  the  time  of 
Blackstone.  They  are  now  the  great 
basis  of  profits;  are  not  only  prac- 
tised every  day,  but  are  recog- 
nized as  the  very  life  of  trade,  and 
without  them  it  may  be  said  that 
commerce,  as  known  amongst  us, 
would  be  at  an  end.  .  .  .  Contracts 
in  total  restraint  of  trade,  or  of 
marriage,  against  the  prohibitions 
of  statutes,  to  infringe  a  copyright, 
to  defraud  the  government  or  third 
parties,  to  oppress  third  parties  or 
prevent  the  due  course  of  justice, 
or  induce  a  ^^olation  of  public  duty, 
that  tend  to  encourage  unlawful  or 
immoral  acts,  or  that  are  founded 
on  trading  with  an  enemy,  are  all 
against  public  policy,  and  void. 
And,  probably,  this  is  a  complete 
enumeration  of  the  several  classes 
to  which  contracts  against  public 
policy  may  h^  reduced." 


CHAP.    XXXIV] 


FORMULATION   OF   RULES 


§  339 


has  made  acts  and  contracts  which  formerh''  were  in  conflict 
with  pubUc  policy,  recognized  and  approved  methods  of  doing 
business.  It  is  as  impossil)le  to  give  an  exact  definition  of  the 
phrase  as  it  is  to  define  fraud.  The  rule  stated  by  Judge 
Story/  however,  may  safely  be  applied:  "  Whenever  any  con- 
tract conflicts  with  the  morals  of  the  time,  and  contravenes  an 
established  interest  of  society,  it  is  void,  as  being  against  public 
policy." 

The  public  policy  of  a  State  is  manifested,  primarily,  by 
its  statutes  and,  secondarily,  by  its  judicial  decisions.^  Ques- 
tions of  public  policy,  however,  generally  arise  in  connection 
with  contracts  which  are  neither  ?»r/ /a  prohihita  nor  mala  in  se. 
Tlie  former  are  expressly  prohibited  and  the  latter  are  mani- 
festly unlawful.  In  testing  the  validity  of  this  middle  class 
of  contracts  by  the  standard  of  public  policy,  the  right  of  the 
individual  to  contract — a  fundamental  right — is  liable  to 
be  impaired,  and  such  contracts  should  be  set  aside  only  when 
clearly  inimical  to  established  interests  of  society.^ 

§  339.  Necessity  for  Rules  of  Public  Policy.  —  As  already 
shown,  the  application  of  the  law  of  monopolies  and  of  con- 


■  1  Story  on  Contracts,  649. 

2  United  States  v.  Trans-Missouri 
Freight  Ass'n,  166  U.  S.  340  (1897), 
(17  Sup.  Ct.  Rep.  559)  :  "The  public 
policy  of  the  government  is  to  be 
found  in  its  statutes,  and  when  they 
have  not  directly  spoken,  then  in  the 
decisions  of  the  courts  and  the  con- 
stant practice  of  the  government 
officials ;  but  when  the  law-making 
power  speaks  upon  a  particular  sub- 
ject, over  which  it  has  constitutional 
power  to  legislate,  public  policy  in 
such  a  case  is  what  the  statute  cnact.«. 
If  the  law  prohibit  any  contract  or 
combination  in  restraint  of  trade  or 
commerce,  a  contract  or  combination 
made  in  violation  of  such  law  is  void, 
whatever  may  have  been  theretofore 
decided  by  the  courts  to  have  been 
the  public  policy  of  the  country  on 
that  subject." 

See  also  Harding  i\  American  Glu- 
cose Co.,  182  111.  551  (1899),  (55  N.  E. 


Rep.   577,   74   Am.   St.   Rep.   235,   64 
L.  R.  A.  738). 

*  Kellogg  V.  Larkin,  3  Pin.  (Wis.) 
1.36  (1851),  (.56  Am.  Dec. .164)  :  "  I  by 
no  means  intend  to  deny  the  right  or 
propriety  of  judicially  determining 
that  a  contract  that  I'.s  actually  at  war 
with  any  established  interest  of  society 
is  void,  however  indiviiluals  may 
suffer  thereby,  because  the  interest 
of  individuals  nnist  be  subservient 
to  the  public  welfare.  But  I  insist 
that  before  a  court  should  determine 
a  contract  which  has  been  made  in 
goo<l  faith,  stipiilating  for  nothing 
that  is  7nalum  in  .s-r,  nothing  that  is 
made  rtialiim  jtrohibitum,  to  be  void 
as  contravening  the  policy  of  the 
State,  it  .should  be  satisfied  that  the 
a(l\-aiitage  to  accrue  to  the  public 
from  so  lujlding  is  certain  and  sub- 
stantial, not  theoretical  or  problem- 
atical." 

611 


§   340  INTERCORPORATE    REIATIONS  [PART   V 

tracts  in  restraint  of  trade  in  determining  the  validity  of  a 
particular  combination,  only  leads  to  the  result  that  if  it  is 
against  public  policy,  it  is  illegal. 

The  same  consequence  follows  the  application  of  other  tests 
which  have  been  stated  by  the  courts  and  text  writers.  Thus, 
it  has  been  said  that  the  test  of  the  illegality  of  a  combination 
is  the  injury  to  the  public.  It  is  undoubtedly  true  that  the 
law  condemns  only  those  combinations  which  are  injurious  to 
the  public,  but,  as  an  effective  test  of  the  validity  of  a  combina- 
tion, the  statement  is  valueless.  In  applying  it,  the  only  result 
obtainable  is  that  if  a  particular  combination  injures  the  public 
it  is  illegal;  but  the  essential  question,  whether  it  is  injurious, 
can  only  be  determined  by  the  application  of  a  rule  of  public 
policy.  So,  in  a  more  definite  form,  it  is  stated  that  a  com- 
bination of  competing  producers  is  illegal  which  has  for  its 
object  the  maintenance  of  prices  and  restriction  of  production. 
But  agreements  to  maintain  prices  and  limit  production  are 
only  means  of  restraining  competition,  and  power  to  control 
prices  and  restrict  production  is  only  an  incident  of  the  suppres- 
sion of  competition.  To  what  extent  combinations  in  restraint 
of  competition  are  invalid  depends  upon  the  application  of  a 
rule  of  public  policy. 

The  formulation  of  rules  of  public  policy  is,  therefore,  neces- 
sary in  order  to  obtain  definite  standards  for  determining  the 
legality  or  illegality  of  any  combination. 

§  340.  Difficulty  of  formulating  Rules  of  Public  Policy  con- 
cerning Combinations.  —  When  public  policy  is  manifested  by 
statute,  the  statute  is  itself  the  rule;  ^  when  it  is  manifested 
by  judicial  decisions,  based  upon  a  uniform  course  of  reason- 
ing, the  formulation  of  a  rule  of  public  policy  requires  only 
the  classification  of  governing  principles.  But  whatever 
rules  of  public  policy  may  exist  for  determining  the  validity 
of  a  combination  of  corporations  have  been  evolved  coinciden- 
tally  with  the  development  of  the  combination  itself,  and  the 
process  of  evolution  has  been  circuitous.  The  courses  of 
reasoning  by  which  different  courts  have  arrived  at  the  same 

*  When  a  combination  is  authorized       policy.     Stewart  v.  Erie,  etc.  Transp. 
or  prohibited  by  statute,  that  fact  is       Co.,  17  Minn.  372  (1871). 
conclusive  upon  the  question  of  public 

612 


CHAP.    XXXIV]  FORMULATION    OF   RULES  §   342 

conclusion  have  varied  widely;  and,  upon  the  same  state  of 
facts,  different  conclusions  have  been  reached. 

The  formulation  of  rules  from  conflicting  decisions  upon 
a  subject  uncertain  in  its  nature  is,  obviously,  attended  with 
difficulties. 

§  341.    Formulation  of  Rules.      Basis  in   Judicial  Decisions. 

—  While  the  framing  of  rules  of  public  policy  concerning  com- 
binations is  difficult,  both  by  reason  of  the  subject  and  con- 
flicting decisions,  certain  broad  principles  may  be  gathered 
from  the  current  of  authority.  Combinations  of  a  certain  nature 
are  clearly  against  public  policy  and  void.  Other  combina- 
tions are  clearly  valid.  Concerning  still  others,  there  is  an 
irreconcilable  diversity  of  judicial  opinion. 

In  ascertaining  these  principles,  an  extended  examination 
of  the  decisions  of  the  courts  is  necessary.  Judicial  decisions 
form  the  basis  of  any  rule  of  public  policy  not  established  by 
statute,  and  leading  cases  must  be  carefully  examined  to  ascer- 
tain their  underlying  principles.  In  presenting  the  result  of 
such  an  examination  in  a  treatise,  general  propositions  may 
be  misleading.  The  law,  in  cases  of  combinations,  is  closely 
interwoven  with  the  facts.  An  exact  appreciation  of  the  prin- 
ciples of  public  policy  enunciated  can  only  be  obtained  by 
examining  the  reasons  and  reasoning  of  the  court,  in  connection 
with  the  facts  of  the  case.  It,  therefore,  seems  advisable  to 
state  the  conclusions  of  the  courts  —  extracts  from  the  opinions 

—  in  the  leading  cases  upon  combinations  of  corporations, 
together  with  facts  sufficient  to  indicate  the  scope  of  the  deci- 
sions —  as  indicating  the  basis  of  rules  of  public  policy.* 

§  342.  Basis  of  Rules  —  (A)  Case  of  the  Sugar  Trust.  —  The 
two  leading  cases  upon  the  validity  of  comV)inations  are,  un- 

*  It  can  hardly  be  said  that  the  in  the  following  pages,  from  which 
formulation  of  rules  of  public  policy  the  rules  of  public  i)olicy  are  for- 
is  so  necessary  now  as  it  was  before  mulated,  appeared,  with  few  excep- 
the  adoption  of  the  federal,  and  the  tions,  in  the  first  edition  of  this  trea- 
many  State,  anti-trust  statutes.  These  tise.  Rules  of  public  policy  are, 
statutes  manifestlj'  furnish  the  most  however,  necessary  in  States  having 
effective  tests  of  the  validity  of  com-  no  anti-trust  statutes.  And  even  in 
binations,  and  the  recent  cases  upon  the  States  having  such  statutes,  they 
the  subject  of  combinations  have  are,  as  a  general  rule,  hekl  to  sup- 
nearly  all  been  brought  under  such  plcnicnt  and  add  to,  but  not  to 
statutes.     In  fact,  the  cases  examined  supersede,  common  law  remedies. 

613 


§342 


INTERCORPORATE    RELATIONS 


[part  V 


doubtedly,    the     cases     of     the     Sugar     and     Standard     Oil 
Trusts. 

In  the  Sugar  Trust  Case,^  the  trial  court,  Judge  Barrett, 
said:  "  Any  combination,  the  tendency  of  which  is  to  prevent 
competition  in  its  broad  and  general  sense,  and  to  control, 
and  thus  at  will  enhance,  prices  to  the  detriment  of  the  public, 


^  People  V.  North  River  Sugar 
Ref'g  Co.,  121  N.  Y.  582  (1890),  (24 
N.  E.  Rep.  834,  18  Am.  St.  Rep.  843, 
9  L.  R.  A.  33),  s.  c.  54  Hun,  354 
(1889),  (3  N.  Y.  Supp.  401).  (The 
latter  report  includes  both  the  gen- 
eral and  special  term  decisions.) 

The  Sugar  Trust  was  a  combina- 
tion of  sugar  refineries,  formed  in 
1887,  under  the  name  of  the  Sugar 
Refineries  Company.  Individuals  and 
firms  took  the  form  of  corporations 
before  entering  the  combination.  All 
the  stock  of  the  several  corporations 
was  transferred  to  a  board  of 
eleven  trustees,  who  issued  in  lieu 
thereof  "trust  certificates"  for  cor- 
responding proportionate  amounts. 
The  object  of  the  "trust,"  as  stated 
in  the  agreement,  was  as  follows  : 

"(1)  To  promote  economy  of 
administration  and  reduce  the  cost 
of  refining,  thus  enabling  the  price 
of  sugar  to  be  kept  as  low  as  is  con- 
sistent with  reasonable  profit. 

"(2)  To  give  to  each  refinery  the 
benefit  of  all  appliances,  known  or 
used  by  the  others,  and  useful  to 
improve  the  quality  and  diminish 
the  cost  of  refined  sugar. 

"(3)  To  furnish  protection  against 
unlawful  combinations  of  labor. 

"(4)  To  protect  against  induce- 
ments to  lower  the  standard  of  refined 
sugars. 

"(5)  Generally  to  promote  the 
interests  of  the  parties  hereto  in  all 
lawful  and  suitable  ways." 

The  trustees  received  the  profits 
from,  all  the  plants  and  distributed 
them  as  dividends  upon  the  "trust 
certificates."  Directors  of  the  several 
corporations    were    chosen,    but    had 

614 


no  power.  Quo  warranto  proceedings 
were  instituted  by  the  attorney- 
general  of  New  York  against  the  North 
River  Sugar  Refining  Company,  a 
constituent  corporation,  upon  the 
ground  that  it  was  a  party  to  an 
unlawful  combination,  and,  also,  had 
exceeded  its  chartered  powers.  The 
case  was  first  heard  before  Judge  Bar- 
rett, at  special  term,  who  held  that 
the  combination  was  a  monopoly, 
and  that  the  defendant  corporation 
had  forfeited  its  charter  by  ultra  vires 
acts  injurious  to  the  public.  Upon 
appeal  to  the  general  term,  the  former 
decision  was  sustained  upon  similar 
grounds.  The  Court  of  Appeals, 
while  affirming  the  judgment,  placed 
its  decision  solely  upon  the  ground 
that  the  corporation  had  forfeited 
its  charter  by  entering  into  an  unlaw- 
ful partnership  of  corporations,  and 
by  attempting  to  practically  consoli- 
date with  other  corporations  -nithout 
following  the   consolidation  statute. 

The  decision  in  this  case  was,  how- 
ever, without  practical  effect.  The 
trust  was  reorganized  under  the  laws 
of  New  Jersey  in  the  form  of  a  cor- 
porate combination,  and  has  done 
business  ever  since. 

For  other  cases  relating  to  the 
Sugar  Trust,  see  People  v.  American 
Sugar  Ref'g  Co.  (Cal.),  7  Ry.  &  Corp. 
L.  J.  83  (1890);  Cameron  v.  Have- 
meyer,  25  Abb.  N.  C.  438  (1890), 
(12  N.  Y.  Supp.  126);  Gray  v.  De 
Castro,  etc.  Sugar  Ref'g  Co.,  57  Hun 
(N.  Y.),  592  (1890),  (10  N.  Y.  Supp. 
632)  ;  United  States  v.  E.  C.  Knight 
Co.,  156  U.  S.  1  (1895),  (15  Sup.  Ct. 
Rep.  249). 


CHAP.    XXXIV]  FORMULATION    OF    RULES  §   342 

is  a  legal  monopoly.  And  this  rule  is  applicable  to  every  mo- 
nopoly, whether  the  supply  be  restricted  by  nature  or  susceptible 
of  indefinite  production.  The  difficulty  of  affecting  the  unlaw- 
ful purpose  may  be  greater  in  one  case  than  in  the  other,  but 
it  is  never  impossible.  Nor  need  it  be  permanent  or  complete. 
It  is  enough  that  it  may  be  even  temporarily  and  partially  suc- 
cessful." 

Upon  appeal,  the  general  term,  Judge  Daniels,  said:  "  In 
this  case  it  was  a  leading  object  to  combine  together  the  dif- 
ferent corporations  and  individuals  engaged  in  this  business, 
not  only  in  and  about  the  City  of  New  York,  but  throughout 
the  country,  and  to  secure  that  control  by  a  substantial  organi- 
zation for  an  indefinite  period  of  time.  This  was  not  to  be 
done,  and  was  not,  in  fact,  done  for  an  idle  purpose,  or  merely 
to  furnish  the  means  of  protection  against  unlawful  combina- 
tions or  for  any  mere  economical  object,  but  it  was,  manife.stly, 
to  place  this  business  within  the  control,  and  subject  to  the 
dictation,  of  this  association,  and  of  the  board  selected  for  the 
government  of  its  affairs.  And,  after  putting  forth  the  efforts 
necessary  to  secure  the  end,  it  would  not  only  be  idle,  but  ab- 
surd, to  indulge  in  the  supposition  that  it  was  not  intended 
to  wield  the  authority,  in  this  manner  secured,  for  the  pecuniary 
advantage  of  the  associates.  And  the  direct  and  usual  way 
in  which  that  is  accomplished,  following  out  the  common  im- 
pulses of  practical  business  men,  is  by  tl^  advancement  of  the 
prices  of  the  commodities  manufactured  and  sold,  in  the  course 
of  the  business  whose  control  may  be  in  this  way  secured. 
When  the  opportunity  to  do  that  is  provided,  human  selfish- 
ness is  sure  to  turn  it  to  a  profitable  account.  A  ]\iTy  certainly 
would  be  fully  justified  in  conclutling,  from  the  agreement  and 
the  other  facts  in  evidence  in  the  case,  that  the  governing  object 
of  the  association  was  to  promote  its  interests  antl  advance 
the  prosperity  of  the  associates,  by  limiting  the  supply,  when 
that  could  properly  be  done,  and  advancing  the  prices  of  the 
products  produced  by  the  companies.  To  conclude  otherwise 
would  be  to  violate  all  the  obscrs'ations  and  experiences  of 
practical  life.  This  is  a  controlling  feature  in  this  controversy. 
And  that  it  was  intended  to  be  secured  by  the  organization 
provided  for,  and  which  actually  took  place,  is  reasonably  free 

615 


§343 


INTERCORPORATE   RELATIONS 


[part  V 


from  doubt.  And  where  that  appears  to  be  the  fact,  the  agree- 
ment, association,  combination  or  arrangement,  or  whatever 
else  it  may  be  called,  having  for  its  objects  the  removal  of  com- 
petition and  the  advancement  of  prices  of  necessaries  of  Ufe, 
is  subject  to  the  condemnation  of  the  law,  by  which  it  is  de- 
nounced as  a  criminal  enterprise." 

The  Court  of  Appeals,  however,  finally  decided  the  case 
upon  grounds  peculiar  to  corporation  law,  saying:  "  We  have 
reached  our  conclusion,  and  it  appears  to  us  to  have  been 
established  that  the  defendant  corporation  has  violated  its 
charter  and  failed  in  the  performance  of  its  corporate  duties, 
and  that  in  respects  so  material  and  important  as  to  justify 
a  judgment  of  dissolution.  Having  reached  that  result,  it 
becomes  needless  to  advance  into  the  wider  discussion  over 
monopolies  and  competition  and  restraint  of  trade  and  the 
problems  of  political  economy.  Our  duty  is  to  leave  them  until 
some  proper  emergency  compels  their  consideration." 

§  343.  Basis  of  Rules  —  (B)  Case  of  the  Standard  Oil  Trust. 
—  In  the  Case  of  the  Standard  Oil  Trust  ^  the  Supreme  Court  of 
Ohio,  by  Judge  Minshall,  said : 


>  state  V.  Standard  Oil  Co.,  49 
Ohio  St.  137  (1892),  (30  N.  E.  Rep. 
379,  34  Am.  St.  Rep.  541,  15  L.  R.  A. 
145,  36  Am.  &  Eng.  Corp.  Cas.  1). 

The  celebrated  Standard  Oil  Trust, 
a  combination  of  corporations  en- 
gaged in  the  production  and  sale  of 
petroleum  and  its  products,  was 
formed  in  1882  by  a  trust  agreement, 
substantially  in   the   following   form : 

(1)  "As  soon  as  practicable,  a  cor- 
poration shall  be  formed  in  each  of  the 
following  States  under  the  laws 
thereof,  to  wit :  Ohio,  New  York, 
Pennsylvania   and   New   Jersey.  ..." 

(2)  "The  purpose  and  powers  of 
said  corporation  shall  be  to  mine  for, 
produce,  manufacture,  refine,  and 
deal  in  petroleum  and  all  its  products, 
and  all  the  materials  used  in  such 
businesses,  and  transact  other  business 
collateral  thereto.   ..." 

(3)  "At  any  time  hereafter,  .  .  . 
similar  corporations  may  be  formed 
in  other  States  and  Territories." 

616 


(4)  "Each  of  said  corporations 
shall  be  known  as  the  Standard  Oil 
Co.  of  [name  of  State]." 

(5)  "The  capital  stock  of  each  of 
said  corporations  shall  be  fixed  at  such 
an   amount   as  may   seem  necessary. 

(6)  "The  shares  of  stock  of  each 
corporation  shall  be  issued  only  for 
money,  property,  or  assets,  equal  at  a 
fair  valuation  to  the  par  value  of  the 
stock  delivered  therefor." 

(7)  "All  of  the  property,  real  and 
personal,  assets  and  business  of  each 
and  all  of  the  corporations  .  .  .  men- 
tioned in  class  first  ...  in  or  of  each 
particular  State,  shall  be  transferred 
to  and  vested  in  the  Standard  Oil 
Company    of    that    particular    State. 

(8)  "The  indi^^ duals  embraced  in 
class  second  .  .  .  agree  ...  to  sell, 
assign,  transfer,  convey  and  set  over 
all  the  property,  real  and  personal, 
assets    and    business    mentioned    and 


CHAP.    XXXIV] 


FORMULATION    OF    RULES 


§343 


"By  this  agreement,  indirectly  it  is  true,  but  none  the  less 
effectually,  the  defendant  is  controlled  and  managed  by  the 
Standard  Oil  Trust,  an  association  with  its  principal  place  of 
business  in  New  York  City,  and  organized  for  a  purpose  con- 
trary to  the  policy  of  our  laws.  Its  object  was  to  estabhsh  a 
virtual  monopoly  of  the  business  of  producing  petroleum,  and 
of  manufacturing,  refining  and  dealing  in  it  and  all  its  products, 
throughout  the  entire  country,  and  by  which  it  might  not  merely 


embraced  in  schedules  accompanying 
such  sale  and  transfer  to  the  Stantlard 
Oil  Company,  or  Companies,  of  the 
proper  State  or  States.   ..." 

(9)  "The  parties  embraced  in  class 
third  .  .  .  agree  to  assign  and  trans- 
fer all  the  stock  held  by  them  in  the 
corporations  .  .  .  herein  named  to 
the  trustees  herein  provided  for.  .  .  . 
And  whenever  and  as  often  as  all 
the  stocks  of  any  corporation  .  .  . 
are  vested  in  said  trustees,  the  proper 
steps  may  then  be  taken  to  have  all 
the  monej',  propertj^  real  and  per- 
sonal, of  such  corporation  .  .  .  con- 
veyed to  the  Standard  Oil  Companj' 
of  the  proper  State,  ...  in  which 
event  the  trustees  shall  receive  stocks 
of  the  Standard  Oil  Companies  equal 
to  the  value  of  the  money,  property, 
and  business  assigned.   ..." 

(10)  "The  consideration  for  the 
transfer  ...  to  each  or  any  of  the 
Standartl  Oil  Companies,  shall  be 
the  stock  of  the  respective  .  .  .  com- 
pany to  which  such  transfer  or  con- 
veyance is  made.  .  .  .  Said  stock 
shall    be    delivered    to    the    trvistees. 

(11)  "The  consideration  for  any 
stocks  delivered  to  said  trustees  .  .  . 
shall  be  the  delivery  ...  to  the  per- 
sons entitled  thereto  of  trust  cer- 
tificates .  .  .  equal  at  par  value  to 
the  par  value  of  the  stock  of  the  said 
Stantlard  Oil  Comi)anies  so  received 
by  said  trustees." 

This  agreement  was  signed  by  all 
the  officers  and  stockholders  of  the 
Standard     Oil     Co.     of     Ohio,  —  the 


defendant  in  the  case,  —  but  its  cor- 
porate name  and  seal  were  not 
affixed. 

Quo  warranto  proceedings  were 
instituted  bj'  the  attorney-general 
of  Ohio  upon  the  ground  that  the 
defendant  corporation  had  misused 
its  franchises  by  becoming  a  party 
to  an  agreement  opposed  to  public 
polidy. 

The  Supreme  Court  of  Ohio  held 
upon  demurrer  to  the  defendant 's 
answer : 

1.  That  the  defendant  company 
entered  into  the  agreement  in  its 
corporate  capacity. 

2.  That  the  agreement  subjected 
the  defenilant  to  a  control  incon.sist- 
ent  with  its  character  as  a  corpora- 
tion. 

3.  That  it  provided  for  an  a-ssocia- 
tion  contrary  to  public  policy. 

Judgment  of  absolute  ouster  was 
denied  on  accoimt  of  the  statute  of 
limitations,  but  it  was  decreed  that 
the  defendant  be  ousted  "from  the 
power  to  make  and  jjcrform  "  said 
agreement. 

This  judgment  was  rendered  in 
1892,  and  at  the  present  time  (1908) 
the  same  combination  —  i>crhaps  in  a 
different  form  —  is  carrying  on  a  busi- 
ness of  far-reaching  and  ever-increas- 
ing magnitude. 

For  consideration  of  rights  of 
holders  of  Standard  Oil  "trust  cer- 
tificates," see  Rice  v.  Rockefeller, 
1.34  N.  Y.  174  (1892),  (.31  X.  E.  Rep. 
907,  30  Am.  St.  Rep.  G.58,  17  I  .  R. 
A.  237). 

617 


§   344  INTERCORPORATE    RELATIONS  [PART    V 

control  the  production,  but  the  price,  at  its  pleasure.  All 
such  associations  are  contrary  to  the  policy  of  our  State  and 
void.  .  .  .  Much  has  been  said  in  favor  of  the  objects  of  the 
Standard  Oil  Trust,  and  what  it  has  accomplished.  It  may 
be  true  that  it  has  improved  the  quality  and  cheapened  the  cost 
of  petroleum  and  its  products  to  the  consumer.  But  such  is 
not  one  of  the  usual  or  the  general  results  of  a  monopoly;  and 
it  is  the  policy  of  the  law  to  regard,  not  what  may,  but  what 
usually  happens.  Experience  shows  that  it  is  not  wise  to  trust 
human  cupidity  when  it  has  the  opportunity  to  aggrandize 
itself  at  the  expense  of  others.   .   .  . 

"  A  society  in  which  a  few  men  are  the  employers,  and  the 
great  body  are  merely  the  employees  or  servants,  is  not  the  most 
desirable  in  a  republic;  and  it  should  be  as  much  the  policy 
of  the  laws  to  multiply  the  numbers  engaged  in  independent 
pursuits  or  in  the  profits  of  production,  as  to  cheapen  the  price 
to  the  consumer.  Such  policy  would  tend  to  an  equality  of 
fortunes  among  its  citizens,  thought  to  be  so  desirable  in  a 
republic,  and  lessen  the  amount  of  pauperism  and  crime." 

§  344.  Basis  of  Rules  —  (C)  Whiskey  Trust  Cases.  —  In  the 
Case  of  the  Distillers  and   Cattle    Feeders    Trust  ^   ("  Whiskey 

^  State  V.  Nebraska  Distilling  Co.,  tillery  plant  is  situated  is  deeded  to 
29  Neb.  700  (1890),  (46  N.  W.  Rep.  some  one  member  of  the  company 
155).  The  Distillers  and  Cattle  as  trustee  for  the  stockholders,  and 
Feeders  Trust,  an  unincorporated  the  trustee  then  leases  said  real  es- 
association,  was  formed  in  1887  by  tate  to  the  company  for  the  term  of 
the  owners  of  nine  distilleries  located  twenty-five  years.  The  capital  stock 
north  and  west  of  the  Ohio  River,  of  the  company  is  cancelled  and  new 
for  the  purpose  of  restricting  the  stock  issued  to  said  nine  trustees  of 
output,  regulating  prices,  and  sup-  the  trust,  for  which  the  trustees  give 
pressing  competition  in  the  manu-  the  agreed  amount  of  certificates  of 
factiire  and  sale  of  alcohol,  high  the  trust.  The  board  of  directors 
wines,  and  other  liquors.  The  object  of  the  company  resigns  and  a  new 
of  the  trust  was  accomplished  by  its  board  is  elected,  a  majority  of  which 
getting  control  of  as  many  distilleries  are  taken  from  the  nine  trustees  of 
as  possible,  and  the  method  adopted  the  trust.  .  .  .  The  trustees  of  the 
is  stated  in  the  report  as  follows :  trust  have  almost  unlimited  power 
"An  arrangement  or  agreement  is  and  control  over  all  distilleries  that 
made  b}^  which  the  company  is  to  enter  it.  They  can  limit  their  produc- 
transfer  its  capital  stock  to  the  trus-  tion  or  suspend  their  operation  alto- 
tees  of  the  Distillers  and  Cattle  gether.  .  .  .  The  trustees  confine 
Feeders  Trust,  for  which  said  trustees  the  production  of  the  distilleries  under 
are  to  issue  certificates  of  the  trust.  their  control  to  the  large  houses  sit- 
The  real  estate  upon  which  the  dis-  uated  in   favorable    localities,    which 

618 


CHAP.    XXXIV] 


FORMULATION    OF    RULES 


§344 


Trust  "),  the  Supreme  Court  of  Nebraska  said:  "  The  findings 
in  this  case,  to  which  no  objection  is  made,  clearly  show  that 
the  object  of  the  Distilling  Company  in  entering  into  the  illegal 
combination  was  to  destroy  competition  and  create  a  monopoly, 
not  only  by  limiting  the  production  of  alcohol,  but,  by  disman- 
tling as  many  distilleries  as  the  trust  saw  fit,  absolutely  prevent 
the  manufacture  of  the  article  except  in  the  few  establisiiments 
controlled  by  the  trust,  and  thus  it  would  be  enabled  to  control 
prices,  prevent  production,  and  create  a  monopoly  of  the  most 
offensive  character." 

In  a  later  case  against  the  Distilling  and  Cattle  Feeding 
Company,^  successor  to  the  Distillers  and  Cattle  Feeders 
Trust,  the  Supreme  Court  of  Illinois  said,  concerning  the 
latter  combination:  "  There  can  be  no  dou])t,  we  think,  that 
the  Distillers  and   Cattle  Feeders  Trust,  which  preceded  the 


can  be  run  at  less  expense  than  small 
houses  located  in  unfavorable  jtlaces. 
.  .  .  The  said  trustees  can,  and  do, 
at  will  restrict  and  limit  the  produc- 
tion and  supply  of  alcohol,  spirits, 
and  other  liiiuors,  and  thereby 
enhance  their  value." 

The  Nebraska  Distilling  Company 
became  a  party  to  the  trust  in  the 
manner  described.  Quo  warranto  pro- 
ceedings were  instituted  against  that 
corporation,  and,  upon  the  facts 
stated,  the  Supreme  Court  of  Nebraska 
held  that  the  trust  agreement  was 
contrary  to  public  policy  and  voi<l, 
and  that  the  defendant  corporation 
had  forfeited  its  charter. 

The  Distillers  and  Cattle  Feeders 
Trust  being  thus  attacked,  a  corpora- 
tion, callctl  the  Distilling  and  Cattle 
Feeding  Company,  was  formed,  in 
1890,  for  the  purpose  of  taking  over 
the  assets  of  the  trust  and  it  issued 
its  certificates  of  stock  in  lieu  of  the 
old  trust  certificates. 

Quo  warranto  jjrocecdings  against 
the  new  corporation  were  instituted 
by  the  attorney-general  of  Illinois 
upon  the  ground  that  it  was  a  mere 
continuation,  in  cori>oratc  form,  of 
an    illegal    trust,    and    the    Supreme 


Court  of  Illinois,  in  Distilling  and 
Cattle  Feeding  Co.  v.  People,  150 
111.  448  (1895),  (41  N.  E.  Rep.  188. 
47  Am.  St.  Rep.  200),  held  that  the 
conveyance  from  the  trust  to  the  cor- 
poration was  merely  a  form;  that 
(p.  491)  "the  trust,  .  .  .  being  re- 
pugnant to  public  policy  and  illegal  it 
is  impossible  to  see  why  the  .sanie 
is  not  true  of  the  corjioration  which 
succeeds  to  it  and  takes  its  place." 

Judgment  of  ouster  was  thereupon 
pronounced  against  the  company. 

Prior  to  final  decree,  howe\'er,  a 
receiver  of  the  corporation  had  V>een 
apj)()inted  by  the  I'nited  States 
Circuit  Court  (Olmstead  v.  Distilling 
and  Cattle  Feeiling  Co.,  73  Feii.  44 
(1S9.'})),  and  the  property  of  the  cor- 
jioration  was  subsoiiuciitly  sold,  and, 
through  a  reorganization  i)lan,  an- 
other corporation.  The  .American 
Spirits  Manufacturing  Company,  or- 
ganized imder  the  laws  of  New  >lersey. 
aciiuired  the  assets  and  busines-i. 
\'arious  reorganizations  have  taken 
place  since  that  time. 

'  Distilling  and  Cattle  Feetiing  Co. 
V.  People,  15()  111.  4S(;  (lS9.'->),  (41  N.  E. 
Rep.   ISS,  47  -Xm.  St.   Rep.  200). 

619 


§345 


INTERCORPORATE    RELATIONS 


[part  V 


incorporation  of  the  defendant,  was  an  organization  which 
contravened  well-estabHshed  principles  of  pubHc  policy,  and 
that  it  was,  therefore,  illegal.  No  one  who  intelligently  con- 
siders the  scheme  of  this  trust,  as  detailed  in  the  information, 
can  for  a  moment  doubt  that  it  was  designed  to  be,  and  was, 
in  fact,  a  combination  in  restraint  of  trade,  and  that  it  was 
organized  for  the  purpose  of  getting  control  of  the  manufacture 
and  sale  of  all  distillery  products,  so  as  to  stifle  competition, 
and  to  be  able  to  dictate  the  amount  to  be  manufactured  and 
the  prices  at  which  the  same  should  be  sold,  and  thus  to  create, 
or  tend  to  create,  a  virtual  monopoly  of  the  manufacture  and 
sale  of  products  of  that  character." 

§  345.    Basis  of  Rules  —  (D)  Case  of  the  Preservers  Trust.  — 
In  Bishop  v.  American  Preservers  Co}  the  Supreme  Court  of 


*  Bishop  V.  American  Preservers 
Co.,  157  111.  311  (1895),  (41  N.  E. 
Rep.  765,  48  Am.  St.  Rep.  317),  per 
McGruder,  J. 

The  American  Preservers  Trust 
was  a  voluntary  association  formed, 
originally,  by  the  stockholders  of 
seven  corporations  located  in  different 
States,  and  engaged  in  the  business 
of  preserving  fruit.  The  trust  agree- 
ment provided  for  the  creation  of  a 
board  of  nine  trustees,  to  whom  the 
parties  agreed  to  transfer  their  stock 
in  exchange  for  trust  certificates. 
The  trustees  were  to  hold  in  trust  the 
stocks  transferred  to  them,  receive 
the  dividends  thereon,  and  distribute 
the  same  in  the  form  of  dividends 
upon  the  certificates.  The  trustees 
were  also  authorized  to  purchase  the 
stock,  or  the  plants  and  property,  of 
other  corporations  by  the  issue  of 
trust  certificates.  They  were  also 
empowered  to  organize  other  corpo- 
rations, to  carry  on  the  business  of 
the  trust,  and  to  acquire  and  hold  the 
stock  of  such  corporations.  The 
truist  was  to  continue  twenty-five 
j'ears,  unless  sooner  terminated  by 
the  act  of  a  certain  number,  in  excess 
of  a  majority,  of  the  certificate 
holders. 

620 


In  accordance  with  the  pro\dsions 
of  the  trust  agreement,  the  trustees 
formed  a  corporation  called  the  Amer- 
ican Preservers  Company.  This  com- 
pany instituted  an  action  of  replevin 
against  one  Bishop  to  recover  pos- 
session of  certain  property  which  he 
had  agreed  to  tranfer  to  the  corpora- 
tion, and  of  which  he  had  given  a  bill 
of  sale  and  for  which  trust  certificates 
had  been  issued  to  him.  Bishop  had 
pre\'iously  tendered  his  certificates 
back,  retained  possession  of  the  prop- 
erty, and  defended  the  suit  upon  the 
ground  that  the  corporation  was 
merely  an  instrument  of  an  unlawful 
trust  and  without  standing  in  court 
to  enforce  the  agreement.  The  Su- 
preme Court  of  Illinois  held  that  the 
trust  agreement  was  an  illegal  con- 
tract and  refused  to  grant  relief, 
saying  (p.  316)  :  "The  law  will  not  aid 
the  appellee  to  recover  the  property, 
but  will  leave  both  it  and  the  appel- 
lant where  they  were  when  the  suit 
was  begun." 

In  American  Preservers  Trust  r. 
Taylor  Mfg.  Co.,  46  Fed.  152  (1891), 
this  trust  was  also  held  to  be  invalid 
upon  principles  of  corporation  law. 
Judge  Thayer  said:  "The  question 
now  before  the  court  is,  whether  a 


CHAP.   XXXIV]  FORMULATION   OF   RULES  §  346 

Illinois  said:  "  The  agreement  recites  that  it  is  designed  by 
its  signers  to  form  a  trust  for  the  purpose  of  securing  cooperation 
in  the  business  of  manufacturing  presers-es,  etc.,  and  of  selling 
and  dealing  in  the  same  in  home  and  foreign  markets.  This 
cooperation,  to  be  secured  through  the  extraordinary  powers 
conferred  upon  the  nine  trustees  named  in  the  agreement, 
six  of  whom  are  designated  by  name  and  authorized  to  elect 
three  others,  could  not  result  otherwise  than  in  a  grinding 
monopoly,  controlling  all  trade  in  the  business  specified,  and 
raising  or  depressing  prices  therein  at  the  will  of  the  trustees. 
...  It  will  thus  be  seen  that  the  agreement  in  question  makes 
provision  for  welding  together  all  the  interests  engaged  in  the 
business  named  in  the  agreement,  into  one  giant  combination 
or  partnership  under  the  absolute  dominion  and  control  of  a 
board  of  nine  trustees.  Its  illegal  purpose  is  apparent  upon 
its  face,  and,  therefore,  under  the  decisions  above  referred  to, 
it  must  be  held  to  be  void,  as  being  injurious  to  the  public 
interest." 

§  346.  Basis  of  Rules  —  (E)  Case  of  the  Chicago  Gas  Trust.— 
In  People  v.  Chicago  Gas  Trust  Co}  the  Supreme  Court  of 
Illinois  said: 

business  corporation,  organized  under  operate  any  gas  works,  but  sought  to 
the  laws  of  this  State,  has  tlie  right  exercise  the  power  claimed  under  the 
to  become  a  member  of  such  an  second  clause  anii  ac<iuired  a  major- 
association  with  such  extensive  power,  ity  of  the  capital  stock  of  four  inde- 
and  that  inquiry  must  be  answered  pendent  gas  companies  then  doing 
in  the  negative."  business    in    Chicago,    thereby    con- 

>  People  V.  Chicago  Gas  Trust  Co.,  trolling  them. 
130  111.294(1889),  (22  N.  E.  Rep.  798,  Quo   warranto   proceedings  against 

17  Am.  St.  Rep.  319,  8  L.  R.  A.  497).  the   Trust   Company   were   instituted 

The  Chicago  Gas  Trust  Company  was  by    the    attorney-general    of    Illinois 

organized  in  1887,  under  the  general  upon  the  ground  that  it  had  usurix-d 

incorporation  act  of  Illinois,  for  two  and  exerci.sed  "powers,  liberties,  j)rivi- 

purposes,  as  stated  in  its  articles  of  leges  and  franchises  not  conferred  by 

incorporation:     First,    to    erect    and  law."     The  defendant  i)ieailed  that  it 

operate  gas  works  for  the  manufacture  acted  within  the  powers  conferred  by 

and  sale  of  gas  in  the  City  of  Chicago,  its  charter. 

and  other  places  in  Illinois.  Second,  A  demurrer  to  the  plea  was  over- 
to  purchase,  hoUl  and  .sell  the  capital  ruled  by  the  lower  court,  but  sus- 
stock,  or  purchase  or  lease  the  prop-  tained  by  the  Supreme  Court  of 
erty,  plants,  good-will,  rights  and  Illinois  upon  the  following  grounds : 
franchises  of  other  gas  companies  in  (1)  That  the  corporation  had  no  ex- 
Chicago  or  elsewhere  in  Illinois.  press  power  to  hold  the  stock  of  other 

The  corporation  did  not   erect   or  corporations.      (2)    That    it    did   not 

621 


§   346  INTERCORPORATE   RELATIONS  [PART   V 

"  Public  policy  is  that  principle  of  the  law  which  holds  that 
no  subject  or  citizen  can  lawfully  do  that  which  has  a  tendency 
to  be  injurious  to  the  public  or  against  the  public  good.  This 
principle  owes  its  existence  to  the  very  sources  from  which  the 
common  law  is  suppUed.^  The  common  law  will  not  permit 
individuals  to  oblige  themselves  by  a  contract  either  to  do  or 
not  to  do  anything  when  the  thing  to  be  done  or  omitted  is 
in  any  degree  clearly  injurious  to  the  public.  ...  '  Contracts 
creating  monopolies  are  null  and  void  as  being  contrary  to  public 
policy.'  ^  All  grants  creating  monopolies  are  made  void  by 
the  common  law.^  In  the  Case  of  the  Monopolies  *  it  was 
decided  as  long  ago  as  the  forty-fourth  year  of  the  reign  of 
Queen  Elizabeth,  that  a  '  grant  to  the  plaintiff  of  the  sole  mak- 
ing of  cards  within  the  realm  was  utterly  void,  and  that  for  two 
reasons:  1.  That  it  is  a  monopoly  and  against  the  common 
law.  2.  That  it  is  against  divers  acts  of  parliament.'  ...  Of 
what  avail  is  it  that  any  number  of  gas  companies  may  be  formed 
under  the  general  incorporation  law,  if  a  giant  trust  company 
can  be  chartered  with  the  power  of  buying  up  and  holding  the 
stock  and  property  of  such  companies,  and,  through  the  con- 
trol thereby  attained,  can  direct  all  their  operations  and  weld 
them  into  one  huge  combination?  The  several  privileges  or 
franchises  intended  to  be  exercised  by  a  number  of  companies 
are  thus  vested  exclusively  in  a  single  corporation.  To  create 
one  corporation  for  the  express  purpose  of  enabling  it  to  control 
all  the  corporations  engaged  in  a  certain  kind  of  business,  and 
particularly  a  business  of  a  public  character,  is  not  only  opposed 
to  the  public  policy  of  the  State,  but  is  in  contravention  of  the 
spirit,  if  not  the  letter,  of  the  constitution.  That  the  exercise 
of  the  power  attempted  to  be  conferred  upon  the  appellee 
company  must  result  in  the  creation  of  a  monopoly,  results 
from  the  very  nature  of  the  power  itself." 

acquire  such  power  by  claiming  it   in  monopolize      the      gas      business      of 

its  articles  of  association ;    (3)    That  Chicago. " 

it    had    no    such    incidental    power ;  '  Citing  Greenhood  on  Public  Pol- 

(4)    That  its  exercise  of  such   power  icy,  pp.  2,  3. 

was  unlawful ;    (5)  That  the  stock  of  ^  Citing   2    Addison    on   Contracts, 

the  four  companies  was   acquired  by  743. 

the  Trust  Company  with  the  design  ^  Citing  7  Bacon's  Abridgment,  22. 

of  bringing  them  "under  its  control,  *  Citing    Case    of    the    Monopohes, 

and  by  crushing  out  competition  to  Part  11,  Coke,  86  b  (1602). 

622 


CHAP.    XXXIV] 


FORMULATION    OF   RULES 


§347 


§347.  Basis  of  Rules — (F)  Case  of  the  Diamond  Match 
Company. — In  Richardson  \.  Buhl  ("Diamond  Mutch  Com- 
pany Case")/  the  Supreme  Court  of  Michigan  (per  Judge  Sher- 
wood) said:  "  The  organization  is  a  manufacturing  company. 
The  business  in  which  it  is  engaged  is  making  friction  matches. 
Its  articles  provide  for  the  aggregation  of  an  enormous  amount 
of  capital,  sufficient  to  buy  up  and  absorb  all  of  that  kind  of 
business  done  in  the  United  States  and  Canada,  to  prevent 
any  other  person  or  corporation  from  engaging  in  or  carrying 
on  the  same,  thereby  preventing  all  competition  in  the  sale  of 


>  Richardson  v.  Buhl,  77  Mich.  657 
(1889),  (43  N.  W.  Rep.  1102,  6  L. 
R.  A.  457). 

The  following  facts  were  stated  in 
the  opinions:  "It  appeared  from  tlie 
testimony  that  the  Diamond  Match 
Company  was  organized  for  the  pur- 
pose of  controlling  the  manufacture 
and  trade  in  matches  in  the  United 
States  and  Canada.  The  object  was 
to  get  all  the  manufacturers  of 
matches  in  the  United  States  to  enter 
into  a  combination  and  agreement, 
by  which  the  manufacture  and  out- 
put of  all  the  match  factories  should 
be  controlled  bj^  the  Diamontl  Match 
Company.  Those  manufacturers  who 
would  not  enter  into  the  scheme  were 
to  be  brought  out,  those  who  proposed 
to  enter  into  the  business  were  to  be 
bought  off,  and  a  strict  watch  was  to 
be  exercised  to  discover  any  person 
who  proposed  to  engage  in  such  busi- 
ness, that  he  might  be  prevented,  if 
possible.  All  who  entered  into  the 
combination,  and  all  who  were  bought 
off,  were  reqtiired  to  enter  into  bontls 
to  the  Diamond  Match  Company  that 
the}''  would  not,  directly  or  indirectly, 
engage  in  the  manufacture  or  sale 
of  friction  matches,  nor  aid  nor 
as.si.st,  nor  encourage  any  one  else  in 
said  business,  where,  by  doing  so,  it 
might  conflict  with  the  business 
interests,  or  diminish  the  sales,  or 
lessen  the  profits,  of  the  Diamond 
Match  Company.     These   restrictions 


varied  in  indi\idual  cases,  as  to  the 
time  it  was  to  continue,  from  ten  to 
twenty  years.  Thirty-one  manu- 
facturers, being,  substantially,  all 
the  factories  where  matches  were 
made  in  the  Unitetl  States,  either 
went  into  the  combination  or  were 
purchased  by  the  Diamond  Match 
Company,  and  out  of  this  number 
all  were  closed  except  thirteen." 

An  action  invoh-ing  the  construc- 
tion of  a  contract  entered  into  in  con- 
nection with  the  formation  of  the 
combination  came  before  the  Supreme 
Court  of  Michigan.  No  questions  as 
to  the  validity  of  the  contract  or  com- 
bination upon  grounds  of  public 
policy,  or  otherwise,  were  raised  by 
the  parties;  but  the  Court,  of  its 
own  volition,  heUl  both  the  com- 
bination and  the  contract  unlawful 
antl  refusetl  to  grant  relief,  .saying : 
"A  court  of  e(|uity  will  leave  the 
parties  .  .  .  where  it  finds  thorn, 
outside  the  rules  of  courts  of  justice, 
'w  pari  delicto,'  and  they  must  settle 
their  own  grievances  anil  inilawful 
transactions." 

Compare,  however.  Diamond  Match 
Co.  V.  Roeber,  lOG  N.  Y.  473  (18S7), 
(13  N.  E.  Rep.  419,  CO  .\m.  Rep.  464), 
where  the  New  York  Court  of  .\ppoals 
enforced  one  of  the  bonds  alxivo 
referred  to  without  raising  any  c]ues- 
tion  a.s  to  the  validitj-  of  the  com- 
bination. 

623 


§   347  INTERCORPORATE    RELATIONS  [PART   V 

the  article  manufactured.  This  is  the  mode  of  conducting  the 
business  and  the  manner  of  carrying  it  on.  The  sole  object 
of  the  corporation  is  to  make  money,  by  having  it  in  its  power 
to  raise  the  price  of  the  article,  or  diminish  the  quantity  to  be 
made  and  used,  at  its  pleasure.  Thus,  both  the  supply  of  the 
article  and  the  price  thereof  are  made  to  depend  upon  the 
action  of  a  half-dozen  individuals,  more  or  less,  to  satisfy  their 
cupidity  and  avarice,  who  may  happen  to  have  the  controlling 
interest  in  this  corporation,  an  artificial  person,  governed  by 
a  single  motive  or  purpose,  which  is  to  accumulate  money  re- 
gardless of  the  wants  or ,  necessities  of  over-  sixty  million  of 
people.  The  article  thus  completely  under  their  control,  for 
the  last  fifty  years  has  come  to  be  regarded  as  one  of  necessity, 
not  only  in  every  household  in  the  land,  but  one  of  daily  use  by 
almost  every  individual  in  the  country.  It  is  difficult  to  con- 
.ceive  of  a  monopoly  which  can  affect  a  greater  number  of  people, 
or  one  more  extensive  in  its  effect  on  the  country,  than  that  of 
the  Diamond  Match  Company.  It  was  to  aid  that  company 
in  its  purposes,  in  carrying  out  its  object,  that  the  contract 
in  this  case  was  made  between  these  parties,  and  which  we 
are  now  asked  to  aid  in  enforcing.  Monopoly  in  trade  or  in 
any  kind  of  business  in  this  country  is  odious  to  our  form  of 
government.  It  is  sometimes  permitted  to  aid  the  government 
in  carrying  on  a  great  public  enterprise,  or  public  work  under 
government  control,  in  the  interest  of  the  public.  Its  tendency 
is,  however,  destructive  of  free  institutions,  and  repugnant 
to  the  instincts  of  a  free  people,  and  contrary  to  the  whole  scope 
and  spirit  of  the  federal  Constitution,  and  is  not  allow^ed  to 
exist  under  express  provision  in  several  of  our  State  constitu- 
tions. Indeed,  it  is  doubtful  if  free  government  can  long  exist 
in  a  country  where  such  enormous  amounts  of  money  are  allowed 
to  be  accumulated  in  the  vaults  of  corporations,  to  be  used  at 
discretion  in  controlling  the  property  and  business  of  the  country 
against  the  interest  of  the  public  and  that  of  the  people,  for 
the  personal  gain  and  aggrandizement  of  a  few  individuals. 
It  is  always  destructive  of  individual  rights,  and  of  that  free 
competition  which  is  the  life  of  business,  and  it  revives  and  per- 
petuates one  of  the  great  evils  which  it  was  the  object  of  the 
framers  of  our  form  of  government  to  eradicate  and  prevent. 
624 


CHAP.    XXXIV]  FORMULATION    OF   RULES  §   348 

It  is  alike  destructive  to  both  individual  enterprise  and  individual 
prosperity,  whether  conferred  upon  corporations  or  individuals, 
and  therefore  public  policy  is,  and  ought  to  be,  as  well  as  public 
sentiment,  against  it.  All  combinations  among  persons  or 
corporations  for  the  purpose  of  raising  or  controlling  the  prices 
of  merchandise,  or  any  of  the  necessaries  of  life,  are  monopolies, 
and  intolerable;  and  ought  to  receive  the  condemnation  of  all 
courts." 

Judge  Champlin  said  in  concurring:  "Such  a  vast  combina- 
tion as  has  been  entered  into  under  the  above  name  is  a  menace 
to  the  public.  Its  object  and  direct  tendency  is  to  prevent 
free  and  fair  competition,  and  control  prices  throughout  the 
national  domain.  It  is  no  answer  to  say  that  this  monopoly 
has,  in  fact,  reduced  the  price  of  friction  matches.  That  policy 
may  have  been  necessary  to  crush  competition.  The  fact  exists 
that  it  rests  in  the  discretion  of  this  company  at  any  time  to 
raise  the  price  to  an  exorbitant  degree.  Such  combinations 
have  frequently  been  condemned  by  the  courts  as  unlawful 
and  against  public  policy." 

§  348.    Basis  of  Rules  —  (G)  Case  of  the  Glucose  Combination. 

—  In  the  case  of    Harding  v.    American    Glucose   Compajiy,^ 

'  Harding  v.  American  Glucose  Co.,  company    wherein    it    agreed    to    sell 

182  111.015(1899),  (55  N.  E.  Rep.  577,  all    its    real    and    personal    property, 

74  Am.  St.  Rep.  189,  64  L.  R.  A.  738).  good-will,  trademarks,  etc.,  to  a  trust 

The  following  is  a  brief  summary  of  company  or  its  transferee,  if  requested 

the    facts    in    this    important    case :  within     a     reasonable     time.     These 

Prior  to   1897,  seven  competing  cor-  contracts     provided     that     paj-ment 

porations  alone  were  engaged  in  the  for  the  properties  transferred  should 

manufacture  of  gluco-se  —  a  corn  prod-  be  in  stock  of  the  new  company,  or, 

uct  —  in   the  corn  belt  of  the  United  sometimes,  partly  in  cash  and  partly 

States,  which  is  the  only  territory  in  in  stock.     The  options  were  exerciso<l, 

which   it   can   be   successfully    manu-  and    the    plants   and    other   property 

factured.     In    that    year,    a    scheme  of    the    companies    were    transferreil 

was  entered  into  for  the  purpo.se  of  or  about  to  be  transferred  to  the  new 

combining    the    properties    of    these  corporation. 

corporations  in  a  single  corporation.  Thereupon  a  stockholder  of  one  of 

and  all  of  said  companies,  except  one  said  companies  —  the  American  Glu- 

—  the  smallest  —  became  parties  to  cose  Company,  a  New  Jersey  corpora- 
such  arrangement.  Accortlingly,  the  tion  —  who  objected  to  the  transfer, 
Gluco.se  Siigar  Refining  Company  filed  a  bill  for  an  injunction  to  restrain 
was  organized  untler  the  laws  of  New  the  transfer  of  the  property  of  his 
Jersey  for  the  purpose  of  acquiring  corjioration  to  the  combination  tii>on 
the  plants  of  the  several  companies.  the  groimd  that  the  whole  arrange- 
Option  contracts  were  signed  by  each  ment  was  for  the  purpose  of  control- 

G25 


§   348  INTERCORPORATE    RELATIONS  [PART   V 

the  Supreme  Court  of  Illinois  reaffirmed  its  earlier  deci- 
sions that  trusts  and  combinations,  for  the  prevention  of  com- 
petition, are  against  public  policy:  "  Any  combination  of 
competing  corporations  for  the  purpose  of  controlling  prices, 
or  limiting  production,  or  suppressing  competition,  is  contrary 
to  public  policy,  and  is  void.  ...  In  the  present  case  each 
of  six  corporations,  engaged  in  the  manufacture  of  glucose, 
made  a  contract  to  sell  its  plant  to  a  new  corporation  to  be 
organized,  and  agreed  not  to  engage  in  such  manufacture  for 
a  term  of  years,  and  then  conveyed  all  its  property  to  the  new 
corporation  organized  to  conduct  the  same  kind  of  business; 
and  it  did  all  this  with  the  knowledge  and  understanding  that 
each  of  five  other  competing  corporations  was  making  the  same 
kind  of  contract,  and  executing  the  same  kind  of  conveyance 
in  respect  to  their  own  respective  properties,  all  to  be  consum- 
mated and  delivered  at  the  same  time,  and  under  the  direction 
and  management  of  agents  or  promoters  employed  by  all  the 
corporations.  If  the  transactions  referred  to  in  the  bill  in  this 
case  did  not  amount  to  an  absolute  agreement  made  in  advance 
between  the  six  corporations,  they  at  least  constituted  a  scheme 
understood  by  all  the  corporations,  and  participated  in  by 
them  all.  The  carrying  out  of  the  scheme,  thus  understood  and 
participated  in,  would  necessarily  result  in  the  suppression  of 
competition  in  the  manufacture  of  glucose,  and  in  the  creation 
of  a  monopoly  in  that  business.  .  .  .  The  material  considera- 
tion in  the  case  of  such  combinations  is,  as  a  general  thing,  not 
that  prices  are  raised,  but  that  it  rests  in  the  power  and  dis- 
cretion of  the  trust  or  corporation,  taking  all  the  plants  of  the 
several  corporations,  to  raise  prices  at  any  time,  if  it  sees  fit  to 
do  so. .  It  does  not  relieve  the  trust  of  its  objectionable  features 
that  it  may  reduce  the  price  of  the  articles  which  it  manufac- 
tures, because  such  reduction  may  be  brought  about  for  the  ex- 
press purpose  of  crushing  out  some  competitor  or  competitors." 

ling  prices,   suppressing  competition,  The  case  is  also  of  importance  in 

and  creating  a  monopoly.  determining  the  rights  and  status  of 

The  Supreme  Court  of  Illinois,  for  corporations  and  their  stockholders  — 

the   reasons   stated  in   the  text,   and  parties   to    unlawful    combinations  — 

others,    sustained    the    claim    of    the  in   foreign   States,   with   reference   to 

complainant,   and   granted   the   relief  property  there   situated, 
prayed  for. 

626 


CHAP.    XXXIV] 


FORMULATION    OF    RULES 


§  348a 


§  348a.    Basis  of  Rules  —  (H)    Case  of   the  Pocahontas  Coke 

Company.  —  In  the  very  recent  case  of  Pocahontas  Coke  Co. 
V.  Powhatan  Coal  and  Coke  Co}  the  Supreme  Court  of 
West  Virginia  said:  "  We  now  come  to  a  consideration  of 
the  contract  upon  the  principles  of  the  common  law.  For  the 
purpose  of  determining  whether  or  not  the  contract  is  illegal 
under  the  rules  of  the  common  law,  we  consider,  not  onlv  the 


'  Pocahontas  Coke  Co.  v.  Powhatan 
Coal  and  Coke  Co.  60  W.  Va.  508 
(1906),  (56  S.  E.  Rep.  264  116  Am. 
St.  Rep.  901,  10  L.  R.  A.  (n.  s.)  268). 
In  this  case  •  several  producers  and 
manufacturers  of  coke,  among  whom 
was  the  appellant  in  said  action  — 
the  Powhatan  Company  —  entered 
into  a  contract  agreeing  to  form  a 
corporation  for  the  stated  purpose 
of  regulating, impro\'ing  and  standard- 
izing the  quality  of  coke  manufactured 
by  them  and  providing  that  upon  the 
formation  of  such  corporation,  each 
producer  or  manufacturer  should 
enter  into  a  three  years'  contract  for 
the  sale  by  such  corporation  of  all 
coke  produced  by  it  upon  a  stipulated 
commission,  and  that  provision  should 
be  made  for  a  penalty  or  liquidated 
damages  in  case  such  producer  should 
sell  its  coke  through  any  other  agency, 
or  to  any  person  other  than  such 
corporation.  When  the  corporation 
—  the  Pocahontas  Company  —  was 
organized  (it  being  the  appellee  in 
said  action)  the  parties  to  the  above 
contract  entered  into  a  "uniform 
contract "  whereby  the  appellee  was 
appointed  their  sole  sales  agent.  The 
following  year  the  appellee  received 
notice  from  the  appellant  whereby 
the  latter  undertook  to  terminate  its 
contract  with  it,  and  gave  notice  that 
it  would  no  longer  deliver  coke  to  the 
appellee.  The  appellee  then  brought 
a  suit  in  which  an  injunction  was 
awarded  restraining  the  appellant 
from  selling,  through  any  agent  or 
agencies  other  than  appellee,  or  in 
any  other  way,  any  of  the  coke  cov- 


ered by  the  terms  of  such  contract 
and  frpm  refusing  to  carr}'  out  the 
contract  by  withdrawing  its  coke  from 
the  appellee  as  its  sole  agent,  until 
the  further  order  of  the  court.  The 
appellant  then  moved  to  dissolve  the 
injunction,  which  motion  was  denied 
by  a  judge  in  vacation,  from  which 
the  appellant  appealed. 

The  appellant  sought  to  have  said 
contract  set  aside  on  the  ground  that 
it  was  in  restraint  of  trade  aiul  tended 
to  monopoly. and  was  against  public 
policy.  Under  this  ground  it  con- 
tended (1)  that  the  contract  was 
illegal  under  the  federal  anti-trust 
law  ;  (2)  that  the  contract  was  illegal 
under  the  rules  of  the  common  law. 

It  was  held  that,  upon  the  facts 
before  the  court,  it  did  not  appear 
that  the  contract  contemplated  inter- 
.state  or  international  commerce  in 
the  coke  which  constituted  the  sub- 
ject-matter of  the  contract  —  that 
the  contract  was  capable  of  being 
fully  performed  within  a  State  and, 
therefore,  was  not  illegal  under  the 
federal  act. 

But  it  was  further  held  that  the 
combination  established  by  the  con- 
tract was  in  unreasonable  restraint 
of  trade  and  against  public  policy ; 
that  when  all  the  powers  conferred 
bj'  the  contract  were  exercised,  the 
direct  and  nece.s.sary  or  natural  effect 
was  to  restrain  competition  and  con- 
trol prices,  and  that  such  effect  was 
not  merely  incidental,  commensurate, 
or  necessary  to  the  protection  of  the 
parties  in  the  enjoyment  of  the  legiti- 
mate   fruits   of  a  lawful  undertaking. 

G27 


§   348a  INTERCORPORATE    RELATIONS  [PART    V 

contract,  but  its  subject-matter,  the  situation  of  the  parties, 
and  all  the  circumstances  surrounding  the  transaction,  so  far 
as  they  are  disclosed  by  the  allegations  of  the  bill. 

"  Coke,  the  subject-matter  of  the  contract,  is  a  legitimate 
article  of  trade  and  commerce,  a  commodity  of  extensive  use. 
Under  the  recent  decisions,  it  is  immaterial  whether  it  is  an 
article  of  prime  necessity  or  not.  If  a  contract  concerning  an 
article  of  prime  necessity  would  be  illegal  as  in  unreasonable 
restraint  of  trade,  it  is  likewise  illegal  if  its  subject-matter  be 
any  other  article  of  legitimate  trade  or  commerce.  If  the 
question  were  material,  we  would  have  little  difficulty  in  arriv- 
ing at  the  conclusion  that  coke,  like  coal,  is  properly  classified 
under  the  head  of  necessaries. 

"  Twenty  separate  and  independent  coke  manufacturing 
and  producing  corporations,  operating  in  the  same  coal  field, 
entered  into  contract  A,  and  afterwards  each  entered  into 
contract  B.  Do  these  contracts,  under  the  circumstances 
appearing,  effectuate  and  consummate  an  arrangement,  com- 
bination, or  trust  in  unreasonable  restraint  of  trade,  tending  to 
monopoly,  and  against  public  policy,  under  the  common  law? 
If  so,  every  contract  whereby  such  combination  or  trust  was 
effectuated  and  established  is  void  and  unenforceable  between 
the  parties,  and  the  courts  will  refuse  to  assist  them  in  enforcing 
its  performance.  We  approach  the  determination  of  this  ques- 
tion, realizing  the  great  change  that  has  taken  place  in  indus- 
trial conditions  and  in  business  methods  from  those  prevailing 
in  the  early  history  of  the  common  law,  and  that  courts  are 
constantly  called  upon  to  apply  the  principles  of  that  law 
to  such  new  conditions,  in  view  of  many  decisions,  diverse  and 
ofttimes  conflicting,  and  amid  an  evolution  of  the  application 
of  old  principles,  rather  than  the  announcement  of  new  prin- 
ciples, and  to  reach  conclusions  guided  by  what  they  deem 
the  best  considered  cases  and  authorities  on  the  subject. 

"  Monopoly,  in  its  original  sense,  was  an  exclusive  right 
granted  by  the  State  to  one  or  a  few  of  something  which  was 
before  of  common  right.  As  now  used  and  understood,  mo- 
nopoly embraces  any  combination  the  tendency  of  which  is  to 
prevent  competition  in  its  broad  and  general  sense,  and  to 
control  prices  to  the  detriment  of  the  public.  A  trust  has  been 
628 


CHAP.    XXXIV]  FORMULATION    OF    RULES  §   348a 

defined  as  a  contract,  combination,  confederation,  or  under- 
standing, express  or  implied,  between  two  or  more  persons,  to 
conti-ol  the  price  of  a  commodity  or  services  for  the  benefit  of 
the  parties  thereto,  and  to  the  injury  of  the  public,  and  which 
tends  to  create  a  monopoly. 

H:  >):  ^  %  ^  ^  :(: 

"  It  may  be  said  in  this  connection  that  the  determination 
of  the  question  whether  or  not  a  contract  is  in  restraint  of 
trade  is  to  be  arrived  at  in  exactly  the  same  way  and  under 
exactly  the  same  rules,  whether  the  case  falls  under  the  pro- 
visions of  the  act  of  Congress  or  under  the  rules  of  the  common 
law.  The  difference  between  the  act  and  the  common  law 
does  not  lie  in  the  manner  of  ascertaining  whether  or  not  re- 
straint exists,  but  in  the  degree  of  restraint  required  to  render 
the  contract  illegal.  Under  the  act  of  Congress  any  restraint 
is  illegal,  while  under  the  common  law  only  unreasonable  re- 
straint is  illegal. 

"  It  is  deducible  from  the  authorities  that,  if  the  direct  and 
necessary  or  natural  effect  of  a  contract  or  combination  among 
producers  and  sellers  of  a  commodity  is  to  restrain  competition 
and  control  prices,  to  the  injury  of  the  public,  when  all  the 
powers  of  the  contract  or  combination  shall  have  been  exercised, 
the  contract  or  combination  is  in  unreasonable  restraint  of 
trade  and  against  public  policy.   .   .   . 

"  It  is  no  defence  to  the  illegality  of  a  contract  or  combination 
which  is  in  unreasonable  restraint  of  trade  to  show  that  in  the 
particular  case  a  complete  monopoly  has  not  been  formed,  or 
that  no  control  of  prices  has  been  exercised,  or  that  prices  have 
been  lowered  and  not  raised.  If  a  contract  or  combination  in 
unreasonable  restraint  of  trade  could  not  be  attacked  until  a 
complete  monopoly  had  been  formed,  then  the  law  against 
monopolies  would  be  unavailing.  In  this  country  it  would 
be  almost  impossible  to  combine  all  the  interests  in  any  line  of 
industry  into  a  single  and  complete  monopoly.  If  only  com- 
plete monopolies  could  be  reached  under  the  law,  a  combination 
could  then  be  formed  tending  to  monopoly  and  embracing  sub- 
stantially all  the  evil  results  of  a  complete  monopoly,  intention- 
ally leaving  out  of  the  combination  some  one  or  more  of  those 

629 


§   348a  INTERCORPORATE    RELATIONS  [PART   V 

engaged  in  the  industry,  for  the  very  purpose  of  rendering  the 
combination  legal. 

"  A  contract  which  is  charged  to  be  in  restraint  of  trade  is 
not  to  be  tested  by  what  has  been  done  under  it,  but  by  what 
may  be  done  under  it;  not  by  its  performance,  but  by  its  powers 
of  performance  when  fully  exercised.  Many  of  the  later  au- 
thorities draw  a  distinction  between  contracts  which  were  in 
*  restraint  of  trade,'  as  that  phrase  was  understood  in  the  early 
history  of  the  common  law,  and  contracts  which  are  in  're- 
straint of  competition,'  and  which  are  also  in  restraint  of  trade, 
as  understood  in  modern  times.  Both  classes  of  contracts, 
when  unreasonable  and  to  the  injury  of  the  public,  are  alike 
illegal  and  against  public  policy.  The  illegality  of  a  contract  or 
combination  for  the  restraint  of  competition  does  not  lie  in  the 
agreement  not  to  compete,  but  in  its  reflex  injury  to  the  public. 
One  way  to  control  prices  is  to  destroy  or  restrain  competition. 
It  has  been  said  that  many  of  the  cases  decided  in  America, 
holding  contracts  valid  as  not  being  in  unreasonable  restraint 
of  trade,  would  have  been  held  otherwise  if  the  modern  doctrine 
as  to  restraint  of  competition  had  been  properly  applied. 

"  In  passing  upon  a  contract  claimed  to  be  in  restraint  of 
trade,  whether  the  parties  agree  to  refrain  from  trade  or  from 
competition,  the  courts  have  endeavored  to  concede  the  greatest 
liberty  of  contract  consistent  with  the  public  good.  Yet  the 
constitutional  liberty  of  contract  has  never  been  held  to  give 
parties  the  right  to  contract  contrary  to  public  policy  and  to 
have  that  contract  respected  by  the  courts. 

"  Conceding,  for  the  sake  of  argument,  that  the  purpose  stated 
is  lawful,  we  are  not  limited,  in  ascertaining  the  real  purpose 
of  the  contract,  to  a  consideration  of  the  purpose  stated.  If 
all  that  was  necessary,  in  order  to  render  legal  a  contract  other- 
wise illegal  because  in  unreasonable  restraint  of  trade,  were 
to  state  in  the  contract  a  legal  main  purpose,  such  statement 
would  furnish  an  easy  evasion  of  the  law. 

"  We  are  clearly  of  the  opinion  that  it  was  not  necessary, 
in  order  to  arrange  for  the  improvement  of  conditions  in  the 
manufacture,  inspection,  and  shipment  of  coke,  and  in  order 
630 


CHAP.    XXXIV]  FORMULATION    OF    RULES  §   349 

to  regulate  and  improve  the  quality  of  coke,  manufactured  by 
said  corporation  or  in  said  field,  for  the  said  corporations  to  form 
a  trust  or  combination,  the  direct  effect  of  which  is  to  destroy 
all  competition  among  them,  to  pool  their  combined  production 
and  cause  them  to  enter  the  market  for  the  sale  of  the  produc- 
tion of  all  as  a  single  concern,  and  which  tends  to  restrain  com- 
petition between  them  and  others  engaged  in  the  same  business." 
§  349.  Basis  of  Rules  —  (I)  Miscellaneous  Cases.  — 
I.  American  Biscuit  Combination.  In  American  Biscuit, 
etc.  Co.  V.  Klotz  ^  the  Court  said:  "  We  are  not  satisfied  that 
the  complainant's  business  is  legitimate.  While  the  nominal 
purpose  of  the  complainant  corporation,  as  stated  in  its  charter, 
is  the  manufacture  and  sale  of  biscuit  and  confectionery,  its 
real  scope  and  purpose  seem  to  be  to  combine  and  pool  the 
large  competing  bakeries  throughout  the  country  into  practi- 
cally what  is  known  and  called  a  '  trust,'  the  effect  of  which 
is  to  partially,  if  not  wholly,  prevent  competition,  and  enhance 
prices  of  necessary  articles  of  food,  and  secure,  if  not  a  mo- 
nopoly, a  large  control  of  the  supply  and  prices  in  leading 
articles  of  breadstuffs." 

//.    National  Lead  Trust.     In   National  Lead  Co.  v.   Grote 
Paint  Store  Co.j^  the  Court  of  Appeals  in  Missouri  said<  "  That 


'  American  Biscuit,  etc.  Co.  v.  on  the  basis  of  the  stock  assigned  to 
Klotz,  44  Fed.  723  (1891).  The  each  bakery "  (p.  724). 
American  Biscuit  and  Manufacturing  Klotz  &  Co.  sold  their  biscuit  and 
Company  was  formed  for  the  nominal  confectionery  business  to  the  coin- 
purpose  of  manufacturing  and  selling  bination  for  stock  at  an  agreed  val- 
biscuit  and  confectionery.  In  its  uation.  One  Klotz,  of  the  firm  of 
actual  operation  it  had  acquired,  Klotz  &  Co.,  continued  to  manage 
at  the  time  of  this  decision,  control  the  business  as  agent  for  the  company 
of  thirty-five  of  the  leading  bakeries  for  some  time,  when  he  repudiated 
in  twelve  different  States  of  the  West  the  transfer  and  resumed  possession 
and  South.  The  stock  of  the  com-  of  the  property  in  behalf  of  Klotz  & 
pany  was  parcelled  out  in  payment  Co.  The  American  Biscuit  and  Mauu- 
for  the  plants  acquired  "on  an  agreed  facturing  Company  then  brought 
value  of  the  property  and  a  large  suit  for  an  injunction,  accounting 
estimate  of  good-will.  Each  bakery  and  receiver.  The  Court  declined 
when  secured  to  be  carried  on  bj'  its  to  appoint  a  receiver  in  interlocutory 
former  managers,  subject,  however,  proceedings  for  the  reasons  stated  in 
as  to  control  of  funds,  territory,  prices,  the  text. 

and      competition      to      the      central  ^  National  Lead  Co.  v.  Grote  Paint 

management;    all  profits  pooled,  and  Store  Co.,  80  Mo.  App.  200  (1899). 
of  course,  division  thereof  to  be  made  The  question  involved  in  this  case 

631 


§   349  INTERCORPORATE    RELATIONS  [PART    V 

the  predecessor  of  the  plaintiff,  the  '  National  Lead  Trust/ 
was  an  unlawful  combination,  both  in  purpose  and  fact,  is 
sufficiently  established  by  the  nature  of  the  agreement  under 
which  it  was  created  and  the  methods  and  practices  resorted 
to  in  furtherance  of  that  agreement.  The  agreement  can  only 
be  construed  as  a  contract  to  suppress  competition,  fix  the  price 
of  commodities  and  limit  their  production,  and  to  restrain  trade. 
Unless  some  one  or  all  of  these  purposes  had  been  entertained 
by  the  signers  of  the  trust  agreement,  it  would  not  have  con- 
tained provisions  looking  to  the  acquisition  by  the  trustees  of 
the  entire  lead  business  of  the  country,  nor  would  it  have  united, 
in  the  accomplishment  of  that  end,  a  majority  of  the  stockholders 
of  the  largest  corporations  dealing  in  that  product.  .  .  . 
While  the  conclusion  of  the  illegal  purpose  of  the  trust  agree- 
ment is  irresistible  upon  a  consideration  of  its  several  provisions 
and  the  manner  in  which  they  were  carried  out,  it  will  appear 
from  an  examination  of  the  cases  that  this  result  has  been 
declared  by  every  court  called  upon  to  review  that  agreement, 
or  others  substantially  like  it." 

///.  Cases  of  Associations.  Of  an  association  of  manu- 
facturers for  the  purpose  of  regulating  the  price  of  wire  cloth, 
a  New  York  court*  said:  "  The  people  have  a  right  to  the 
necessaries  and  conveniences  of  life  at  a  price  determined  by 
the  relation  of  supply  and  demand,  and  the  law  forbids  any 
agreement  or  combination  whereby  that  price  is  removed 
beyond  the  salutary  influence  of  legitimate  competition." 

Of  an  association  for  the  purpose  of  controlling  the  manu- 
facture and  sale  of  salt,  the  Supreme  Court  of  Ohio  ^  said: 
"  Pubhc  poHcy,  unquestionably,  favors  competition  in  trade, 
to  the  end  that  its  commodities  may  be  afforded  to  the  con- 
sumer as  cheaply  as  possible,  and  is  opposed  to  monopolies, 
which  tend  to  advance  market  prices  to  the  injury  of  the  general 
public." 

was    whether    the    plaintiff    corpora-  >  De  Witt  Wire  Cloth  Co.  v.  New 

tion,   successor  to   the   "Trust,"  was  Jersey    Wire    Cloth     Co.,      16     Daly 

a  party  to  an  illegal  combination  in  (N.  Y.),   529  (1891),   (14  N.Y.   Supp. 

violation    of    the    Missouri    anti -trust  278). 

act.     See  post,  ch.  XLII. :  "Construe-  ^  Central  Ohio  Salt  Co.  v.  Guthrie, 

tion  and   Application   of  State   Anti-  35  Ohio  St.  672  (1880). 

trust  Statutes." 

632 


CHAP.  XXXV]  RULES   OF   PUBLIC    POLICY  §   350 

And  in  the  leading  case  of  Morris  Run  Coal  Co.  v.  Bar- 
clay Coal  Co.,^  already  referred  to  at  length,  the  Court  said 
of  an  association  of  five  coal  companies:  "  This  combination 
has  a  power  in  its  confederated  form  which  no  individual 
action  can  confer.  The  public  interest  must  succumb  to  it, 
for  it  has  left  no  competition  free  to  correct  its  baleful  in- 
fluence." 


CHAPTER    XXXV 

RULES   OF    PUBLIC    POLICY 

§  350.    In  General. 

§  351.  Distinction  between  Rules  of  Public  Policy  applicable  to  Private 
and  Quasi-public  Corporations. 

§  352.    Rules. 

§  353.    Rules  Conservative  Standards. 

§  354.  Analysis  of  Rule  governing  Private  Corporations  —  (A)  Form  of  Com- 
bination Immaterial. 

§  355.    Analysis  of  Rule  —  (B)  Objects  and  Tendencies  of  Combinations. 

§  356.    Analysis  of  Rule  —  (C)  Control  of  the  Market. 

§  357.    Analysis  of  Rule  —  (D)  Extent  of  Territory. 

§  358.    Analysis  of  Rule  —  (E)  Useful  Commodities. 

§  359,    Analysis  of  Rule  applicable  to  Quasi-public  Corporations. 

§  350.  In  General.  • —  In  formulating  the  rules  of  public 
policy  stated  in  this  chapter  from  the  decisions  of  the  courts 
which  form  their  bases,  the  cases  have  been  examined  with  a 
view  of  ascertaining  and  harmonizing,  so  far  as  po.ssible,  their 
underlying  principles.  No  attempt  has  been  made  to  follow 
the  language,  or  to  use  the  particular  expressions  employed 
in  the  opinions.  Thus,  the  phrase  "  control  of  the  market," 
in  the  rule  governing  private  corporations,  appears  in  few  cases, 
but  it  is  made  use  of  because  it  appears  to  embody,  in  a  con- 
cise expression,  the  conception  of  the  courts  in  the  phrases 
"  destruction  of  competition,"  "  establishment  of  a  virtual 
monopoly,"  "  control  of  supply  and  prices,"  "  control  of  all 
trade  in  the  business  "  and  others  of  a  similar  nature.     80  the 

>  Morris  Run  Coal  Co.  v.  Barclay  (8  Am.  Rep.  159).  Sec  ante,  §  328, 
Coal  Co.,  68  Pa.  St.  173,  186  (1871),       note. 

633 


§   353  INTERCORPORATE    RELATIONS  [PART    V 

phrase  "  useful  commodity,"  in  the  rule,  has  seldom  been  em- 
ployed by  the  courts,  but  it  includes  "  the  necessaries  of  life  " 
mentioned  in  many  cases,  and  places  only  a  slight  —  though 
necessary  — Umitation  upon  the  "  commodities  of  commerce  " 
referred  to  in  others. 

§  351.  Distinction  between  Rules  of  Public  Policy  applicable 
to  Private  and  Quasi-public  Corporations.  —  A  rule  of  public 
policy  governing  industrial  combinations  applies  alike  to  private 
corporations  and  individuals.  The  right  of  trading  and  pro- 
ducing companies  to  combine  is  not  affected  by  their  corporate 
character,  except  so  far  as  principles  of  corporation  law  are 
involved.  In  framing  a  rule  for  determining  the  vaUdity  of 
such  combinations,  regard  must  be  had,  on  the  one  hand,  to 
the  right  to  contract,  and,  on  the  other,  to  the  effect  of  the 
exercise  of  the  right  upon  the  public  welfare. 

Quasi-'puhlic  corporations,  in  consideration  of  the  grant  of 
special  privileges  and  franchises,  assume  the  performance  of 
pubhc  duties.  In  formulating  a  rule  of  public  poHcy  respecting 
such  corporations,  it  is  of  primary  importance  to  regard  the 
corporation  as  a  party  to  a  contract  with  the  State,  and  to  con- 
sider the  effect  of  a  combination  upon  its  ability  to  perform,  in 
a  manner  most  beneficial  to  the  pubhc,  the  obUgations  it  has 
assumed. 

The  State  has  an  indirect  interest  in  combinations  of  private 
corporations  to  see.that  nothing  is  done  prejudicial  to  the  public 
welfare.  It  has  a  direct  contractual  interest  to  see  that  the 
grantee  of  public  franchises  properly  fulfils  its  covenants. 

§  352.  Rules.  —  (1)  Any  combination  of  corporations  or 
individuals  the  object  of  which  is,  or  the  necessary  or  natural 
consequence  of  the  operation  of  which  will  be,  the  control  of 
the  market  for  a  useful  commodity,  is  against  public  policy  and 
unlawful. 

(2)  Any  combination  of  quasi-public  corporations  the  object 
of  which  is,  or  the  necessary  or  natural  consequence  of  the  opera- 
tion of  which  will  be,  the  increase  of  charges  beyond  reasonable 
rates,  or  the  curtailment  of  facilities  afforded  the  public,  is 
against  public  policy  and  unlawful. 

§  353.  Rules  Conservative  Standards.  —  The  rules  state 
conservative  standards.  That  relating  to  private  corporations 
634 


CHAP.  XXXV]  RULES    OF   PUBLIC   POLICY  §   354 

furnishes  rather  a  test  of  illegahty  than  of  legaUt)'.  There 
are,  undoubtedly,  combinations  contrary  to  pubUc  policy, 
which  do  not  contravene  its  provisions,  but,  on  the  other  hand, 
it  is  believed  that  every  combination  which  does  come  within 
its  provisions  is  against  public  policy  and  invalid.  Combinations 
for  the  restriction  of  competition,  not  amounting  to  a  control 
of  the  market,  have,  in  many  cases,  been  declared  invalid.  But 
conflicting  decisions  are  equally  numerous,  and  the  line  between 
la^^•ful  and  unlawful  restriction  is  not  readily  drawn.  Unlawiul 
combinations  may  be  in  such  form  that  it  is  impossible  to  say 
that  their  object  is  to  control  the  market  for  a  commodity,  but 
these  are  exceptions  and  will  often  be  found  to  be  within  the 
rule  applicable  to  ^t^si-public  corporations. 

The  latter  rule  was  more  readily  formulated  and  is  more 
easily  applied.  The  nature  of  the  g^msi-public  corporation 
enters  into  the  rule.  Any  combination  which  interferes  with 
the  performance,  in  the  most  advantageous  manner,  of  its 
obligations  to  the  State  is  against  public  policy. 

§  354.  Analysis  of  Rule  governing  Private  Corporations 
—  (A)  Form  of  Combination  Immaterial.  —  The  test  of  the 
legality  of  a  combination  lies  in  its  object  and  not  in  its  form. 
The  view  that  a  combination  by  means  of  a  purchasing  cor- 
poration is  less  vulnerable  than  other  forms  of  combination  is 
well  founded  only  with  reference  to  questions  of  corporation 
law. 

An  association  of  corporations  may  be  ultra  vires  of  its 
members;  a  trust  contravenes  elementar\^  legal  principles; 
a  corporate  combination,  per  contra,  may  be  formed  through 
the  exercise  of  the  ordinar}^'  corporate  powers  of  purchase 
and  sale.  But  the  same  principles  of  public  policy  are  ap- 
plicable. That  which  public  policy  forbids  in  the  case  of 
an  association  or  trust  cannot  lawfully  be  done  by  a  corporate 
combination,  and  vice  versa} 

'  Harding  ?'.  American  Glucose  Co.,  of  trustees,  and  to  receive  trust  cer- 

182  111.  615(1899),  (55  N.  E.  Rep.  577,  tificatcs    therefor   from    the    trustees. 

74    Am.    St.    Rep.  2.'i5,   64  L.  R.    A.  But   the    question  in  the  present  ca.se 

738):   "  A  trust  ha.s  usually  api)oared  is   whether  a   trust   is  created   where 

in  the  form  of  an  agreement  between  a  majority  of  stockhoKlers  consolidate 

stockholders    in     many     corporations  their  interests  by  conveying  all   their 

to  place  all  their  stock  in  the  hands  property  to   a  corporation,  organized 

635 


§   354  INTERCORPORATE    RELATIONS  [PART   V 

A  distinction  has  been  drawn  between  contracts  of  inde- 
pendent manufacturers,  for  the  purpose  of  restricting  com- 
petition, and  the  purchase  by  one  corporation,  under  the 
power  contained  in  its  charter,  of  the  properties  and  busi- 
ness of  competing  corporations,  which  may  have  the  effect 
of  suppressing  competition.  The  suppression  of  competition, 
in  the  former  case,  is  said  to  be  opposed  to  pubhc  poUcy  ; 
while,  in  the  latter  case,  it  is  declared  to  be  only  the  necessary 
result  of  the  exercise  of  an  express  statutory  power.  Thus, 
in  Trenton  Potteries  Co.  v.  Olyphant,^  the  Supreme  Court 
of  New  Jersey  said:  "  Contracts  by  independent  and  uncon- 
nected manufacturers  or  traders  looking  to  the  control  of  the 
prices  of  their  commodities,  either  by  limitation  of  production, 
or  by  restriction  on  distribution,  or  by  express  agreement  to 
maintain  specified  prices,  are,  without  doubt,  opposed  to 
public  policy.  .  .  .  Corporations,  however,  may  lawfully 
do  any  acts  within  the  corporate  powers  conferred  on  them 
by  legislative  grant.  .  .  .  Under  such  powers,  it  is  obvious 
that  a  corporation  may  purchase  the  plant  and  business  of 
competing  individuals  and  concerns.  The  legislature  might 
have  withheld  such  powers,  or  imposed  hmitations  upon  their 
use.  In  the  absence  of  prohibition  or  limitation  on  their 
powers  in  this  respect,  it  is  impossible  for  the  courts  to  pro- 
nounce acts,  done  under  legislative  grants,  to  be  inimical  to 
public  policy.  The  grant  of  the  legislature  authorizing  and  per- 
mitting such  acts  must  fix  for  the  courts  the  character  and 
limit  of  public  policy  in  that  regard.  It  follows  that  a  corpora- 
tion, empowered  to  carry  on  a  particular  business,  may  la\\iully 
purchase  the  plant  and  business  of  competitors,  although  such 
purchases  may  diminish,  or  for  a  time  at  least,  destroy,  competi- 
tion. Contracts  for  such  purchases  cannot  be  refused  enforce- 
ment." ^ 

for  the  purpose  of  taking  their  prop-  *  Trenton  Potteries  Co.  v.  Olyphant, 

erty.       Any      combination     of    com-  58  X.  J.  Eq.  507  (1899),  (43  Atl.  Rep. 

peting    corporations    for  the  purpose  728,  7B  Am.  St.  Rep.  612,  46  L.  R.  A. 

of  controlling  prices,  or  limiting  pro-  255). 

duction,   or  suppressing  competition,  ^  gg  in  State  v.  Continental  Tobacco, 

is  contrary  to  public   policy,   and    is  177    Mo.    1     (1903),  (75   S.  W.    Rep. 

void."     See  also  Yazoo,   etc.   R.   Co.  737),  it  was  held  that  a  purchase  by 

V.   Searles,  85  Miss.   520    (1905),   (37  one  corporation  of  the  plants  of  other 

So.    Rep.    939,    68 '  L.    R.    A.    723).  corporations   of  a   similar  nature  to 

636 


CHAP.  XXXV] 


RULES    OF    PUBLIC    POLICY 


§354 


These  conclusions  may  be  well  founded  in  their  application 
to  an  actual  sale,  as  distinguished  from  a  combination  in  the 
form  of  a  sale.^  A  corporation,  having  general  power  to  dispose 
of  its  property,  may,  like  an  individual,  sell,  in  good  faith,  to 
a  competing  corporation  without  violating  the  rule  of  public 
policy.^     There  is  no  combination  in  such  a  purchase.     But  if 


its  own,  if  made  in  good  faith  in  the 
legitimate  pursuit  of  its  business,  was 
in  tlie  exercise  .of  a  legal  right.  The 
Court  said,  in  effect,  that  the  cor- 
poration had  the  same  power  as  an 
individual    to   make   such    purchases. 

And  in  Dittman  v.  Distilling  Co.,  64 
N.  J.  Eq.  537  (1903),  (54  Atl.  Rep.  576), 
where  it  was  charged  that  a  corpora- 
tion organized  for  the  express  purpose 
of  acquiring  and  holding  stocks  in 
other  corporations  was  unlawful  as 
constituting  a  monopoly,  it  was  held 
that  as  such  monopoly,  if  it  existed, 
arose  from  the  exercise  of  the  power 
conferred  upon  the  corporation  by 
its  charter  to  purchase  stocks,  the 
exercise  of  such  power  would  not  be 
enjoined  in  the  suit  of  a  stockholder 
—  that  the  cjuestion  could  only  be 
determined  in  quo  warranto  proceed- 
ings instituted  by  the  Attorney- 
general  to  oust  the  corporation  from 
its  franchises. 

See  also  Mctcalf  v.  American  School 
Furniture  Co.,    122   Fed.    115   (1903). 

'  In  Shawnee  Compress  Co.  v.  An- 
derson, 28  Sup.  Ct.  Rep.  572  (1908), 
the  Supreme  Court  of  the  United 
States  said :  "This  case  presents 
something  more  than  a  lease  of  prop- 
erty by  the  Shawnee  Company, 
induced  or  made  necessary  by  finan- 
cial embarrassment.  It  presents 
something  more  than  the  acquisition 
by  the  Gulf  Company  of  another 
compress  —  of  a  incre  addition  to 
its  business.  It  presents  acts  in  said 
monopoly." 

Davis  V.  A.  Booth  &  Co.,  131  Fed. 
37  (1904)  :  "There  is  a  clear  dis- 
tinction, which  seems  to  be  lost  sight 
of  in  tlie  argument  here,  between  the 


aggregation  of  properties  by  purchase 
when  the  seller  no  longer  retains  an 
interest  in  the  property,  and  a  combi- 
nation of  owners  and  properties  under 
one  management  where  such  owners' 
interest  is  continued  in  the  combina- 
tion." 

See  also  cases  cited  in  note  to  § 
360,  pout:  "Associations  of  Manu- 
facturers    and     Producers. " 

National  Lead  Co.  v.  Grote  Paint 
Store  Co.,  80  Mo.  App.  267  (1899): 
"The  record  in  the  case  under  review 
shows  that  the  beneficial  owners  of  the 
property  were  the  subscribers  to  the 
National  Lead  Trust  and  holders  of  its 
certificates,  and  that  these  same  per- 
sons remained  the  beneficial  owners  of 
the  same  property  after  it  was  con- 
verted into  the  capital  of  the  plaintiff 
corporation,  the  only  difference  being 
that  each  holder  of  a  trust  certificate 
received,  in  lieu  thereof,  shares  of 
stock  in  the  new  corporation  at  an 
agreed  rate  of  exchange,  and  the 
further  fact  that  the  legal  title  to 
the  property  was  put  into  a  corporate 
entity  of  a  body  of  nine  trustees 
appointed  under  the  trust  agreement. 
The  sale  itself  was  titular  rather  than 
real." 

^  In  Carter-Crume  Co.  v.  Peurrung, 
86  Fed.  439  (1898),  the  plaintiff 
entered  into  contracts  with  .several 
manufacturers  of  butter-dishes  for 
the  purchase  of  their  products.  Its 
purpose  was  to  control  the  market 
for  these  articles,  but  the  manufac- 
turers had  no  knowledge  of,  and  did 
not  participate  in,  such  unlawful 
purpose.  In  sustaining  one  of  these 
contracts  the  Court  saiil  :  "The 
transaction    with    Peurrung    Brothers 

637 


§354 


INTERCORPORATE    RELATIONS 


[part  V 


the  sale  is  for  the  purpose  of  forming  a  corporate  combination, 
in  which  the  vendor  corporation  or  its  stockholders  participate, 
the  same  rule  of  public  policy  is  applicable  as  in  the  case  of  any 
combination  of  corporations.  As  already  stated,  the  object  of 
a  combination,  or  the  necessary  or  natural  consequence  of 
its  operation,  determines  its  legality.  The  form  —  trust,  cor- 
porate combination  or  association  —  will  not  serve  as  a  cloak 
for  conspiracy  nor  prevent  the  application  of  the  rule  of  public 
policy.^ 

Corporate  power  to  purchase  no  more  authorizes  the  exer- 
cise of  such   power  for  purposes   opposed   to  public   policy, 


&  Co.  was,  on  its  face,  legitimate, 
and  it  cannot  be  impeached  simply 
by  evidence  that  the  Carter-Crume 
Company  understood  and  intended 
it  as  one  step  in  a  general  illegal 
scheme  for  monopolizing  the  trade  in 
wooden  butter-dishes  and  controlling 
prices. " 

*  In  considering  this  subject  these 
propositions  must  be  clearly  borne  in 
mind  : 

(1)  A  corporation  authorized  to 
purchase  the  properties  or  shares  of 
other  corporations  has  no  greater 
power  than  aa  individual  —  that 
which  is  unlawful  on  the  part  of  the 
latter  is  unlawful  on  the  part  of  the 
former. 

(2)  Whether  a  transaction  is  a 
sale  or  a  combination  depends  pri- 
marily upon  whether  the  vendor  cor- 
poration or  its  stockholders  retain  an 
interest  in  the  united  properties. 

The  fallacy  of  the  argument  in 
Trenton  Potteries  Co.  v.  Olyphant, 
supra,  lies  in  the  assumption  that 
general  corporate  power  to  purchase 
is  equivalent  to  express  power  to 
form  a  corporate  combination.  Power 
conferred  upon  a  corporation  to 
purchase  the  properties  or  shares  of 
other  corporations  gives  it  the  same 
power  —  and  no  more  —  possessed 
by  an  indi\ndual.  An  individual 
manufacturer  might  purchase  the 
plant    of    a    competing    corporation. 

638 


If  there  were  no  element  of  combina- 
tion present  the  purchase  would 
be  valid.  So  a  corporation,  with 
power  to  purchase,  might  make  a 
similar  acquisition.  But  the  individ- 
ual would  have  no  right  to  enter  into 
a  combination  with  the  competing 
corporation  in  the  form  of  a  sale. 
Nor  would  its  charter  powers  authorize 
the  corporation  to  do  so.  The  grant 
by  the  legislature  of  the  power  to 
purchase  fixes  the  public  policy  of 
the  State  with  respect  to  a  purchase. 
Express  statutory  authority  to  form 
a  combination  would  be  necessary  to 
fix  the  policy  regarding  a  corporate 
comhination. 

As  we  have  seen,  the  statutes  of 
many  States  authorize  the  consolida- 
tion of  corporations.  These  statutes 
determine  the  policy  of  the  States 
where  they  are  enacted  regarding 
the  particular  union  of  stocks  and 
properties  therein  authorized.  But 
no  State  has  enacted  statutes  au- 
thorizing the  combination  of  corpo- 
rations in  looser  form.  Until  such 
statutes  shall  have  been  adopted  the 
rules  of  public  policy  regarding  com- 
binations must  be  considered  as 
apphing  in  the  same  degree  to  cor- 
porations as  to  indivTduals. 

Whether  a  transaction  between 
corporations  or  between  indi^^duals 
amounts  to  a  sale  or  to  a  combination 
depends    upon    whether    the    vendor 


CHAP.  XXXV] 


RULES   OF   PUBLIC    POLICY 


§  355 


than  a  general  power  to  make  contracts  authorizes  the 
execution  of  agreements  conflicting  with  the  public  inter- 
ests.^ 

§  355.  Analysis  of  Rule  —  (B)  Objects  and  Tendencies  of 
Combinations.  —  Where  the  objects  and  purposes  of  a  com- 
bination of  corporations,  as  stated  in  the  instruments  of  its 
formation,  are,  upon  their  face,  contrary  to  pul^lic  polic}-,  the 
combination  is,  manifestly,  void.  But  an  affirmation  of  pur- 
poses inimical  to  public  policy  is  hardl}^  to  be  expected  from 
the  organizers  of  a  combination,  and  the  law  does  not  place  a 
premium  upon  evasion  by  making  the  test  of  validity  the  ob- 
ject stated.^  On  the  contrary,  the  court,  in  determining 
the  validity  of  a  combination,  upon  grounds  of  public 
policy,  should  place  itself  in  the  position  of  its  members 
at  the  time  of  its  formation,  and,  from  that  point  of  view. 


actually  parts  with  all  interest  in  the 
property  sold  or  merely  changes  the 
form  of  the  investment.  A  bona  fide 
sale  of  a  plant  for  cash  or  its  equiva- 
lent possesses  none  of  the  elements 
of  combination.  On  the  other  hand, 
an  exchange  of  one  plant  for  an  in- 
terest in  united  plants  possesses  all 
the  elements  of  combination.  How 
this  exchange  is  effected  is  immaterial. 
An  ordinary  method  is  to  pay  the 
purchase  price  in  the  shares  of  the 
corporate  combination.  Sometimes 
these  shares  are  deliveretl  to  the 
vendor  corporation  ;  sometimes  they 
are  distributed  directly  among  its 
stockholders.  It  is  not  material 
which  course  is  taken.  In  such  a 
transaction  the  stockholders  —  the 
ultimate  owners  —  stand  for  their 
corporation. 

'  As  to  the  power  of  a  corporation  to 
purchase  competing  plants  for  the  pur- 
pose of  suppressing  competition,  see 
Distilling,  etc.  Co.  v.  People,  156  111. 
448,  491  (1895),  (41  N.  E.  Rep.  188, 
47  Am.  St.  Rep.  200),  where  the 
Court  said  :  "  But  it  is  urged  that  the 
defendant,  by  its  charter,  is  authorized 
to  purchase  and  own  distillery  prop- 
erty,   and     that     there    is    no    limit 


placed  upon  the  amount  of  property 
which  it  may  thus  acquire.  By  its  cer- 
tificate of  organization,  it  is  author- 
ized to  engage  in  a  general  distillery 
busine.ss  in  Illinois  and  elsewhere, 
and  to  own  the  property  necessary 
for  that  purpose.  .  .  .  The  de- 
fendant is  authorized  to  own  such 
property  as  is  necessary  for  carrying 
on  its  distillery  business,  and  no  more. 
Its  power  to  acquire  and  holil  property 
is  limited  to  that  purpose ;  and  it  has 
no  power,  by  its  charter,  to  enter 
upon  a  scheme  of  getting  into  its  hands 
and  under  its  control  all,  or  substan- 
tially all,  the  distillery  plants  and  the 
distillery  business  of  the  country, 
for  the  purpo.se  of  controlling  pro- 
duction and  prices,  of  crushing  out 
competition,  anil  of  establishing  a 
virtual  monopoly  in  that  business." 

^  Pocahontas  Coke  Co.  v.  Powhatan 
Coal,  etc.  Co.,  60  W.  Va.  508  (1906), 
(56  S.  E.  Rep.  264,  116  Am.  St. 
Rep.  901,  10  L.  R.  A.  (N.  S.)  268): 
"Conceding  for  the  sake  of  the  argu- 
ment that  the  purpose  stated  is  law- 
ful, we  are  not  limited  in  a.scertnining 
the  real  purpose  of  the  contract,  to  a 
consitleration  of  the  purpose  stated." 
(Citing  this  section.) 

639 


§355 


INTERCORPORATE    RELATIONS 


[part  V 


determine  the  real,  and  not  the  ostensible,  purpose  of  the 
combination.* 

As  said  by  Judge  Daniels  in  the  Sugar  Trust  Case:^  "  The 
law  does  not  require  that  instruments  of  this  description, 
before  they  may  be  declared  to  be  illegal,  shall,  in  plain  language 
affirm  the  intention  to  be  to  prevent  competition  and  control 
the  market,  or  advance  the  prices  of  necessary  commodities. 
.  .  .  But  the  courts,  as  in  other  cases,  are  permitted  to  place 
themselves  in  the  position  of  the  parties  entering  into  the 
agreement  or  arrangement  to  discover  the  objects  or  designs 
by  which  they  may  have  been  actuated." 

Moreover,  in  determining  the  validity  of  a  combination  upon 
principles  of  public  policy,  its  actual  effect  when  put  into 
operation  is  immaterial.  The  question  is  not  what  has  been 
done  under  the  combination  but  what  might  have  been  done, 
or  might  be  done,  under  it.^     The  inquiry  is  whether  a  natural 


'  Detroit  Salt  Co.  v.  National  Salt 
Co.,  134  Mich.  120  (1903),  (96  N.  W. 
Rep.  1)  :  "It  is  obvious  that,  so  long 
as  combinations  in  restraint  of  trade 
are  profitable,  there  will  be  found 
those  whose  desire  for  gain  will  over- 
come their  reverence  for  law,  and  even 
lead  them  to  dare  the  dangers  of 
criminal  prosecution ;  and  it  is  not 
unreasonable  to  suppose  that  in  their 
contracts  they  will  endeavor  to  give 
the  appearance  of  lawful  transactions. 
In  making  tliis  contract  before  us  the 
parties  had  difficulty  in  avoiding 
illegal  provisions,  and,  if  defendant 
is  right  about  the  case,  the  safeguards 
of  the  contract  are  to  be  found  in  the 
provisions  contemplating  its  breach. 
In  a  question  of  this  kind  it  is  proper 
to  show  the  circumstances  attending 
the  making  of  the  contract,  the  object 
and  purpose  in  \iew,  and  the  construc- 
tion placed  upon  it  by  the  parties,  as 
evidenced  by  their  dealings  under 
it." 

Wilson  V.  Morse,  117  Iowa,  581, 
584  (1902),  (91  N.  W.  Rep.  823)  : 
"The  contract  being  legal  on  its  face, 
the  burden  was  on  defendants  to 
show  its  illegality  by  satisfactory  and 

640 


convdncing  evidence.  If  made  to 
prevent  competition,  or  to  fix  the 
price  to  be  paid  for  grain  in  the  ter- 
ritory where  it  was  to  be  operative, 
it  was,  of  course,  contrary  to  public 
policy  and  void.  .  .  .  Whether  the 
parties  had  in  mind  either  of  these 
purposes  is  a  question  of  fact  to  be 
determined  from  the  evidence." 

See  also  Southern  Electric  Se- 
curities Co.  V.  State  (Miss.  1907), 
44  So.  Rep.  785 ;  Dunbar  v.  American 
Telephone,  etc.  Co.,  224  111.  9  (1906), 
(79  N.  E.  Rep.  423,  115  Am.  St. 
Rep.  132)  ;  Pocahontas  Coke  Co.  v. 
Powhatan  Coal,  etc.  Co.,  60  W.  Va. 
508  (1906),  (56  S.  E.  Rep.  264,  116 
Am.  St.  Rep.  901,  10  L.  R.  A.  (N.S.) 
268). 

2  People  V.  North  River  Sugar  Rf 'g 
Co.,  54  Hun  (N.  Y.),  376  (1889), 
(3  N.  Y.  Supp.  401). 

3  People  V.  Sheldon,  139  N.  Y.  251 
(1893),  (34  N.  E.  Rep.  785,  36  Am. 
St.  Rep.  690,  23  L.  R.  A,  221) :  "The 
question  here  does  not  turn  on  the 
point  whether  the  agreement  between 
the  retail  dealers  in  coal  did,  as  a 
matter  of  fact,  result  in  injury  to  the 
public,  or  to  the  community  in  Lock- 


CHAP.  XXXV] 


RULES   OF   PUBLIC   POLICY 


§  355 


result  of  the  operation  of  the  combination  would  be  prejudicial 
to  the  public  interests.* 

The  courts  have  generally  held  that  a  combination  is  void 
as  being  against  public  policy,  the  tendency  of  which  is  injurious 
to  the  public.^     Testing  the  vaUdity  of  acts  or  contracts  by 

port.     The  question  is,  Was  the  agree-  '  Texas  Standard  Oil  Co.  i'.  Adoue, 

ment  one,  in  view  of  what  might  liave        83  Tex.  650  (1892),  (19  S.W.  Rep.  274, 

29  Am.  St.  Rep.  690,  15  L.  R.  A. 
598) :  "The  agreement  may  be  illegal  if 
the  natural  or  necessary  consequences 
of  its  operation  are  to  prevent  com- 
petition and  create  fictitious  prices 
independent  of  the  law  of  demand 
antl  supply  an<i  to  such  an  extent  as 
to  injuriou.sly  affect  the  interests  of 
the  public,  or  the  interests  of  any 
particular  class  of  citizens  who  may  be 
especially  interested,  either  as  jiro- 
ducers  or  consumers,  in  the  articles 
or  staples  which  are  the  subject  of 
the  restrictions  imposed  by  the  con- 
tract." 

2  Anheuser-Bu.sch  Brew.  Ass'n  v. 
Houck  (Tex.  1894),  27  S.  W.  Rep. 
696  :  "The  effect  on  the  public  of  an 
agreement  which  is  again.st  public 
policj'  is  not  essential ;  the  tendency 
is  enough  to  bring  it  within  the  con- 
demnation of  the  courts." 

Nester  v.  Continental  Brewing  Co., 
161  Pa.  St.  481  (1894),  (29  Atl.  Rop. 
102,  41  Am.  St.  Rep.  894)  :  "  Courts 
will  not  stop  to  inquire  as  to  the  de- 
gree of  injury  inflicted.  It  is  enough 
to  know  that  the  natural  tendency 
of  such  contracts  is  injurious." 

Central  Ohio  Salt  Co.  v.  Guthrie,  35 
Ohio  St.  672  (1880)  :  "The  clear  ten- 
dency of  such  an  agreement  is  to  estab- 
lish a  monopoly  and  destroy  com- 
petition in  trade,  and,  for  that  reason, 
on  grountls  of  public  policy,  courts 
will  not  aid  in  its  enforcement.  It  is 
no  answer  to  say  that  competition  in 
the  salt  trade  was  not,  in  fact,  de- 
stroyed, or  that  the  price  of  the  com- 
modity was  not  imreasonably  ad- 
vanced. Courts  will  not  stop  to 
inquire  as  to  the  ilegree  of  injury 
inHicted  upon  the  public  ;  it  is  enough 


been  done  under  it  and  the  fact  that 
it  was  an  agreement,  the  effect  of 
which  was  to  prevent  competition 
among  the  coal  dealers,  one  upon 
which  the  law  fastens  the  brand  of 
condemnation  ? ' ' 

Judd  V.  Harrington,  139  N.  Y.  105 
(1893),  (34  N.  E.  Rep.  790)  :  "Courts 
will  not  aid  parties  seeking  to  enforce 
such  an  agreement,  irrespective  of  the 
question  whether,  in  fact,  it  produced 
the  evil  results  to  which  it  tended,  or 
was  harmless.  .  .  .  The  illegal  char- 
acter of  the  agreement  appeared 
upon  its  face,  and  was  a  necessary 
legal  conclusion  from  its  provisions." 

Harding  v.  American  Glucose  Co., 
182  lU.  615  (1899),  (55  N.  E.  Rep. 
577,  74  Am.  St.  Rep.  189,  64  L.  R. 
A.  738)  :  "The  material  con.sideration 
in  the  case  of  such  combinations  is, 
as  a  general  thing,  not  that  prices 
are  raised,  but  that  it  rests  in  the  power 
and  discretion  of  the  trust  or  com- 
bination, taking  all  the  plants  of  the 
several  corporations,  to  raise  prices 
at  any  time,  if  it  sees  fit  to  do  so." 
See  also  Pocahontas  Coke  Co.  v. 
Powhatan  Coal,  etc.  Co.,  60  W.  Va. 
508  (1906),  (56  S.  E.  Rep.  273, 
116  Am.  St.  Rep.  901,  10  L.  R.  A. 
(N.  S.)  268). 

But  in  MacGinnis  i<.  Boston,  etc. 
Mining  Co.,  29  Mont.  428  (1904), 
(75  Pac.  Rep.  89),  the  Supreme  Court 
of  Montana  refused  to  follow  the  rule 
stated  in  Harding  v.  American  Glucose 
Co.,  supra,  that  mere  possession  of 
power  to  repress  competition  is 
sufficient  to  constitute  an  unlawful 
combination,  and  held  that  competi- 
tion mu.st  be  actuallj'  repressed  before 
there  is  any  illcgalit}'. 


041 


§  356 


INTERCORPORATE   RELATIONS 


[part  V 


their  tendencies,  real  or  supposed,  is  making  a  standard  of 
that  which  is  essentially  uncertain  and  indefinite.  Two  courts 
may  honestly  disagree  as  to  the  tendency  of  a  particular  agree- 
ment, and  the  phrase  "  injurious  tendency  "  is  too  often  a 
generality  taking  the  place  of  exact  reasoning.  The  distinction 
between  the  natural  consequences  of  the  operation  of  a  combina- 
tion and  its  tendencies  may  be  slight,  but  it  is  essential. 

§  356.  Analysis  of  Rule  —  (C)  Control  of  the  Market.  —  The 
phrase  "  control  of  the  market,"  ^  as  employed  in  the  rule  of 
public  policy,  means  the  control  of  the  disposition  of  a  given 
product  in  a  given  market.  It  involves,  primarily,  the  sup- 
pression of  competition,  and,  as  incidental  thereto: 

(1)  The  control  of  production. 

(2)  The  regulation  of  prices. 

It  is  not  essential,  however,  to  the  control  of  the  market, 
within  the  rule,  that  it  should  be  complete.     Practical  con- 


to  know  that  the  inevitable  tendency 
of  such  contracts  is  injurious  to  the 
public." 

Walter  A.  Wood  Mowing,  etc. 
Mach.  Co.  V.  Greenwood  Hardware 
Co.,  75  S.  C.  383  (1906),  (55  S.  E. 
Rep.  973) :  "  The  main  general  test 
should  be  whether  the  contract,  trust 
or  combination  is  monopolistic  in 
purpose  or  natural  tendencJ^" 

Brown  v.  Jacobs'  Pharmacy  Co., 
115  Ga.  429,  433  (1902),  (41  S.  E.  Rep. 
553,  90  Am.  St.  Rep.  126,  57  L.  R.  A. 
547)  :  "It  is  the  nature  or  character 
and  tendency  of  the  agreement  which 
renders  it  objectionable  whether  in 
fact  the  parties  to  it  succeed  in  re- 
straining trade  generally,  or  stifling 
competition,  or  not." 

Richardson  v.  Buhl,  77  Mich.  660 
(1889),  (43  N.  W.  Rep.  1102,  6  L.  R. 
A.  457),  (Champlin,  .1.,  concurring 
opinion)  :  "Such  a  vast  combination 
as  has  been  entered  into  under  the 
above  name  is  a  menace  to  the  public. 
Its  object  and  direct  tendency  is  to 
prevent  free  and  fair  competition, 
and  control  the  prices  throughout  the 
national  domain." 

See  also  Addyston  Pipe,  etc.  Co.  v. 

642 


United  States,  175  U.  S.  211  (1899), 
(20  Sup.  Ct.  Rep.  96) ;  United  States 
V.  Trans-Missouri  Freight  Ass'n,  166 
U.  S.  290  (1897),  (17  Sup.  Ct.  Rep. 
540) ;  State  v.  Portland  Natural  Gas, 
etc.  Co.,  153  Ind.  483  (1899),  (53  N.  E. 
Rep.  1089,  74  Am.  St.  Rep.  314, 
53  L.  R.  A.  415) ;  Stanton  v.  Allen, 
5  Denio  (N.  Y.),  434  (1848),  (49  Am. 
Dec.  282) ;  State  v.  Nebraska  Dis- 
tilling Co.,  29  Neb.  700  (1890),  (46  N. 
W.  Rep.  155) ;  DistiUing  and  Cattle 
Feeding  Co.  v.  People,  156  111.  448 
(1895),  (41  N.  E.  Rep.  188,  47  Am. 
St.  Rep.  200) ;  Sanford  v.  People,  121 
111.  App.  619  (1905);  Slaughter  v. 
Thacker  Coal,  etc.  Co.,  55  W.  Va. 
642  (1904),  (47  S.  E.  Rep.  247,  104 
Am.  St.  Rep.  1013,  65  L.  R.  A. 
342). 

'  The  term  "monopoly"  has,  like- 
wise, been  defined  as  "the  control  of 
a  given  product  in  a  given  market." 
While,  for  reasons  already  indicated, 
the  use  of  the  term  "monopoly"  is 
undesirable  in  stating  a  rule  of  public 
policy,  the  decisions  of  the  courts 
which  use  the  term  in  the  sense  stated 
may  properly  be  referred  to  as  illus- 
trating the  rule. 


CHAP.  XXXV] 


RULES   OF   PUBLIC    POLICY 


§  356 


trol  is  sufficient;    and  this  does  not  imply  an  absolute  elimi- 
nation of  competition.^ 

On  the  other  hand,  a  mere  restriction  of  competition  does 
not  give  control  of  the  market  and  is  not  unlawful.-     The 


>  United  States  v.  E.  C.  Knight  Co., 
156  U.  S.  16  (1894),  (15  Sup.  Ct. 
Rep.  249):  "Again,  all  the  authori- 
ties agree  that  in  order  to  vitiate  a 
contract  or  combination  it  is  not 
essential  that  its  result  shall  be  a 
complete  monopoly ;  it  is  sufficient 
if  it  really  tends  to  that  end  and  to 
deprive  the  public  of  the  advantages 
which  flow  from  free  competition." 
Klingel's  Pharmacy  v.  Sharp,  104 
Md.  218,  230  (1906),  (64  Atl.  Rep. 
1029,  118  Am.  St.  Rep.  399,  7  L.  R. 
A.  (N.  S.)  976):  "When  the  direct 
and  in\aolate  effects  of  a  contract  or 
combination  among  particular  dealers 
in  a  commodity  is  to  destroy  competi- 
tion between  them  and  others,  so  that 
the  parties  to  the  contract  or  com- 
bination may  obtain  increa-sed  prices 
for  themselves,  such  contract  or  com- 
bination amounts  to  a  restraint  in 
trade  of  the  commodity,  even  though 
contracts  to  buy  such  commodity 
at  the  enhanced  price  are  constantly 
being  made.  Total  suppression  of 
trade  in  the  commodity  is  not  neces- 
sary in  order  to  make  the  contract 
one  in  restraint  of  trade." 

De  Witt  Wire  Cloth  Co.  v.  New 
Jersey  Wire  Cloth  Co.,  16  Daly  (N. 
Y.),  529  (1891),  (14  N.  Y.  Supp.  277)  : 
"  Neither  need  the  agreement  nor  com- 
bination, in  order  to  expose  it  to  the 
denunciation  of  the  law,  constitute  a 
complete  monopoly  or  effect  a  total 
suppre.s.sion  of  competition ;  but  the 
langviage  of  courts  and  of  writers  is 
that,  if  the  agreement  tends  to  a  mo- 
nopoly or  to  reduce  or  lessen  competi- 
tion, it  is  contrary  to  public  policy  and 
imlawful,  becau.se  operating  pro  tanto 
an  artificial  enhancement  of  price." 

In  the  Sugar  Trust  Ca.se  (People  v. 
North  River  Sugar  Ref 'g  Co.,  54  Hun 
(N.  Y.),  354,  note  (1889)),  Judge  Bar- 


rett said  :  "This  rule  is  applicable  to 
every  monopoly,  whether  the  supply 
is  restricted  by  nature  or  susceptible 
of  indefinite  production.  The  dith- 
culty  of  effecting  the  unlawful  pur- 
pose may  be  greater  in  one  case  than 
in  the  other,  but  it  is  never  impossible. 
Nor  need  it  be  permanent  or  complete. 
It  is  enough  that  it  may  be  even  tem- 
porarily and  partially  successful." 

See  also  Texas  Standard  Oil  Co. 
V.  Adoue,  83  Tex.  650  (1892),  (19 
S.  W.  Rep.  274,  29  Am.  St.  Rep.  690, 
15  L.  R.  A.  598).  Also  Addyston 
Pipe,  etc.  Co.  v.  United  States,  175 
U.  S.  211  (1899),  (20  Sup.  Ct.  Rep. 
108);  Pocahontas  Coke  Co.  r.  Pow- 
hatan Coal,  etc.  Co.,  60  W.  Va. 
508  (1907),  (56  S.  E.  Rep.  264, 
116  Am.  St.  Rep.  901,  10  L.  R.  A. 
(N.  S.)  268);  Dunbar  v.  American 
Telephone,  etc.  Co.,  224  Rl.  9  (1906), 
(79  N.  E.  Rep.  423,  115  Am.  St. 
Rep.  132) ;  Chicago,  etc.  Coal  Co.  v. 
People,  214  111.  421  (1905),  (73  N.  E. 
Rep.  770),  affirming  114  111.  App.  75 
(1904) ;  State  v.  Armour  Packing  Co., 
173  Mo.  356  (1903),  (73  S.  W.  Rep. 
645,  61  L.  R.  A.  464);  Brown  v. 
Jacobs'  Pharmacy  Co.,  115  Ga.  429 
(1902),  (41  S.  E.  Rep.  553,  90  .\m. 
St.  Rep.  126,  57  L.  R.  A.  547). 

-  Public  policy  regarding  compe- 
tition, as  manifested  by  divergent 
judicial  decisions,  is  indicated  by  the 
following  extracts  from  opinions  of 
courts  in  different  States  and  in 
England  : 

Califirrnia.  Ilorriman  r.  Menzies, 
115  Cal.  22  (1890),  (44  Pac.  Rep. 
660,  50  \n\.  St.  Rep.  82,  .35  L.  R.  A. 
318)  :  "Combinations  between  indi- 
^^duals  or  firms  for  the  regulation  of 
prices,  and  of  comiu-tition  in  business, 
are  not  monopolies,  and  are  not  un- 
lawful as  in  restraint  of  traile,  so  long 

G43 


356 


INTERCORPORATE    RELATIONS 


[part  V 


commercial  maxim,  "  competition  is  the  life  of  trade,"  while 
not  adopted  as  a  maxim  of  jurisprudence,  finds  a  place  in 


as  they  are  reasonable,  and  do  not 
include  all  of  a  commodity  or  trade, 
or  create  such  restrictions  as  to  ma- 
terially affect  the  freedom  of  com- 
merce. " 

Compare  Santa  Clara  Valley  Mill, 
etc.  Co.  V.  Hayes,  76  Cal.  392  (1888), 
(18  Pac.  Rep.  391,  9  Am.  St.  Rep. 
211)  :  "When  agreements  are  resorted 
to  for  the  purpose  of  taking  trade  out 
of  the  realm  of  competition,  and 
thereby  enhancing  or  depressing 
prices  of  commodities,  the  courts 
cannot  be  successfully  invoked,  and 
their  execution  will  be  left  to  the 
volition  of  the  parties  thereto." 

Illinois.  Harding  v.  American 
Glucose  Co.,  182  111.  615  (1899),  (55 
N.  E.  Rep.  577,  74  Am.  St.  Rep.  235, 
64  L.  R.  A.  738)  :  "Any  combina- 
tion of  competing  corporations  for  the 
purpose  of  controlling  prices,  or  limit- 
ing production,  or  suppressing  com- 
petition, is  contrary  to  public  policy 
and  is  void.  .  .  .  The  public  policy 
of  the  State  of  Illinois  has  always 
been  against  trusts  and  combinations 
organized  for  the  purpose  of  suppress- 
ing competition  and  creating  mo- 
nopoly." 

See  also  ante,  §  344  :  "  Basis  of  Rules 
—  (C)  Whiskey  Trust  Cases  "  ;  ante, 
§  345  :  "Basis  of  Rules  —  (D)  Case  of 
the  Preservers  Trust  "  ;  ante,  §  346  : 
"  Basis  of  Rules  —  {E)  Case  of  the 
Chicago  Gas  Trust." 

Indiajia.  State  v.  Portland 
National  Gas,  etc.  Co.,  153  Ind.  483 
(1899),  (53  N.  E.  Rep.  1089,  74  Am. 
St.  Rep.  314,  53  L.  R.  A.  415)  :  "It 
is  an  old  and  familiar  maxim  that 
'competition  is  the  life  of  trade,'  and 
whatever  act  destroys  competition,  or 
even  relaxes  it,  upon  the  part  of 
those  who  sustain  relations  to  the 
public,  is  regarded  by  the  law  as  in- 
jurious to  public  interests,  and  is, 
therefore,  deemed  to  be  unlawful,  on 

644 


the  grounds  of  public  policy."  See 
also  Over  v.  Byram  Foundry  Co., 
37  Ind.  App.  452  (1906),  (77  N.  E. 
Rep.  302). 

Kentucky.  Anderson  v.  Jett,  89 
Ky.  375  (1889),  (12  S.  W.  Rep.  670, 
6  L.  R.  A.  390)  :  "Rivalry  is  the  Ufe 
of  trade.  The  thrift  and  welfare 
of  the  people  depend  upon  it.  Mo- 
nopoly is  opposed  to  it  all  along  the 
line.  The  accumulation  of  wealth 
out  of  the  brow  sweat  of  honest  toilers 
by  means  of  combinations  is  opposed 
to  competing  trade  and  enterprise. 
That  pubhc  policy  that  encourages 
fair  dealing,  honest  thrift  and  enter- 
prise among  all  the  citizens  of  the 
commonwealth,  and  is  opposed  to 
monopolies  and  combinations  because 
unfriendly  to  such  fair  dealing,  thrift 
and  enterprise,  declares  all  combina- 
tions whose  object  is  to  destroy  or 
impede  free  competition  between  the 
several  lines  of  business  engaged  in 
utterly  void." 

Michigan.  See  ante,  §  347  :  "Basis 
of  Rules  —  {F)  Case  of  the  Diamond 
Match  Company." 

New  Hampshire.  Manchester,  etc. 
R.  Co.  V.  Concord  R.  Co.,  66 
N.  H.  127  (1889),  (20  Atl. 
Rep.  383,  49  Am.  St.  Rep.  582)  : 
"While,  without  doubt,  contracts 
which  have  a  direct  tendency  to 
prevent  a  healthy  competition  are  det- 
rimental to  the  public,  and,  conse- 
quently, against  public  policy,  it  is 
equally  free  from  doubt  that  when 
such  contracts  prevent  an  unhealthy 
competition  .  .  .  they  are  beneficial, 
and  in  accord  with  sound  principles 
of  public  policy." 

New  Jersey.  Meredith  v.  Zinc  and 
Iron  Co.,  55  N.  J.  Eq.  221  (1897),  (37 
Atl.  Rep.  539)  :  "Now,  I  am  unable 
to  find  any  foundation,  either  in  law 
or  in  morals,  for  the  notion  that  the 
public  have  the  right  to  have  these 


CHAP.  XXX V] 


RULES  OF  PUBLIC  POLICY 


§356 


many  decisions,  and  the  language  of  the  courts  is  often  broad 
enough  to  include,  as  opposed  to  public  policy,  ever}'  com- 


private  owners  of  this  sort  of  property 
continue  to  do  business  in  competition 
with  each  other.  No  doubt  the  public 
has  reasonable  ground  to  entertain  its 
hope  and  expectation  that  its  indi- 
\'idual  members  will  generally,  in 
their  several  struggles  to  acquire  the 
means  of  comfortable  existence,  com- 
pete with  each  other.  But  such  ex- 
pectation is  based  entirely  upon  the 
exercise  of  the  free  will  and  choice  of 
the  indiN-idual,  and  not  upon  any  legal 
or  moral  duty  to  compete,  and  can 
never,  from  the  nature  of  things, 
become  a  matter  of  right  on  the  part 
of  the  public  against  the  indi\Tdual." 
See  also  Trenton  Potteries  Co.  v.  Olj'- 
phant,  58  N.  J.  Eq.  507  (1899),  (43 
Atl.  Rep.  723,  78  Am.  St.  Rep.  612, 
46  L.  R.  A.  255). 

New  York.  Vinegar  Co.  v.  Foehren- 
bach,  148  N.  Y.  64  (1895),  (42  N.  E. 
Rep.  403)  :  "But  not  all  combinations 
are  condemned,  and  self-preservation 
may  justify  the  prevention  of  undue 
and  ruinous  competition,  when  the 
prevention  is  sought  by  fair  and  legal 
methods." 

Judd  V.  Harrington,  139  N.  Y.  105 
(1893),  (34  N.  E.  Rep.  790)  :  "The 
real  purpose  and  intent  of  the  agree- 
ment wa.s  to  suppress  competition  in 
an  article  of  food,  and  as  such  agree- 
ments tend  to  advance  the  price,  they 
are  regarded  as  detrimental  to  the 
public  interest,  and  contrary  to  public 
policy. " 

Diamond  Match  Co.  v.  Roeber,  106 
N.  Y.  483  (1887;,  (13  N.  E.  Rep.  419, 
60  Am.  Rep.  464)  :  "We  suppose  a 
party  may  legally  purchase  the  trade 
and  business  of  another  for  the  very 
purpose  of  preventing  competi- 
tion." 

Cohen  v.  Berlin  and  Jones  Envelope 
Co.,  38  App.  Div.  (N.  Y.)  499  (1899), 
(56  N.  Y.  Supp.  588)  :  "It  cannot  be 
doubted  but  that  the  defendant  had 


the  right  to  buj-  out  all  the  envelope 
manufacturing  bu.siness,  and  even 
though  they  thereby  obtained  power 
to  end  competition  and  arbitrarily  fi.\ 
prices." 

Rafferty  v.  Buffalo  Oty  Gas  Co., 
37  App.  Div.  (N.  Y.)  623  (1899),  (56 
N.  Y.  Supp.  288)  :  "A  contract  made 
to  prevent  or  avoid  destructive  com- 
petition is  not  nece.ssarily  invalid." 

Chappell  V.  Brock  way,  21  Wend. 
157  (1839)  :  "Competition  in  business, 
though  greatly  beneficial  to  the  pub- 
lic, may  be  carried  to  such  an  extent 
as  to  become  an  e\-il." 

See  also  ante,  §  342:  "Basis  of 
Rules  —  (A)  Case  of  the  Sugar  Trust." 

Ohio.  Central  Ohio  Salt  Co.  v. 
Guthrie,  35  Ohio  St.  672  (1880): 
"Public  policy,  unquestionably,  fa- 
vors comj>etition  in  trade,  to  the 
end  that  its  commodities  may  be 
afforded  to  the  consumer  as  cheaply 
as  possible,  and  is  opposed  to  monopo- 
lies, which  tend  to  advance  market 
prices,  to  the  injurj'  of  the  general 
public." 

See  also  ante,  §  343  :  "  Ba.'iis  of 
Rules  —  (B)  Case  of  the  Standard  Oil 
Trust. " 

Pennsylvania.  Morris  Run  Coal 
Co.  V.  Barclay  Coal  Co.,  68  Pa.  St. 
186  (1871),  (8  Am.  Rep.  159)  : 
"When  competition  is  left  free,  indi- 
vidual error  or  folly  will  generally  find 
a  correction  in  the  contluct  of  others. 
But  here  is  a  combination  of  all  the 
companies  o{>erating  in  the  Blossburg 
and  Barclay  mining  regions,  and  con- 
trolling their  entire  productions.  .  .  . 
The  public  interest  must  succumb  to 
it,  for  it  has  left  no  competition  free 
to  correct  its  baleful  influence." 

Rhode  Island.  Oakilale  Mfg.  Co.  v. 
Garst.,  18  R.  I.  484  (1894),  (28  Atl. 
Rep.  973,  49  Am.  St.  Rep.  784,  23 
L.  R.  A.  639):  "Undoubtedly,  there 
may  be  combinations  so  destructive  of 

645 


§  356 


INTERCORPORATE    RELATIONS 


[part  V 


bination  in  restraint  of  competition,  regardless  of  degree. 
But  the  weight  of  authority  —  as  well  as  sound  principle  — • 
supports  the  view  that  every  combination  restricting  com- 
petition is  not  invalid  —  that  restriction,  to  be  unlawful, 
while  not  necessarily  amounting  to  total  suppression,  must 
give,   substantially,   the  control    of  the   market. 

Just  where  the  line  is  to  be  drawn  between  a  lawful  and 
unlawful  restriction  of  competition  —  just  what  restriction  is 
practical  suppression  —  must  depend  largely  upon  the  facts 
and  circumstances  of  each  case.  As  said  in  Hoffman  v. 
Brooks,^  a  case  not  officially  reported:  "  Those  engaged  in 
any  trade  or  business  may,  to  such  limited  extent  as  may  be 
fairly  necessary  to  protect  their  interests,  enter  into  agreements 


the  right  of  the  people  to  buy  and  sell, 
and  to  pursue  their  business  freely, 
that  they  must  be  declared  to  be  void 
upon  the  ground  of  public  policy.  In 
such  cases,  the  injury  to  the  public  is 
the  controlling  consideration.  But  it 
does  not  follow  that  every  combina- 
tion in  trade,  even  though  such  com- 
bination may  have  the  effect  to  di- 
minish the  number  of  competitors  in 
business,  is  illegal.  .  .  .  Combina- 
tions for  mutual  advantage  which  do 
not  amount  to  a  monopoly,  but  leave 
the  field  of  competition  open  to  others, 
are  neither  within  the  reason  nor  the 
operation  of  the  rule." 

Texas.  Texas  Standard  Oil  Co.  v. 
Adoue,  83  Tex.  650  (1892),  (19  S.  W. 
Rep.  274,  29  Am.  St.  Rep.  690,  15 
L.  R.  A.  598).  See  extract  from  this 
decision  in  note  to  last  section. 

Wisconsin.  Kellogg  v.  Larkin, 
3  Pin.  150  (1851),  (56  Am.  Dec.  180)  : 
"I  apprehend  it  is  not  true  that  com- 
petition is  the  life  of  trade.  On  the 
contrary,  that  maxim  is  one  of  the 
least  reliable  of  the  host  that  may  be 
picked  up  in  every  market-place.  It 
is,  in  fact,  the  shibboleth  of  mere 
gambling  speculation,  and  is  hardly 
entitled  to  take  rank  as  an  axiom  in 
the  jurisprudence  of  this  country. 
.  .  .  Indeed,  by  reducing  prices 
below,  or  raising  them  above  values 

646 


(as  the  nature  of  the  trade  prompted), 
competition  has  done  more  to  monopo- 
lize trade,  or  to  secure  exclusive  ad- 
vantages in  it,  than  has  been  done  by 
contract.  Rivalry  in  trade  will  de- 
stroy itself,  and  rival  tradesmen 
seeking  to  remove  each  other,  rarely 
resort  to  contract,  unless  they  find  it 
the  cheapest  mode  of  putting  an  end 
to  the  strife." 

England.  Mogul  Steamship  Co.  v. 
McGregor,  L.  R.  App.  Cas.  25  (1892), 
(61  L.  J.  R.  295),  (Lord  Bramwell) : 
"In  these  days  of  instant  communica- 
tion with  almost  all  parts  of  the  world, 
competition  is  the  life  of  trade,  and  I 
am  not  aware  of  any  stage  of  competi- 
tion called  "  fair  "  intermediate  be- 
tween lawful  and  unlawful.  The  ques- 
tion of  fairness  would  be  relegated  to 
the  idiosyncrasies  of  individual  judges. 
I  can  see  no  limit  to  competition,  ex- 
cept that  you  shall  not  invade  the 
rights  of  another." 

Canada.  Ontario  Salt  Co.  v.  Mer- 
chants Salt  Co.,  18  Grant's  Ch.  540 
(1871)  :  "I  know  of  no  rule  of  law  ever 
existing  which  prohibited  a  certain 
nurnbar  (not  all)  of  the  producers  of 
a  staple  commodity  agreeing  not  to 
sell  below  a  certain  price." 

'  Hoffman  v.  Brooks,  11  Cincin- 
nati Week.  Law  Bull.  259  (1884),  23 
Am.  Law  Reg.  648. 


CHAP.  XXXV]  RULES   OF   PUBLIC    POLICY  §   3o7 

which  will  result  in  diminishing  competition  and  increasing 
prices.  Just  the  extent  to  which  this  may  be  done  the  courts 
have  been  careful  not  to  define,  just  as  they  have  refused  to 
set  monuments  along  the  line  between  fairness  and  fraud." 

§  357.  Analysis  of  Rule  —  (D)  Extent  of  Territory.  —  A  com- 
bination to  control  the  markets  of  the  world  for  a  useful  com- 
modity would  contravene  the  rule  of  public  policy.  A  com- 
bination for  the  purpose  of  controlling  the  market  in  a  particular 
locality  would  be  equally  unlawful.  The  phrase  "control  of 
the  market "  means  the  control  of  any  market. 

No  limit  of  territory'  can  or  should  be  prescribed.  The 
dealers  in  a  village  might  combine  to  control  the  market  for 
a  necessary  of  life.  In  order  to  accomplish  their  object,  they 
must  control  the  ordinary  sources  of  supply  of  the  village. 
Manufacturers  throughout  the  United  States  might  combine  to 
control  the  markets  of  the  country  for  their  product.  Their 
purpose  could  only  be  attained  by  having  under  their  power 
the  sources  of  supply  of  the  country.  The  result  to  the  public 
from  each  combination  would  be  the  same.  Competition, 
in  each  case,  would  be  suppressed,  and,  consequently,  prices 
raised  and  production  limited.  The  difference  would  be  only 
in  degree,  and  each  combination  would  be  against  public  policy 
and  invalid.^ 

•  Texas  Standard  Oil  Co.  v.  Adoue,  people  in  any  g^ven   locality.     Does 

83  Tex.  650   (1892),  (19   S.  W.   Rep.  any  one  doubt  that  a  combination  of 

274,  29  .\m.  St.  Rep.  690,  15  L.   R.  A.  a  number  of  the  most  extensive  deal- 

598)  :  "We  can  scarcely  conceive  how  ers  in  flour,  meat,  or  oils,  etc.,  in  one 

mere  territorial  limits  can  be  the  con-  great  city,  to  sell  tho.se  commodities 

trolling  test,  in  all  instances,  of  the  at  only  one  price  or  not  at  all,  within 

legality  of  the  restraints  imposed  upon  the  limits  of  that  city,  would  affect  the 

the  ordinary  course   of  trade.      This  interests  of  the  public,  and,  perhaps, 

criterion  may  do  very  well  when  ap-  also  some  of  the  individual   dealers, 

plied  to  the  occupation  or  profession  much    more    extensively    and    disas- 

of  one  man,  or  even  a  few  individuals;  trously  than  a  similar  agreement  ex- 

for  neither  their  labor,  industry,  busi-  tended    to    a    much    greater    area    of 

ness,  nor  services  may  be  so  necessary  country,    but    in    which    only    a    few 

to  the  public  as  not  to  be  dispensed  jwople  reside,  or  require  such  articles? 

with  without  inconvenience  or  injury.  It    would    .seem    that  "the    injurious 

It  appears  to   us,   however,   that  the  effects     ujion     the     public     interests 

case    is    very    different    in    regard    to  would  be  in  pro]iortion  to  the  number 

trade  or  commerce  in  tho.se  articles  of  of  ])e()plo  affected  by  the  restrictions, 

prime  necessity,  or  even  of  very  frc-  though    we  are  not  imaware  that  this 

quent  use  among  a  large  number  of  position  has  not  been  deemed  tenable 

047 


358 


INTERCORPORATE    RELATIONS 


[part  V 


§  358.  Analysis  of  Rule  —  (E)  Useful  Commodities.  —  The  old 
English  offences  of  regrating,  forestalling  and  engrossing,  — 
crimes  in  the  days  of  Edward  VI.  and  approved  methods  of 
doing  business  at  the  present  time,  —  related  exclusively  to 
certain  forms  of  traffic  in  the  necessaries  of  life} 


by  some  of  the  authorities  in  cases 
where  the  right  to  exercise  a  trade  or 
profession  within  a  particular  district 
or  locaUty  has  been  restricted  by  the 
contract.  We  think  that  territory 
cannot  be  the  sole  test,  though  in  the 
present  instance  the  contract  em- 
braces such  extensive  territory,  and 
such  a  number  of  localities,  as  to 
bring  it  even  within  that  rule." 

Hoffman  v.  Brooks,  11  Cincinnati 
Weekly  Law  Bull.  (Ohio)  259  (1884), 
23  Am.  Law  Reg.  648:  "The  pre- 
sumption is  always  against  the  validity 
of  such  agreements  [in  restraint  of 
competition],  and,  certainly,  where 
they  include  all  those  engaged  in  any 
business  in  a  large  city  or  district,  are 
unlimited  in  duration,  and  are  mani- 
festly intended,  by  the  surrender  of 
individual  discretion,  by  the  arbi- 
trary fixing  of  prices,  or  by  any  of  the 
methods  to  which  the  hope  of  gain 
makes  human  ingenuity  so  faithful, 
to  strangle  competition  outright,  and 
breed  monopolies,  the  law,  while  it 
may  not  punish,  will  not  enforce 
them." 

Chapin  v.  Brown,  83  Iowa,  156 
(1891),  (48  N.  W.  Rep.  1074,  32  Am. 
St.  Rep.  297,  12  L.  R.  A.  428)  :  "The 
agreement  is  against  public  policy. 
It  plainly  tends  to  monopolize  the 
butter  trade  at  Storm  Lake,  and 
destroy  competition  in  that  business. 
It  is  not  necessary  that  the  enforce- 
ment of  the  agreement  should  actu- 
ally create  a  monopoly  in  order  to 
render  it  invalid,  and,  surely,  where 
all  the  dealers  in  a  commodity  in  a 
certain  locality  agree  to  quit  the  busi- 
ness, and  the  plaintiffs  are  installed 
as  the  only  dealers  in  that  line,  the 
tendency  is,  for  a  time,  at  least,  to 

648 


destroy  competition,  and  leave  the 
plaintiffs  as  the  only  dealers  in  that 
species  of  property  in  that  locality. 
Such  contracts  cannot  be  enforced." 

Santa  Clara  Valley  Mill,  etc.  Co.  v. 
Hayes,  76  Cal.  387  (1888),  (18  Pac. 
Rep.  391,  9  Am.  St.  Rep.  211)  :  "Here 
it  [the  plaintiff]  entered  into  a  con- 
tract with  the  object  and  view  to  sup- 
press the  supply  and  enhance  the  price 
of  lumber  in  four  counties  of  the  State. 
The  contract  was  void  as  being 
against  public  policy." 

*  "  Regrating :  In  old  English  law, 
the  offence  of  buying  or  getting  into 
one's  hands  at  a  fair  or  market,  any 
provisions,  corn,  or  other  dead  victuals 
with  the  intention  of  selling  the  same 
again  in  the  same  fair  or  market,  or  in 
some  other  within  four  miles  thereof, 
at  a  higher  price.  The  offender  was 
termed  a  'regrator. '"  Black's  Law 
Diet. 

"Forestalling  the  Market:  The  act 
of  buying  or  contracting  for  any  mer- 
chandise or  provision  on  its  way  to  the 
market,  with  the  intention  of  selling 
it  again  at  a  higher  price  ;  or  dissuad- 
ing persons  from  bringing  their  goods 
or  provisions  there ;  or  persuading 
them  to  enhance  the  price  when  there. " 
Black's  Law  Diet,  citing  4  Black  Com. 
158. 

"Engrossing :  Whatsoever  person  or 
persons  that  after  said  first  day  of  Maj^ 
shall  engross  or  get  into  his  or  their 
hands,  by  buying,  contracting,  or 
promise-taking,  other  than  by  demise, 
grant,  or  lease  of  land  or  tithe,  any 
corn  growing  in  the  fields,  or  anj'  corn 
or  grain,  butter,  cheese,  fish,  or  other 
dead  \nctuals  whatsoever,  within  the 
realm  of  England,  to  the  intent  to  sell 
the  same  again,  shall  be  accepted,  re- 


CHAP.  XXXV] 


RULES   OF   PUBLIC    POLICY 


§358 


The  influence  of  the  early  statutes  and  decisions  against 
those  offences  has  not  yet  entirely  died  out.  The  term  ''en- 
gross" is  not  infrequently  used  in  connection  with  modern 
combinations,  and  the  character  of  an  article  as  one  of  "the 
necessaries  of  life,"  as  an  "article  of  necessity"  or  ''an  article 
of  prime  necessity" — according  to  the  particular  phrase  — 
is  generally  stated  as  a  controlling  reason  why  the  suppression 
of  competition  therein  is  inimical  to  public  policy.*  A  com- 
bination for  the  purpose  of  controlling  the  market  for  an  article 
of  necessity  is  against  public  policy.  But  the  rule  of  public 
policy  is  of  broader  application.^  The  essential  question  is 
whether  the  article  is  a  useful  commodity,^  as  distinguished  from 


puted  and  taken  as  unlawful  engrosser 
or  engrossers."  Statute  5th  and  6th 
Edward  VI.,  entitled,  "An  Act 
against  Ilegraters,  Forestallers,  and 
Engrossers"  (ch.  14,  §  3). 

The  acts  thus  denominated  offences 
are  now  recognized  and  approved  as 
necessary  methods  of  transacting  busi- 
ness, and  the  change  of  public  policy, 
with  reference  to  them,  furnishes  an 
apt  illustration  of  its  fluctuating 
nature. 

'  Queen  Ins.  Ck).  v.  State  (Tex. 
av.  App.  1893),  22  S.  W.  Rep.  1048: 
"As  we  have  said,  these  statutes 
(against  engrossing,  regrating  and 
forestalling)  have  been  repealed  in 
England.  They  were  applicable 
to  a  condition  of  society  which  no 
longer  exists.  But  it  is  to  be  pre- 
sumed that  the  common-law  principle 
which  underlies  them  is  the  origin  of 
the  modern  doctrine  on  the  subject. 
We  find  that  most  of  the  cases  in 
which  agreements  among  manufac- 
turers and  dealers  to  increase  the 
price  of  their  wares  and  commodities 
were  declared  illegal,  related  to  some 
merchantable  article  of  necessity,  or 
of  great  utility." 

2  In  United  States  r.  E.  C.  Knight 
Co.,  156  U.  S.  12  (1895),  (15  Sup.  Ct. 
Rep.  248),  Mr.  Chief  Justice  Fuller 
said:  "The  argument  is,  that  the 
power  to  control  the  manufacture  of 


refined  sugar  is  a  monopoh'  over  a 
necessary  of  life,  to  the  enjoyment  of 
which,  by  a  large  part  of  the  popula- 
tion of  the  United  States,  interstate 
commerce  is  indispensable,  and  that, 
therefore,  the  general  government,  in 
the  e.xercise  of  the  power  to  regulate 
commerce,  may  repress  such  monopoly 
directly,  and  set  aside  the  instruments 
which  have  created  it.  But  this  argu- 
ment cannot  be  confined  to  necessaries 
of  life,  merely,  but  must  include  all 
articles  of  general  consumption." 

See  also  DeWitt  Wire  Cloth  Co.  v. 
New  Jersey  Wire  Cloth  Co.,  16  Daly 
(N.  Y.),  529  (1891),  (14  N.  Y.  Supp. 
279),  where  the  Court  said:  "Nor  is 
the  operation  of  the  rule  forbitliling 
contracts  restricting  com])etition  and 
enhancing  price,  limited  to  trade  in 
the  necessaries  of  life,  but,  a.s  ai>pear3 
from  the  citations  above,  extends 
equally  and  alike  to  all  commodities 
of  conunerce. " 

'  Queen  Ins.  Co.  v.  State  (Tex.  Civ. 
App.  1893),  22  S.  W.  Rep.  1048: 
"The  word  'commodity'  has  two 
significations.  In  its  most  compre- 
hensive sense,  it  means  'convenience, 
accommodation,  profit,  benefit,  a<l- 
vantage,  interest,  commodiousne.-NS ;  ' 
but,  according  to  Webster's  Inter- 
national Dictionary,  the  use  of 
the  word  in  this  sense  is  obsolete. 
Page    286.     The    word    is    ordinarily 

649 


358 


INTERCORPORATE    RELATIONS 


[part  V 


those  "articles  of  commerce,  which  are,  in  no  proper  sense, 
necessaries  or  even  conveniences,  but  mere  luxuries  or  append- 
ages of  vanity."  ^ 

No  precise  rule  can  be  stated  for  determining  what  are  articles 
of  necessity.^     The  luxuries  of  the  period  of  Edward  VI.  have 


used  in  the  commercial  sense  of  any 
movable  or  tangible  thing  that  is  ordi- 
narily produced  or  used  as  the  subject 
of  barter  or  sale. " 

'  Cummings  v.  Union  Blue  Stone 
Co.,  164  N.  Y.  405  (1900),  (79  Am.  St. 
Rep.  655,  52  L.  R.  A.  262). 

In  Herriman  v.  Menzies,  115  Cal. 
16  (1896),  (44  Pac.  Rep.  660,  56  Am. 
St.  Rep.  81,  35  L.  R.  A.  318),  the 
Court  said  :  "An  agreement,  the  pur- 
pose or  effect  of  which  is  to  create  a 
monopoly,  is  unlawful  if  it  relate  to 
some  staple  commodity,  or  thing,  of 
general  requirement  and  use,  or  of 
necessity,  and  not  something  of  mere 
luxury  or  convenience." 

2 1.  Combinations  for  the  sup- 
pression of  competition  in  the  sale  or 
production  of  the  following  articles 
have  been  held  to  be  inimical  to  public 
policy,  generally  upon  the  ground  that 
they  are  necessaries  of  life. 

Alcohol.  State  v.  Nebraska  Distill- 
ing Co.,  29  Neb.  718  (1890),  (46  N.  W. 
Rep.  155)  :  "Alcohol  is  an  article  of 
commerce.  It  is  applied  to  a  thou- 
sand uses  in  arts  and  manufactures. 
The  amount  which  is  rectified  and 
used  as  intoxicating  drinks  forms  but 
a  very  small  part  of  the  quantity 
actually  distilled,  and  being  an  article 
of  commerce,  any  contract  creating  a 
monopoly  therein,  is  against  public 
policy  and  void." 

Beer.  Held :  An  article  of  daily 
consumption  and  a  combination  there- 
in unlawful.  Nester  v.  Continental 
Brew.  Co.  (Pa.),  2  Dist.  R.  177  (1894) ; 
on  appeal,  161  Pa.  St.  473  (1894),  (29 
Atl.  Rep.  102,  41  Am.  St.  Rep.  894). 
Contra,  however,  Anheuser-Busch 
Brewing  Ass'n  v.  Houck  (Tex.  1894), 
(27  S.  W.   Rep.  692). 

650 


Brick.  Jackson  v.  Brick  Ass'n,  53 
Ohio  St.  303  (1895),  (41  N.  E.  Rep. 
257,  53  Am.  St.  Rep.  637,  35  L.  R. 
A.  287). 

Blue  Stone.  Cummings  v.  Union 
Blue  Stone  Co.,  164  N.  Y.  405  (1900), 
(79  Am.  St.  Rep.  655,  52  L.  R.  A. 
262). 

Biscuits  and  Confectionery.  Ameri- 
can Biscuit,  etc.  Co.  v.  Klotz,  44  Fed. 
721  (1891). 

Butter.  Chapin  v.  Brown,  83 
Iowa,  156  (1891),  (48  N.  W.  Rep. 
1074,  32  Am.  St.  Rep.  297,  12  L.  R. 
A.  428). 

Candles.  Emery  v.  Ohio  Candle 
Co.,  47  Ohio  St.  320  (1890),  (24  N.  E. 
Rep.  660,  32  Am.  &  Eng.  Corp.  Cas. 
165,  21  Am.  St.  Rep.  819). 

Coal.  Morris  Run  Coal  Co.  v.  Bar- 
clay Coal  Co.,  68  Pa.  St.  173  (1871), 
(8  Am.  Rep.  159);  People  v.  Shel- 
don, 139  N.  Y.  251  (1893),  (34  N. 
E.  Rep.  785,  36  Am.  St.  Rep.  690,  23 
L.  R.  A.  221) ;  Arnot  v.  Pittston,  etc. 
Coal  Co.,  68  N.  Y.  558  (1877),  (23 
Am.  Rep.  190) ;  Drake  v.  Siebold,  81 
Hun  (N.  Y.),  178  (1894),  (30  N.  Y. 
Supp.  697). 

Coke.  Pocahontas  Coke  Co.  v. 
Powhatan  Coal,  etc.  (60  W.  Va.  508 
(1906),  (56  S.  E.  Rep.  264,  116  Am. 
St.  Rep.  901,  10  L.  R.  A.  (N.  S.) 
268). 

Cotton  Bagging.  India  Bagging 
Ass'n  V.  Kock,  14  La.  Ann.  169  (1859)  : 
"The  agreement  between  the  parties 
was  palpably,  and  unequivocally,  a 
combination  in  restraint  of  trade,  and 
to  enhance  the  price  in  the  market  of 
an  article  of  prime  necessity  to  cotton 
planters.  Such  combinations  are  con- 
trary to  public  order,  and  cannot  be 
enforced  in  a  court  of  justice." 


CHAP.  XXXV] 


RULES   OF   PUBLIC    POLICY 


§358 


become   the    commonest    of   necessities,   or    have  passed    out 
of  use  altogether.     In  the   present   stage   of   civiHzation,  the 


Cotton  Seed.  Texas  Standard  Oil 
Co.  V.  Adoue,  83  Tex.  650  (1892), 
(19  S.  W.  Rep.  274,  29  Am.  St.  Rep. 
690,   15  L.   R.  A.  598). 

Glucose  and  its  Products.  Harding 
V.  American  Glucose  Co.,  182  111.  551 
(1899),  (55  N.  E.  Rep.  577,  74  Am. 
St.  Rep.  235,  64  L.  R.  A.  738). 

Grain.  Craft  v.  McConoughby, 
79  111.  346  (1875),  (22  Am.  Rep.  171). 

Grain  Bags  and  Burlap.  Pacific 
Factor  Co.  v.  Adler,  90Cal.  110(1891), 
(27  Pac.  Rep.  361,  25  Am.  St.  Rep. 
102). 

Ice.  Griffin  v.  Piper,  55  111.  .A.pp. 
213  (1894). 

Lumber.  Santa  Clara  Valley  Mill, 
etc.  Co.  V.  Hayes,  76  Cal.  387  (1888), 
(18  Pac.  Rep.  391,  9  Am.  St.  Rep. 
211). 

Matches.  Richardson  v.  Buhl,  77 
Mich.  632  (1889),  (43  N.  W.  Rep. 
1102,  6  L.  R.  A.  457). 

Milk.  People  v.  Milk  Exchange, 
145  N.  Y.  267  (1895),  (39  N.  E.  Rep. 
1062,  45  Am.  St.  Rep.  609,  27 
L.  R.  A.  437) ;  Ford  v.  Chicago  Milk 
Shippers  Ass'n,  155  111.  166  (1895), 
(39  N.  E.  Rep.  651,  27  L.  R.  A.  298). 

Petroleum  and  its  Products.  State 
V.  Standard  Oil  Co.,  49  Ohio  St.  137 
(1892),  (30  N.  E.  Rep.  279,  34  Am.  St. 
Rep.  541,   15  L.  R.  A.   145). 

Preserves.  American  Preservers 
Trust  V.  Taylor  Mfg.  Co.,  46  Fed.  152 
(1891) ;  Bishop  v.  American  Pre- 
servers Trust,  157  111.  284  (1895), 
(41  N.  E.  Rep.  765,  48  Am.  St.  Rep. 
317). 

Salt.  Central  Ohio  Salt  Co.  v. 
Guthrie,    35    Ohio   St.    666    (1880). 

Sheep  and  Lambs.  Judd  v.  Har- 
rington, 139  N.  Y.  105  (1893),  (34 
N.  E.  Rep.  790). 

Spring  Tooth  Harrows.  National 
Harrow  Co.  v.  Bement,  21  App.  Div. 
(N.  Y.)  296  (1897),  (47  N.  Y.  Supp. 
462)  :    "A  harrow  is  an  implement  as 


important  and  as  generally  used  by 
farmers  as  a  plough,  and  is  quite  as 
nece.ssary  for  the  proper  cultivation 
of  land  as  any  other  agricultural 
implement,  and  is  in  use  in  every 
properly  cultivated  farm.  ...  I 
think  it  neetb  no  argument  to  show 
that  a  combination  formed  for  the 
purpose  of  controlling  their  prices, 
limiting  their  production,  preventing 
competition  among  manufacturers, 
and  also  preventing  further  improve- 
ment in  them,  is  contrarj'  to  public 
policy." 

Sugar.  People  v.  North  River 
Sugar  Ref'g  Co.,  54  Hun  (N.  Y.),  354 
(1889),  (3  N.  Y.  Supp.  401) ;  affirmed 
upon  principles  of  corporation  law, 
121  N.  Y.  582  (1890),  (24  N.  E.  Rep. 
834,  18  Am.  St.  Rep.  843,  9  L.  R. 
A.  33). 

Tobcu:co.  Hoffman  v.  Brooks,  23 
Am.  Law  Reg.  648  (1884),  (11  Week. 
Law  Bull.    (Ohio)  2.58). 

Wire  Cloth.  De  Witt  Wire  Cloth 
Co.  V.  New  Jersey  Wire  Cloth  Co., 
16  Daly  (N.  Y.),  529  (1891),  (14  N.  Y. 
Supp.  277). 

II.  The  following  articles  have 
been  held  not  to  be  articles  of  necessity : 

Curtain  Fixtures.  Central  Shade 
Roller  Co.  v.  Cashman,  143  Mass. 
364  (1887),  (9  N.  E.  Rep.  629)  : 
"The  agreement  does  not  refer  to  an 
article  of  prime  necessity  nor  to  a 
staple  of  commerce,  nor  to  merchan- 
dise to  be  bought  and  sold  in  the  mar- 
ket, but  to  a  particular  curtain  fixture 
of  the  parties'  own  manufacture." 

Glue  made  from  Fish  Skins. 
Gloucester  Isingla-ss,  etc.  Co.  v. 
Russia  Cement  Co.,  154  Mass.  92 
(1891),  (27  N.  E.  Rep.  1005,  26  Am. 
St.  Rep.  214,  12  L.  R.  \.  563). 

Laundrij  Machines.  Dolph  i'.  Troy 
Laundry  Macii.  Co.,  28  Fed.  553 
(1886). 

Zi)ic.     Mereilith    r.    Ziuc,   etc.  Co., 

(Ml 


§  358 


INTERCORPORATE   RELATIONS 


[part  V 


line    between    necessities    and    luxuries    cannot    be    sharply 
drawn/ 

A  fortiori  is  it  impossible  to  lay  down  an  exact  rule  for  de- 
termining what  is  a  useful  commodity.  There  are  few  articles 
which  are  bought  and  sold  which  are  not,  in  a  sense,  useful, 
and,  consequently,  few  articles  which  are  not  within  the  rule 
of  public  policy;  except,  perhaps,  articles  the  use  of  which 
public  policy  requires  should  be  restricted.^ 


55  N.  J.  Eq.  211  (1897),  (37  Atl.  Rep. 
539). 

All  these  articles  are,  however,  use- 
ful commodities  within  the  rule  of 
public  policy. 

•  Brown  v.  .Jacobs'  Pharmacy  Co., 
115  Ga.  433  (1902),  (41  S.  E.  Rep. 
553,  90  Am.  St.  Rep.  126,  57  L.  R. 
A.  547)  :  "Again,  some  courts  have 
sought  to  draw  a  distinction  between 
what  they  term  'necessaries'  or  'the 
necessaries  of  life, '  or  '  prime  neces- 
saries, and  contracts  or  agreements 
with  reference  to  other  articles  of 
commerce  or  merchandise.  But  this 
distinction  is  not  well  founded. 
What  is  at  one  time  a  luxury  at 
another  is  a  necessity.  The  things 
■^hich  were  considered  sufficient  to 
satisfy  the  description  of  'necessaries' 
a  few  years  ago  will  be  considered 
wholly  insufficient  now,  under  pres- 
ent conditions  of  civilization.  How 
useful  must  a  thing  become  before  it 
enters  the  catalogue  of  necessaries, 
so  that  contracts  to  restrain  trade  in 
regard  to  it,  or  to  foster  monopoly  in 
it,  are  void?" 

2  Anheuser-Busch  Brewing  Ass'n 
V.  Houck  (Tex.  1894),  (27  S.  W.  Rep. 
695)  :  "We  think  there  can  be  no 
doubt  that  the  rule  that  is  to  be  de- 
rived from  all  the  authorities  con- 
demns, as  being  against  public  pohcy, 
an  agreement  between  two  or  more 
dealers,  in  an  article  of  prime  necessity 
or  in  general  use  among  the  people, 
whereby  they  agree  to  jointly  control 
the  supply  of  such  article,  to  cease 
competition    between    themselves    in 

652 


respect  to  it,  and  to  regulate  the  price 
thereof  in  a  given  community  or 
market.  .  .  .  There  may  be  a  ques- 
tion as  to  whether  beer  is  an  article 
of  necessity,  but  it  admits  of  no  ques- 
tion that  it  is  an  article  of  usual  and 
general  consumption  and  of  use  among 
the  people.  ...  Is  beer  one  of  those 
articles  of  consumption,  though  one  in 
frequent  use  among  the  people,  the 
sale  of  which  is  not  permitted  by 
public  policy  to  be  limited  by  a  con- 
tract in  restraint  of  trade  ?  We  have 
concluded  that  it  is  not.  The  policy 
of  the  laws  of  the  State  is  not  towards 
the  unrestricted  or  general  sale  of 
such  article.  The  liquor  traffic  has 
always  been  kept  in  restraint  by 
statutes  imposing  onerous  conditions 
and  regulations  in  reference  to  its 
pvirsuits,  clearly  e\Tdencing  a  poUcy 
of  not  allowing  every  one  to  engage 
in  the  business  at  will." 

Compare,  however,  Nester  v.  Conti- 
nental Brewing  Co.,  161  Pa.  St.  473 
(1894),  (20  Atl.  Rep.  102,  41  Am.  St. 
Rep.  894),  where  the  Court  said : 
"The  appellants  insist  that  restraint 
of  trade  in  the  necessaries  of  life  only, 
is  within  the  prohibition  of  public 
policy.  No  standard  has  been  fur- 
nished by  which  to  ascertain  what  con- 
stitutes these  with  reference  to  the 
general  public.  But  assuming  that 
beer  is  not  among  them,  it  is  equally 
within  the  reach  of  the  rule.  The 
law  recognizes  it  as  a  commoditj", 
regulates  its  sales,  it  is  'an  article 
of  daily  consumption,'  and  the  court 
should  refuse  to  aid  in  any  attempted 


CHAP.  XXXV] 


RULES   OF   PUBLIC   POLICY 


§359 


§  359.  Analysis  of  Rule  of  Public  Policy  applicable  to  Quasi- 
public  Corporations.  —  While  combinations  of  private  corpo- 
rations merely  for  the  purpose  of  restricting  competition  are 
not  invalid/  similar  combinations  of  quasi-public  corporations 
are,  presumptively,  against  public  policy.'  The  rule  provides 
that  every  such  combination  is  invalid  if  either  of  these  con- 
sequences may  follow  its  operation: 

(1)  The  increase  of  charges  beyond  reasonable  rates. 

(2)  The  curtailment  of  facilities  aiTorded  the  public. 

The  substance  of  the  rule  is  that  every  combination  of  quasi- 
public  corporations,  which,  without  statutory  authority,  does 
or  may  deprive  the  public  of  the  benefits  accruing  from  separate 
control  and  management,  is  against  public  policy.^ 


imposition  upon  the  public  by  means 
of  illegal  combinations. " 

'  United  States  v.  Tran.s-Missouri 
Freight  Ass'n,  58  Fed.  84  (1893)  (24 
L.  R.  A.  73),  reversed  on  other  grounds, 
166  U.  S.  324  (1897),  (17  Sup.  Ct. 
Rep.  540)  :  "  Another  distinction  which 
is  now  firmly  established  and  en- 
forced grows  out  of  the  nature  of 
the  business  contracted  about,  and 
the  relation  the  contracting  parties 
bear  thereto.  An  individual  or  a 
private  corporation  engaged  in  a 
purely  private  enterpri.se  may  law- 
fully enter  into  contracts  or  combi- 
nation in  regard  thereto  which  would 
be  invalid  and  illegal  if  the  business 
was  of  a  public  nature,  and  the  corpo- 
ration was  created  for  the  purpose  of 
engaging  therein." 

Southern  Electric  Sec.  Co.  v.  State, 
(Miss.  1907),  44  So.  Rep.  789: 
"The  argument  of  counsel  that  a 
public  corporation  may  do  whatever 
an  individual  may  do  is  not  true  in  its 
broadest  aspect.  An  indi\Tdual  owns 
property  unaffected  by  a  neces.sity  to 
use  it  in  the  performance  of  duties 
in  which  the  public  have  an  interest, 
and  is  not  restrained  by  charter 
limitations." 

^  In  Cleveland,  etc.  R.  Co.  v. 
Closser,  120  Ind.  3G0  (1890),  (26  N.  E. 
Rep.  159,  22  Am.  St.  Rep.  593,  9  L.  R. 


A.  754)  the  Supreme  Court  of  Indiana 
said:  "It  is,  however,  both  appro- 
priate and  necessary  to  adjutlge  that 
a  combination  between  common 
carriers  to  prevent  competition  is,  at 
least,  prima  facie  illegal.  The  doubt 
is  as  to  whether  any  ultimate  purpose 
can  save  it  from  the  condemnation  of 
the  law ;  there  can  be  no  doubt  that, 
unexplained,  such  a  combination,  for 
such  a  purpose,  is  condemned  by 
public  policy.  If  such  a  combination 
can,  in  any  event,  be  admitted  to  be 
legal,  it  can  only  be  so  when  it  is 
affirmatively  .shown  that  its  object 
was  to  prevent  ruinous  competition, 
and  that  it  does  not  establish  unrea- 
sonable rates,  unjust  discriminations, 
or  oppressive  regulations.  If  such  a 
contract  can  stand,  it  must  be  upon  an 
affirmative  showing,  and  one  so  full, 
complete,  and  clear  a,s  to  remove  the 
presumption  (to  which  its  existence,  in 
itself,  gives  rise)  that  it  was  formed  to 
do  mischief  to  the  public  by  repressing 
fair  competition. " 

3  United  States:  Gibbs  v.  Con- 
solidated Gas  Co.,  130  U.  S.  408 
(1889),  (9  Sup.  Ct.  Rep.  553)  :  Chi- 
cago, etc.  R.  Co.  v.  Waba.sh,  etc.  R. 
Co.,  61  Fed.  996  (1894). 

Illinois:  People  v.  Chicago  Gas 
Trust  Co.,  130  111.  268  (1889),  (22 
N.    E.  Rep.    798,    17    Am.  St.  Rep. 

653 


§  360 


INTERCORPORATE    RELATIONS 


[part  V 


CHAPTER   XXXVI 

APPLICATION     OF     RULES     OF     PUBLIC     POLICY     TO     PARTICULAR 
CLASSES    OF    COMBINATIONS 


§  360.    Associations  of  Manufacturers  and  Producers. 

§  361.     Associations  of  Manufacturers  owning  Patents. 

§  362.    Associations  of  Dealers. 

§  363.  Associations  of  Railroad  Companies  —  (A)  Traffic  Contracts  of  Con- 
necting Lines. 

§  364.  Associations  of  Railroad  Companies  —  (B)  Traffic  Contracts  of  Com- 
peting Lines. 

§  364a.  Associations  of  Railroad  Companies  —  (C)  Pools. 

§  365.    Associations  of  Gas  Companies  and  Other  QMasi-public  Corporations. 

§  360.  Associations  of  Manufacturers  and  Producers.  —  The 
application  of  the  rule  of  public  policy  to  trusts  and  corpo- 
rate combinations  formed  by  manufacturing  and  producing 
companies  ha§  been  illustrated  in  the  leading  cases  of  com- 
binations of  that  description  which  have  already  been  reviewed.^ 

Associations  of  competing  manufacturers  or  producers, 
for  the  purpose  of  obtaining  control  of  the  market  for  their 
products,  or  for  the  restriction  of  competition,  have  been  re- 
peatedly entered  into,  and  their  vahdity  has,  in  many  cases, 
been  passed  upon  by  the  courts.^ 


319,  8  L.  R.  A.  497) ;  Chicago  Gas 
Light,  etc.  Co.  V.  Peoples  Gas  Light, 
etc.  Co.,  121  111.  530  (1887),  (13  N. 
E.  Rep.  169,  2  Am.  St.  Rep.  124). 

New  York:  Compare  Rafferty  v. 
Buffalo  City  Gas  Co.,  37  App.  Div. 
618  (1899),  (56  N.  Y.  Supp.  288). 

West  Virginia:  West  Virginia 
Transp.  Co.  v.  Ohio  River  Pipe  Line 
Co.,  22  W.  Va.  625  (1883),  (46  Am. 
Rep.  527). 

1  See  ante,  §  342:  "Basis  of  Rules  — 
{A)  Case  of  the  Sugar  Trust" ;  ante, 
§  343 :  "  Basis  of  Rules  —  (S)  Case  of 
the  Standard  Oil  Trust "  ;  ante,  §  344 : 
"Basis  of  Rules — (C)  Whiskey  Trust 
Cases"  ;  ante,  §345:  "  Basis  of  Rules  — 
(D)  Case  of  the  Preservers  Trust "  ;  ante, 
§  347 :    "  Basis  of  Rules  —  (F)  Case  of 

654 


the  Diamond  Match  Company  " ;  ante, 
§  348:  "  Basis  of  Rules —  (G)  Case  of 
the  Glucose  Combination"  ;  ante,  §349: 
"Basis  of  Rules — (/)  Miscellaneous 
Cases." 

2  I.  Cases  holding  associatio?is  of 
competing  ynanufacturers  or  producers 
legal : 

United  States :  Dolph  v.  Troy  Laun- 
dry Mach.  Co.,  28  Fed.  553  (1886). 

Massachusetts :  Gloucester  Isin- 
glass, etc.  Co.  V.  Russia  Cement  Co., 
154  Mass.  92  (1891),  (27  N.  E.  Rep. 
1005,  26  Am.  St.  Rep.  214,  12  L.  R.  A. 
563);  Central  Shade  Roller  Co.  v. 
Cushman,  143  Mass.  353  (1887),  (9 
N.  E.  Rep.  629). 

Missouri:  Skrainka  v.  Scharring- 
ton,  8  Mo.  App.  522  (1880). 


CHAP.  XXXVl] 


APPLICATION    OF   RULES 


§  360 


As  shown  in  a  preceding  section,  these  associations  have 
taken  various  forms.*     Agreements  regulating  prices,  restrict- 


New  Jersey:  Meredith  v.  Zinc  & 
Iron  Co.,  55  N.  J.  Eq.  212  (1897),  (37 
Atl.  Rep.  539);  Trenton  Potteries 
Co.  V.  Olyphant,  58  N.  J.  Eq.  507 
(1899),  (43  Atl.  Rep.  723,  78  Am.  St. 
Rep.  612,  46  L.  R.  A.  255). 

New  York :  Cohen  v.  Berhn  &  Jones, 
Env.  Co.,  38  App.  Div.  499  (1899), 
(56  N.  Y.  Supp.  588). 

Rhode  Island :  Oakdale  Mfg.  Co.  v. 
Garst,  18  11.  I.  484  (1894),  (28  Atl. 
Rep.  973,  49  Am.  St.  Rep.  784,  23  L. 
R.  A.  639). 

Canada:  Ontario  Salt  Co.  v.  Mer- 
chants Salt  Co.,  18  Grant's  Ch.  540 
(1871). 

II.  Cases  holding  associations  of 
competing  manxifacturers  or  producers 
illegal : 

Alabama:  Tuscaloosa  lee  Mfg.  Co. 
V.  WilUams,  28  So.  Rep.  669  (1900). 

California:  Santa  Clara  Valley 
Mill,  etc.  Co.  V.  Hayes,  76  Cal.  387 
(1888),  (18  Pac.  Rep.  391,  9  Am.  St. 
Rep.  211);  Vulcan  Powder  Co.  v. 
Hercules  Powder  Co.,  96  Cal.  510 
(1892),  (31  Pac.  Rep.  581,  31  Am.  St. 
Rep.  242). 

Michigan :  Western  Woodenware 
Ass'n  V.  Starkie,  84  Mich.  76  (1890), 
(47  N.  W.  Rep.  604,  22  Am.  St.  Rep. 
686,  11  L.  R.  A.  503). 

New  York:  De  Witt  Wire  Cloth 
Co.  V.  New  Jersey  Wire  Cloth  Co.,  16 
Daly,  529  (1891),  (14  N.  Y.  Supp. 
277) ;  Cummings  v.  Union  Blue  Stone 
Co.,  164  N.  Y.  405  (1900),  (79  Am. 
St.  Rep.  655,  52  L.  R.  A.  262). 

Ohio:  Emery  v.  Ohio  Candle  Co., 
47  Ohio  St.  320  (1890),  (24  N.  E. 
Rep.  660,  21  .\m.  St.  Rep.  819); 
Central  Ohio  Salt  Co.  v.  Guthrie,  35 
Ohio  St.  666  (1880)  ;  Jackson  v.  Brick 
Ass'n,  53  Ohio  St.  303  (1895),  (41 
N.  E.  Rep.  257,  53  .\m.  St.  Rep.  637, 
35  L.  R.  A.  287). 

Pcnnsijlvania :  Nestcr  v.  Continen- 
tal Brew.  Co..  164  Pa.  St.  473  (1894), 


(29  Atl.  Rep.  102,  44  Am.  St.  Rep. 
624)  ;  Morris  Run  Coal  Co.  v.  Barclay 
Coal  Co.,  68  Pa.  St.  173  (1871),  (8  .\m. 
Rep.  159). 

Texas:  Texas  Standard  Oil  Co.  v. 
Adoue,  83  Tex.  650  (1892),  (19  S.  W. 
Rep.  274,  29  Am.  St.  Rep.  690,  15 
L.  R.  A.  598). 

*  See  ante,  §308:  "Formation  of 
Associations. " 

In  addition  to  the  ca.ses  referred  to 
in  the  notes  to  §  308,  the  following 
recent  ca.scs  illustrate  different  forms 
of  a.ssociations  of  manufacturers  and 
protlucers : 

Where  three  coal  companies  which 
were  competing  in  the  production  and 
sale  of  a  particular  kind  of  coal  organ- 
ized, nominally  in  the  names  of  in- 
di'V'iduals,  a  fourth  corporation  to 
act  as  their  general  sales  agent,  and 
each  corporation  entered  into  a  con- 
tract with  such  agent  giving  it  the 
exclusive  right  to  sell  its  entire 
output  of  coal  at  prices  uniform 
with  those  of  the  other  companies,  it 
was  held  that  such  contract  tended 
to  suppress  competition  and  was 
illegal  and  void. 

Slaughter  v.  Thacker  Coal,  etc.  Co., 
55  W.  Va.  642  (1904),  (47  S.  E.  Rep. 
247,  104  Am.  St.  Rep.  1013).  See 
also  Pocahontas  Coke  Co.  v.  Powhatan 
Coal,  etc.  Co.,  60  W.  Va.  508  (190()), 
(56  S.  E.  Rep.  264,  116  .\m.  St.  Kep. 
901,  10  L.  R.  A.  (N.  S.)  208). 

Where  several'  competing  corpora- 
tions engaged  in  the  business  of  sup- 
plying crushed  granite  .severally  en- 
tered into  a  contract  with  a  corpora- 
tion having  a  merely  nominal  capital, 
wherein  each  corporation  agreed  fo 
sell  its  entire  output  at  a  stipulaled 
price  for  the  period  of  five  years  to 
the  latter  corporation,  and  further 
agreed,  under  a  penalty  so  high  as  to 
be  i)rohibitory,  not  to  .sell  to  any  one 
else,  it  wa.s  held  that  a  combination 

655 


360 


INTERCORPORATE   RELATIONS 


[part  V 


ing  production  and  creating  selling  agencies,  have  been,  per- 
haps, the  most  common.  Occasionally,  novel  devices  have  been 
adopted,  in  an  attempt  to  avoid  the  effect  of  the  decisions 
against  combinations.  Thus,  an  agreement  was  entered  into 
by  manufacturers  fixing  a  price  for  their  products  far  in  excess 
of  the  market  price,  and  stipulating  that  it  might  be  reduced 
but  not  increased.  It  was  contended  that  the  contract,  having 
fixed  a  maximum  price,  was  not  an  agreement  to  raise  prices,  and, 
consequently,  was  not  invalid.  But  it  was  held  that  the  agree- 
ment, for  all  practical  purposes,  controlled  prices  and  was 
illegal.^ 

In  another  instance,  for  the  purpose  of  restricting  produc- 
tion, a  manufacturer  was  paid  a  bonus  in  the  form  of  rent  to 


to  prevent  competition  was  created 
which  was  illegal  at  common  law. 

Finck  V.  Schneider  Granite  Co., 
187  Mo.  244  (1905),  (86  S.  W.  Rep. 
213,  106  Am.  St.  Rep.  452). 

Where  the  object  of  a  corporation 
was  to  obtain  control  of  the  compress 
business  in  certain  territory  by  the 
purchase  or  lease  of  local  properties 
and  it  required  from  vendors  or  les- 
sors an  agreement  not  to  engage  in 
the  business  of  compressing  cotton 
within  fifty  miles  of  any  plant  oper- 
ated by  it  and  to  aid  "in  discouraging 
unreasonable  and  unnecessary  com- 
petition," it  was  held  that  the  execu- 
tion of  such  a  lease  by  a  local  corpora- 
tion would  be  enjoined  —  the  contract 
being  void  upon  grounds  of  public 
policy. 

Anderson  v.  Shawnee  Compress  Co., 
17  Okl.  231  (1906),  (87  Pac.  Rep. 
315) ;  affirmed  by  U.  S.  Supreme  Court, 
April,  1908  (28  Sup.  Ct.  Rep.  572). 

For  cases  where  contracts  by  one 
corporation  to  sell  its  entire  output 
to  another  corporation  have  been 
held  valid,  see  Heimbucher  v.  Goff, 
119  111.  App.  373  (1905);  Over  v. 
Byram  Foundry  Co.,  37  Ind.  App. 
452  (1906),  (77  N.  E.  Rep.  302). 
But  compare  Detroit  Salt  Co.  v. 
National  Salt  Co.,  134  Mich.  103 
(1903),  (96  N.  W.  Rep.  1). 

656 


For  consideration  of  the  right  of 
corporations  to  refuse  to  maintain 
trade  relations  with  other  corpora- 
tions, see  Locker  ?>.  American  Tobacco 
Co.,  121  App.  Div.  (N.  Y.)  443 
(1907),  (106  N.  Y.  Supp.  115). 

1  National  Harrow  Co.  v.  Bement, 
21  App.  Div.  (N.  Y.)  290  (1897),  (47 
N.  Y.  Supp.  462).  The  Court  said  : 
"A  contract  fixing  the  prices  of  har- 
rows at  more  than  forty  per  cent  above 
their  value  or  selling  prices,  and  au- 
thorizing the  licensor  to  reduce,  but  not 
to  increase,  the  prices,  as  effectually 
controls  the  prices  for  all  practical 
purposes  as  though  the  power  to  in- 
crease had  been  expressly  reserved 
to  the  plaintiff.  It  would  hardly  be 
practicable  to  fix  the  prices  at  more 
than  forty-three  or  forty-five  per 
cent  above  the  selling  prices  of  the 
harrows. " 

The  decision  in  this  case  was  re- 
versed by  the  New  York  Court  of 
Appeals,  163  N.  Y.  505  (1900),  (57 
N.  E.  Rep.  764),  and  the  latter  deci- 
sion was  affirmed  by  the  U.  S.  Su- 
preme Court,  186  U.  S.  70  (1902), 
(22  Sup.  Ct.  Rep.  747).  The  reversal, 
however,  was  not  in  respect  of  the 
point  stated  in  the  text  and  foregoing 
extract. 


CHAP.  XXXVl]  APPLICATION   OF   RULES  §   360 

keep  his  plant  idle.  The  arrangement  was  held  to  be  against 
public  policy.^ 

It  is,  undoubtedly,  the  better  view  that  a  business  corpo- 
ration may  in  good  faith  purchase  the  plant  of  a  competitor, 
although  the  effect  is  pro  tanto  to  restrict  competition;  but 
it  cannot  do  so  as  a  part  of  a  scheme,  participated  in  by  the 
vendor,  to  form  a  combination  inimical  to  public  policy.^ 

In  applying  the  rule  of  public  policy  to  combinations  of 
manufacturers  or  producers  the  following  propositions  should 
be  observed : 

(1)  No  device  can  serve  as  a  shield  for  an  unla^vful  combina- 
tion. 

(2)  An  association  for  the  restriction  of  competition  through 
the  regulation  of  prices  is  not  necessarily  unlawful. 

(3)  An  association  for  the  restriction  of  competition  through 
the  limitation  of  production  is  not  necessarily  unla\vful. 

(4)  An  association  for  the  restriction  of  competition,  either 
through  the  regulation  of  prices  or  limitation  of  production, 
becomes  an  association  for  the  control  of  the  market  when  the 
restriction  becomes  suppression. 

(5)  An  a.ssociation  for  the  control  of  the  market  is  an  unlaw- 
ful combination. 


■  '  American,  etc.  Co.  v.  Peoria,  etc.  Clemons  v.  Meadows  (Ky.  1906), 
Co.,  65  111.  App.  .502  (1895).  The  (94  S.  W.  Rep.  13). 
scheme  was  held  invalid  under  an  anti-  ^  Carter-Crume  Co.  v.  Peurrung, 
trust  statute,  but  was  undoubtedly  86  Fed.  439  (1898)  ;  Coquard  v. 
illegal  without  it.  Sec  al^so  Fox,  etc.  National,  etc.  Co.,  171  III.  480  (1898), 
Steel  Co.  V.  Sclioen,  77  Fed.  29  (1896).  (49  N.  E.  Rep.  563) ;  Trenton  Pot- 
Compare  United  States  Chera.  Co.  v.  teries  Co.  v.  Olyphant,  58  N.  J.  Eq. 
Provident  Chcm.  Co.,  64  Fed.  964  507  (1899),  (43  Atl.  Rep.  723,  78  .\m. 
(1894).  St.  Rep.  612,  46  L.  R.  A.  255).  Corn- 
Where  one  of  the  two  hotel  pro-  pare,  however,  Lufkin  Rule  Co.  r. 
prietors  in  a  town  agreed  with  the  Fringeli,  57  Ohio  St.  596  (1898),  (49 
other  to  keep  his  hotel  closed  three  N.  E.  Rep.  1030,  63  Am.  St.  Rep.  736, 
years  and  the  latter  agreed  to  pay  the  41  L.  R.  A.  185)  ;  Wittenberg  r. 
former  a  specified  siun  monthly  during  MoUyneaux,  60  Neb.  583  (19(M)),  (8,3 
such  time,  it  was  held  that  the  agree-  N.  W.  Rep.  842). 

ment  was  in  restraint  of  trade,  and  This  question  is  more  fully  con- 
illegal.  In  this  case  the  Court  sidered  in  §  354,  ante:  "Analysis  of 
adopted  the  somewhat  unique  \-iew  Rule  governing  Private  Corpora- 
that  a  hotel  is  a  ^ua.si'-public  insti-  tion.t.  Form  of  Combination  Imma- 
tution,  the  keeping  oy)en  of  which  by  ierial." 
the  proprietor  is  a  public  duty. 

657 


§   362  INTERCORPORATE    RELATIONS  [PART    V 

§  361.  Associations  of  Manufacturers  owning  Patents.  — The 
leading  cases  with  respect  to  associations  of  manufacturers 
owning  patents,  of  pubhshers  and  dealers  controlling  copy- 
rights, and  of  manufacturers  and  dealers  possessing  secret 
processes  have  arisen  under  the  federal  anti-trust  statute  in 
connection  with  the  examination  of  which  the  general  sub- 
ject is  considered  at  length.^ 

Particular  consideration  of  the  application  of  the  rules  of 
public  policy  to  such  associations,  therefore,  seems  unnecessary. 
But  in  applying  the  decisions  under  the  federal  statute  it  must 
be  borne  in  mind  that  the  statute  goes  further  than  the  common 
law,  and  prohibits  all  combinations  in  restraint  of  competition 
whether  reasonable  or  unreasonable.  An  association  might 
violate  the  federal  statute  without  infringing  the  rules  of  public 
policy;  but  the  converse  proposition  is  not  true. 

§  362.  Associations  of  Dealers.  —  In  the  application  of  the 
rule  of  public  policy  to  associations  of  dealers  the  same  prin- 
ciples govern  as  in  the  case  of  similar  associations  of  manufac- 
turers or  producers. 

Cases  in  which  the  courts  have  passed  upon  the  validity  of 
associations  of  dealers  are  collected  in  the  footnote.^ 

'  See  post,   §  399;    "Application    of  Illinois:     Craft    v.    McConoughby, 

Statute    to    Combinations    under    Pat-  79  111.  346  (1875),  (22  Am.  Rep.  171) ; 

ents;  "  §  400,  "Application  of  Statute  Griffin  v.  Piper,  55  111.  App.  213  (1894). 

to    Combinations    under  Copyrights  "  ;  Iowa :    Chapin  v.  Brown,  83  Iowa, 

§  401,  "Application  of  Statute  to  Com-  156  (1891),  (48  N.  W.  Rep.  1074,  32 

binations  under  Secret  Processes."  Am.  St.  Rep.  297,  12  L.  R.  A.  428). 

^  I.      Cases  holding  associations  of  Louisiana :   India     Bagging    Asso- 

competing  dealers  legal :  ciation    v.    Kock,    14    La.    Ann.    164 

Fairbanks  v.   Leary,   40  Wis.   637  (1849). 

(1876);     Kellogg    v.    Larkin,    3    Pin.  New  York:   People  v.  Sheldon,  139 

(Wis.)  123  (1851),  (56  Am.  Dec.  164).  N.    Y.    251    (1893),    (34    N.    E.    Rep. 

A  live  stock  association  organized  785,  36  Am.  St.  Rep.  690,  23  L.  R.  A. 

for  the  protection  of  the  interests  of  221) ;    People  v.  Milk  Exchange,   145 

its    members   is   not   an   illegal   com-  N.    Y.    267    (1895),    (39    N.    E.    Rep. 

bination.  1062,   45  Am.     St.   Rep.   609,    27    L. 

Gladish  v.  Kansas  City  Live  Stock  R.  A.  437)  ;    Judd  v.  Harrington,  139 

Exch.   113  Mo.  App.  726  (1905),  (89  N.    Y.    105    (1893),    (34  N.    E.    Rep. 

S.  W.  Rep.  77).  790;   Arnot   v.  Pittston,  etc.  Coal  Co., 

II.    Cases    holding    associations    of  68  N.   Y.   558   (1877),    (23  Am.    Rep. 

competing  dealers  illegal:  190). 

California :    Pacific    Factor  Co.   v.  In   the   last   case   the   Court   said : 

Adler,   90  Cal.    110   (1891),    (27   Pac.  "Every  producer  or  vendor  of  coal  or 

Rep.  36,  25  Am.  St.  Rep.  102).  other  commodity  has  the  right  to  use 

658 


CHAP.  XXXVl] 


APPLICATION   OF   RULES 


N^  363 


§  363.  Associations  of  Railroad  Companies  —  (A)  Traffic  Con- 
tracts of  Connecting  Lines. — A  railroud  company,  upon  jH'in- 
ciples  of  the  common  law,  may  make  .such  contracts  antl 
arrangements  with  companies  owning  connecting  hues,  for  the 
interchange  of  traffic,  through  rates,  and  through  bills  of  lading, 
as  it  may  deem  expedient.^  As  a  common  carrier,  it  is  only 
bound  to  carry  on  its  own  line,  and,  in  the  absence  of  statutory 
regulation  to  the  contrar}',  may,  without  undue  discrimination, 
select  its  own  agencies  for  forwarding  upon,  or  receiving  freight 
from,  other  routes.^     Judge  Lacombe  in  Prescott  v.  Atchison, 


all  legitimate  efforts  to  obtain  the 
best  price  for  the  article  in  which  he 
deals.  But  when  he  endeavors  to 
artificially  enhance  prices  by  suppress- 
ing or  keeping  out  of  the  market  the 
products  of  others,  and  to  accom- 
plish that  purpose  by  means  of  con- 
tracts binding  them  to  withhold  their 
supply,  such  arrangements  are  even 
more  mischievous  than  combinations 
not  to  sell  under  an  agreed  price. 
Combinations  of  that  character  have 
been  held  to  be  against  public  policy 
and  illegal." 

»  United  StcUes :  Columbus  R.  Co. 
V.  Indianapolis  R.  Co.,  5  McLean,  450 
(1853). 

Illinois:  Chicago,  etc.  R.  Co.  v. 
Ayres,  140  111.  644  (1892),  (30  N.  E. 
Rep.  687). 

Minnesota :  Stewart  v.  Erie,  etc. 
Transp.  Co.,  17  Minn.  372  (1871). 

New  York:  Hartford,  etc.  R.  Co. 
V.  New  York,  etc.  R.  Co.,  3  Rob.  411 
(1865). 

New  Jersey:  Sussex  R.  Co.  v. 
Morris,  etc.  R.  Co.,  19  N.  J.  Eq.  13 
(1868) ;  reversed  on  other  grounds, 
20  N.  .1.  Eq.  542  (1869). 

Pennsylvania:  Cumberland  Val- 
ley R.  Co.  V.  Gettysburg!),  etc.  R.  Co., 
177  Pa.  St.  519  (1896),  (35  Atl.  Rep. 
952). 

^  In  Atchison,  etc.  R.  Co.  x\  Den- 
ver, etc.  R.  Co.,  110  U.  S.  680  (1884), 
(4  Sup.  Ct.  Rep.  185),  Mr.  Chief  Jus- 
tice Waite  said  :  "At  common  law,  a 
carrier  is  not  bound  to  carry  except 


on  his  own  line,  and  we  think  it  quite 
clear  that  if  he  contracts  to  go  beyond 
he  may,  in  the  absence  of  statutory 
regulations  to  the  contrary,  determine 
for  himself  what  agencies  he  will  em- 
ploy. His  contract  is  equivalent  to 
an  extension  of  his  line  for  the  purpose 
of  the  contract,  and  if  he  hokls  him- 
self out  as  a  carrier  beyond  the  line, 
so  that  he  may  be  required  to  carry  in 
that  way  for  all  alike,  he  may  never- 
theless confine  himself  in  carrving  to 
the  particular  route  he  chooses  to  use. 
He  puts  himself  in  no  worse  position, 
by  extending  his  route  with  the  help 
of  others,  than  he  would  occupy  if 
the  means  of  transportation  em- 
ployed were  all  his  own.  He  cer- 
tainly may  select  his  own  agencies  and 
his  own  associates  for  doing  his  own 
work." 

See  also  St.  Louis  Drayage  Co.  v. 
Louisville,  etc.  R.  Co.,  65  Fed.  39 
(1894);  Little  Rock,  etc.  R.  Co.  f. 
St.  Louis,  etc.  R.  Co.,  41  Fed.  563 
(1890). 

In  Eclipse  Towboat  Co.  v.  Pont- 
chartain  R.  Co.,  24  La.  Ann.  1  (1872), 
a  railroad  and  steamboat  company, 
forming  a  through  line,  agreed  to  pro- 
rate freight  from  New  Orleans  to 
Mobile,  and  it  was  held  that,  as  com- 
mon carriers,  in  the  absence  of  statu- 
tory prohibition,  they  might  agree  or 
refuse  to  prorate  through  freight  with 
anybody,  and  that  another  steamboat 
company  had  no  ground  of  com 
plaint. 


§   363  INTERCORPORATE    RELATIONS  [PART   V 

etc.  R.  Co.  *  said:  "Now  I  know  of  no  principle  of  common 
law  which  forbids  an  individual  railroad  corporation,  or  two 
or  more  corporations,  from  selecting  as  to  which  one  of  two  or 
more  corporations  they  will  employ,  as  auxiliaiy  to  their  own 
lines,  as  the  agency  by  which  they  will  send  freight  beyond  their 
own  lines,  or  as  their  agent  to  receive  freight  on  the  auxiliary 
line  to  be  transmitted  to  their  own  line  upon  through  bills  and 
without  breaking  bulk." 

The  Interstate  Commerce  Act  ^  and  other  statutes  requir- 
ing carriers  to  furnish  equal  facilities  for  the  interchange  of 
traffic  with  connecting  lines,  and  providing  that  there  shall  be 
no  discrimination  in  rates  and  charges,  do  not  invalidate 
traffic  contracts  for  the  interchange  of  business  and  relating 
to  matters  purely  of  mutual  accommodation;  nor  require  that 
such  a  contract,  if  made  with  one  connecting  carrier,  shall  be 
made  with  all.^  If  a  railroad  company  afford  equal  physical 
facilities  for  the  reception  and  delivery  of  freight,  and  maintain 
equal  rates,  it  may,  without  contravening  such  statutes,  dis- 
criminate in  forwarding  through  freight,  and  in  paying,  or 
waiving  prepayment  of,  charges,  and  may  enter  into  traffic 
contracts  for  such  purposes.* 

'  Prescott,  etc.  R.  Co.  v.  Atchison,  cott,  etc.  R.  Co.  v.  Atchison,  etc.  R. 

etc.  R.  Co.,  73  Fed.  438  (1896).  Co.,  73  Fed.  438  (1896),   (practically 

2  Par.   2   of    §  3   of   the   Interstate  overruling   the   decision   of   the   same 

Commerce  Act  (24  U.  S.  Stat,  at  L.  court   in   New   York,    etc.    R.    Co.    v. 

380)  provides:   "Every  common  car-  New  York,  etc.  R.  Co.,  50  Fed.  867 

rier  subject  to  the  provisions  of  this  (1892)) ;    Little  Rock,  etc.  R.  Co.  v. 

act  shall,  according  to  their  respective  St.   Louis,   etc.   R.   Co.,   63   Fed.   775 

powers,  afford  all  reasonable,  proper  (1894),   (26  L.   R.  A.   192),   affirming 

and  equal  facilities  for  the  interchange  59  Fed.  402  (1894);     Kentucky,  etc. 

of    traffic    between    their    respective  Bridge  Co.  v.  Louis\-ille,  etc.  R.  Co., 

lines,  and  for  the  recei\-ing,  forward-  37  Fed.  567  (1889),  (2  L.  R.  A.  289). 

ing,  and  delivering  of  passengers  and  See     also     Atchison,    etc.    R.    Co.    v. 

property   to   and   from   their   several  Denver,  etc.  R.  Co.,   110  U.  S.     667 

lines,  and  those  connecting  therewith,  (1884),  (4  Sup.  Ct.  Rep.  185),  where 

and   shall    not    discriminate   in    their  the    Supreme    Court    of    the    United 

rates  and  charges  between  such  con-  States   construed   a   pro\'ision   of   the 

necting  lines ;    but  this  shall  not  be  Colorado  Constitution  similar  to  that 

construed  as  requiring  any  such  com-  of  the  Interstate  Commerce  Act  above 

mon   carrier   to   give   the   use   of   its  stated. 

tracks  or  terminal  facilities  to  another  *  Southern  Indiana  Express  Co.  v. 

carrier  engaged  in  like  business."  United  States  Exp.  Co.,  88  Fed.  659 

'  Gulf,  etc.  R.  Co.  V.  Miami  Steam-  (1898),  (affirmed  92  Fed.  1022  (1899))  : 

ship  Co.,  86  Fed.  407  (1898);    Pres-  "The    furnishing    of    equal    facilities, 

660 


CHAP.  XXXVl] 


APPLICATIOX   OF   RULES 


§364 


The  question  whether  traffic  contracts  between  connecting 
railroads  are  of  such  a  character  as  to  operate  in  restraint  of 
interstate  commerce  in  violation  of  the  federal  anti-trust  law 
is  considered  in  another  chapter.^ 

§  364.  Associations  of  Railroad  Companies  —  (B)  Traffic  Con- 
tracts of  Competing  Lines.  —  Traflic  contracts  between  com- 
peting railroad  companies  for  the  establishment  and  mainte- 
nance of  rates,  and,  for  the  restriction  of  competition,  in 
the  absence  of  statutory  prohibitions,  are  not  necessarily, 
although   presumptively,^   against   public    policy.^     Such   con- 


without  discrimination,  does  not  re- 
quire a  common  carrier  to  advance 
money  to  all  other  carriers  on  the 
same  terms,  nor  to  give  credit  for  the 
carriage  of  articles  of  trade  and  com- 
merce to  all  carriers  because  it  ex- 
tends credit  for  such  services  to 
others."  Citing  Oregon  Short  Line, 
etc.  R.  Co.  V.  Northern  Pacific  R.  Co., 
61  Fed.  158  (1894) ;  Little  Rock,  etc. 
R.  Co.  V.  St.  Louis  Southwestern  R. 
Co.,  63  Fed.  775  (1894),  (26  L.  R.  A. 
192);  Little  Rock,  etc.  R.  Co.  v.  St. 
Louis,  etc.  R.  Co.,  41  Fed.  559  (1890). 
See  also  Gulf,  etc.  R.  Co.  v.  Miami 
Steamship  Co.,  86  Fed.  407  (1898). 

^Post,  ch.  XXXIX.  :  "Construction 
and  Application   of  Federal  Statute." 

2  Cleveland,  etc.  R.  Co.  v.  Closser, 
126  Ind.  348  (1890),  (26  N.  E.  Rep. 
159,  22  Am.  St.  Rep.  593,  9  L.  R.  A. 
754). 

*  The  argument  in  favor  of  per- 
mitting competing  railroad  companies 
to  enter  into  rca.soiiable  trafhc  con- 
tracts is  well  stated  by  Judge  Blodgett 
in  Manchester,  etc.  R.  Co.  v.  Concord 
R.  Co.,  66  N.  H.  127  (1890),  (20  Atl. 
Rep.  383,  49  Am.  St.  Rep.  582) : 
"The  naked  question  presented  then 
is,  whether  all  contracts  between  rival 
railway  corporations  which  prevent 
competition  are  necessarily  contrary 
to  public  policy,  and  therefore  mala 
prohibita  and  illegal  in  themselves. 
To  state  this  question  i.s  to  answer  it 
in  the  negative,  because  it  is  obvious 
that  the  answer  depends  on  circum- 


stances. While,  without  doubt,  con- 
tracts which  have  a  direct  tendency 
to  prevent  a  healthy  competition  are 
detrimental  to  the  public  antl,  conse- 
quently, against  public  policy,  it  is 
equally  free  from  doubt  that  when 
such  contracts  prevent  an  unhealthy 
competition,  and  yet  furnish  the  pub- 
lic with  atlecjuate  facilities  at  fixed 
and  reasonable  rates,  they  are  bene- 
ficial, and  in  accord  with  sound  prin- 
ciples of  public  policy.  For  the 
lessons  of  experience,  as  well  as  the 
deductions  of  reason,  amply  demon- 
strate that  the  public  interest  is  not 
subserved  by  competition,  which  re- 
duces the  rate  of  transportation 
below  the  standard  of  fair  compensa- 
tion;  and  the  theory  which  formerly 
obtained,  that  the  public  is  benefited 
by  unrestricted  competition  between 
railroads,  ha-s  been  so  emphatically 
disproved  by  the  results  which  have 
generally  followed  its  ailoptiou  in 
practice,  that  the  hope  of  any  per- 
manent relief  from  excessive  rates 
through  the  competition  of  a  parallel 
or  rival  road  may,  as  a  rule,  be  jastly 
characterized  as  illusory  and  falla- 
cious." 

See  also  Hare  v.  London,  etc.  R. 
Co.,  2  Johns.  &  H.  103  (1861),  (30  L. 
J.  Ch.  817,  7  Jur.  (.v.  s.)  1145),  where 
Vice-Chancellor  Wood  said:  "^^'ith 
regard  to  the  argument  against  the 
validity  of  the  agreement  [a  railroad 
traffic  contract],  I  nuiy  clear  the 
ground    of   one    objection    by    sajing 

661 


§  364a 


INTEUCORPOHATE    RELATIONS 


[part  V 


tracts  have  often  resulted  beneficially  to  the  public  as  well 
as  to  the  companies.  The  public  interests,  in  the  past,  have 
not  always  been  promoted  by  ruinous  competition,  rate-cutting 
and  railroad  bankruptcy. 

The  validity  of  a  traffic  contract,  in  the  absence  of  a  con- 
trolling statute,  depends  upon  whether  its  provisions  go  further 
than  is  necessary  to  prevent  unhealthy  competition  —  whether 
its  purpose  or  necessary  or  natural  effect  is  to  increase  rates 
or  diminish  facilities.  Traffic  contracts  affecting  interstate 
commerce  have,  however,  been  held  to  come  within  the  pro- 
hibition of  the  federal  anti-trust  act,  the  application  of  which 
is  fully  considered  elsewhere.* 

§  364a.  Associations  of  Railroad  Companies  —  (C)  Pools.  — 
The  nature  of  that  form  of  traffic  contract  called  a  pool  has 
already  been  fully  described.^     In  England  the  validity  of  pool- 


that  I  see  nothing  in  tlae  alleged  in- 
jury to  the  public  arising  from  the 
prevention  of  competition.  ...  It 
is  a  mistaken  notion  that  the  public 
is  benefited  by  putting  two  railway 
companies  against  each  other  till  one 
is  ruined,  the  result  being  at  last  to 
raise  the  fares  to  the  highest  possible 
standard." 

The  other  side  is  presented  in  the 
dissenting  opinion  of  Judge  Shiras  in 
United  States  v.  Trans.  Missouri 
Freight  Ass'n,  58  Fed.  58  (1893), 
(24  L.  R.  A.  73)  (quoted  with  ap- 
proval by  the  Supreme  Court  in  s.  c. 
166  U.  S.  290  (1896))  :  "I  fail  to  per- 
ceive the  force  of  the  argument  that, 
because  railway  companies,  through 
their  own  action,  cause  e\'ils  to  them- 
selves and  the  pubUc  by  sudden 
changes  or  reductions  in  tariff  rates, 
they  must  be  permitted  to  deprive 
the  community  of  the  benefit  of  com- 
petition in  securing  reasonable  rates 
for  the  transportation  of  the  products 
of  the  country.  Competition,  free 
and  unrestricted,  is  the  general  rule 
which  governs  all  the  ordinary  busi- 
ness pursuits  and  transactions  of  life. 
E\'ils,  as  well  as  benefits,  result  there- 
from.    In  the  fierce  heat  of  compe- 

662 


tition  the  stronger  competitor  may 
crush  out  the  weaker,  fluctuations  in 
prices  may  be  caused  that  result  in 
wreck  and  disaster  ;  yet  balancing  the 
benefits  as  against  the  e\'ils,  the  law 
of  competition  remains  as  a  control- 
ling element  in  the  business  world. 
That  free  and  unrestricted  compe- 
tition in  the  matter  of  railroad  charges 
may  be  productive  of  e\'ils  does  not 
militate  against  the  fact  that  such  is 
the  law  now  governing  the  subject. 
No  law  can  be  enacted  nor  system  be 
de\'ised  for  the  control  of  human 
affairs  that,  in  its  enforcement,  does 
not  produce  some  evil  results,  no 
matter  how  beneficial  its  general  pur- 
pose may  be.  There  are  benefits  and 
there  are  evils  which  result  from  the 
operation  of  the  law  of  free  compe- 
tition between  railway  companies. 
The  time  may  come  when  the  com- 
panies will  be  relieved  from  the  opera- 
tion of  this  law,  but  they  cannot,  by 
combination  and  agreements  among 
themselves,  bring  about  this  change." 

^  Post,  §398:  "Statute  applies  to 
Combinations  of  Railroads  and  Other 
Carriers. " 

*See  ante,  §308:  "Formation  of 
Associations." 


CHAP.  XXXVl] 


APPLICATION    OF   RULES 


§  364a 


ing  agreements  has  been  sustained  and  they  are  held  to  be  vahd 
and  enforceable  contracts.*  In  the  Continental  countries  of 
Europe,  also,  pools  are  generally  legahzed.  There  are  well- 
organized  systems  of  pools  in  most  of  these  countries,  and, 
in  some  of  them,  the  governments  themselves  enter  into  pools 
with  respect  to  State  and  private  lines. 

In  this  country,  on  the  other  hand,  while  pools  flourished 
prior  to  the  passage  of  the  Interstate  Commerce  Act  ^  they 
were  never  recognized  as  valid  agreements.  The  courts  would 
not  lend  their  aid  to  enforce  them  and  they  were  considered  to 
be  against  pubhc  policy.^  In  1887  the  Interstate  Commerce 
Act  absolutely  prohibited  them.* 


'  Hare  v.  London,  etc.  R.  Co.,  2 
Johns.  &  H.  80  (18G1),  (30  L.  J.  Ch. 
817;  7  Jur.  (x.  s.)  1145).  See  also 
Shrewsbury,  etc.  R.  Co.  v.  London, 
etc.  R.  Co.,  17  Q.  B.  652  (1857),  (2 
Mac.  &  G.  324,  16  Beav.  411,  4  De 
Gex.  M.  &  G.  116,   6  H.  L.  Cas.  113). 

A  pooling  contract,  amounting 
substantially  to  an  amalgamation 
without  legislative  authority,  was 
held  invalid  bj'  Vice-Chancellor  Wood 
in  Chatham  i'.  Newcastle,  etc.  R.  Co., 
7  Week.  R.,  731  (1859)  5  Jur.  (n.  s.) 
1100. 

*  The  first  important  railroad  pool 
in  this  country  was  the  Chicago- 
Omaha  pool,  which  was  formed  in 
1870  by  the  Northwestern,  the  Bur- 
lington and  Rock  Island  roads. 
This  pool  was  successfully  operated 
all  through  the  Granger  agitation, 
and  was  merged  into  the  Western 
Freight  As.sociation  in  1884.  An- 
other western  pool  was  the  South- 
western Rate  Association,  which 
was  establi.shed  in  1876,  and  related 
to  traffic  between  Chicago  and  St. 
Louis   and    Mississippi    River   points. 

An  early  eastern  pool  was  organ- 
ized by  the  anthracite  coal  roads  in 
1872  and  continued  in  various  forms 
for  several  years.  In  fact,  prior  to 
1887,  practically  every  railroad  in 
the  country  which  sought  for  com- 
petitive business  was  in  one  or  more 


pools.  Probably  the  most  compre- 
hensive and  effective  of  all  was  the 
Southern  Railway  and  Steamship 
Association,  which  covered  the  south- 
ern traffic. 

^  In  Cliicago,  etc.  R.  Co.  v.  Wabash, 
etc.  R.  Co.,  61  Fed.  998  (1894),  the 
Court  said  with  reference  to  a  pooling 
contract:  "Courts  will  not  lend  their 
aid  to  enforce  the  performance  of  a 
contract  which  is  contrary  to  public 
policy  or  the  law  of  the  lanil,  but  will 
leave  the  parties  in  the  plight  their 
own  illegal  action  has  placed  them." 

For  general  consideration  of  the 
legality  of  pooling  contracts,  see 
Na.shua,  etc.  R.  Co.  v.  Boston,  etc.  R. 
Co.,  19  Fed.  804  (1884). 

In  Central  Trust  Co.  v.  Ohio  Cen- 
tral R.  Co.,  23  Fed.  306  (1885).  it  was 
held  that  when  a  pooling  contract 
has  been  fully  cxccutetl  and  the  profits 
derived  therefrom  collected  and  held 
by  a  receiver  of  one  of  the  companies, 
he  will  not  be  allowed  to  retain  them, 
but  will  be  ordered  to  make  pajTnent. 
to  the  other  party  to  the  contract  in 
accordance  with  its  terms  and  with- 
out regard  to  its  validity. 

For  consideration  of  pooling  ar- 
rangements made  by  receivers,  see 
Missouri  Pac.  R.  Co.  v.  Texas,  30 
Fed.  2  (1887). 

*  Section  5  of  the  Interstate  Com- 
merce Act  provides  as  follows  :  "That 

()()3 


§   365  INTERCORPORATE   RELATIONS  [PART   V 

The  anti-pooling  clause  was  the  outgrowth  of  the  popular 
feeling  that  pools  are  designed  to  increase  rates  and  have  that 
effect.  The  real  purpose  of  a  pool,  however,  is  to  maintain 
rates,  not  to  establish  or  increase  them.  And,  as  a  matter  of 
fact,  rates  decreased  in  this  country  when  pools  were  most 
prevalent.  Pools  undoubtedly  eliminate  competition,  but 
competition  inevitably  leads  to  the  rebates  and  other  discrimina- 
tions prohibited  by  another  clause  of  the  Interstate  Commerce 
Act.  Competition  cannot  be  enforced  and  discriminations 
prevented  at  the  same  time.  The  Act  presents  the  anomaly 
of  prohibiting  discriminations,  and  at  the  same  time  of  prohibit- 
ing a  most  effective  means  for  preventing  them.  Instead  of 
prohibiting  pools  they  might  well  have  been  legalized  and 
then  regulated.^ 

§  365.  Associations  of  Gas  Companies  and  Other  Quasi-public 
Corporations.  —  The  rule  of  public  policy  applicable  to 
quasi-puhlic  corporations  necessarily  applies  to  all  corporations 
of  that  class.  An  examination  of  the  rule  in  reference  to  par- 
ticular corporations  or  kinds  of  corporations,  within  that 
class,  is  valuable  only  by  way  of  illustration. 

it  shall  be  unlawful  for  any  common  owning    parallel    lines    wherein    it    is 

carrier   subject   to   the   provisions   of  agreed    that    neither    company    shall 

this  Act,  to  enter  into  any  contract,  interfere  with  the  other  in  construct- 

agreernent  or  combination  with  any  ing  new  lines ;   nor  does    it  invalidate 

other  common  carrier  or  carriers  for  a  contract  as  a  whole,  but  only  the 

the    pooling    of    freights    of    different  pooling  pro\'isions  in  it. 

and  competing  railroads,  or  to  divide  Ives  v.  Smith,  55  Hun  (N.  Y.),  606 

between  them  the    aggregate   or  net  (1889),  (8  N.  Y.  Supp.  46),    affirming 

proceeds  of  the  earnings  of  such  rail-  19  N.  Y.  St.  Rep.  556  (1888),  (3  N.  Y. 

roads,   or   any  portion   thereof;    and  Supp.  645). 

in  any  case  of  an  agreement  for  the  '  Various  measures  concerning  pool- 
pooling  of  freights  as  aforesaid  each  ing  have  been  proposed  during  the 
day  of  its  continuance  shall  be  deemed  last  ten  years.  Some  have  merely 
a  separate  offence."  removed  the  proliibition.    Others  have 

The  provisions  of  this  section  do  made  pooling  lawful,   but  have  pro- 

not  apply  to  a  pooling  contract  be-  \'ided  for  the  submission  of  the  pool- 

tween  a  railroad  company  and  a  pipe  ing  agreement  to  the  Interstate  Com- 

line  company  for  the  transportation  merce     Commission.       Consolidations 

of  oil.  have  so  largely  divided  the  field  that 

Independent  Refiners'  Ass'n  v.  now  it  is  rather  late  for  strictly  pool- 
Western  New  York,  etc.  R.  Co.,  4  Int.  ing  legislation.  Legalization  of  traffic 
Com.  Rep.  162  (1892).  agreements      between     railroads     is. 

This  section  does  not  invalidate  a  however,     demanded.      See     post,     § 

contract  between  railroad  companies  398,  note. 

664 


CHAP.  XXXVl] 


APPLICATION   OF   RULES 


§   365 


Gas  companies  which  have  acquired  the  right  to  lay  their 
pipes  in  the  pubhc  streets  are  quasi-puhlic  corporations,  and 
any  combination  among  them,  the  necessary  or  natural  con- 
sequence of  the  operation  of  which  will  be  to  increase  charges 
beyond  reasonable  rates  or  to  restrict  facilities,  is  inimical 
to  public  policy.* 


*  Gibbs  V.  Consolidated  Gas  Co., 
130  U.  S.  408  (1889),  (9  Sup.  Ct.  Rep. 
553)  :  "The  .supplj'ing  of  illuminating 
gas  is  a  business  of  a  public  nature  to 
meet  a  public  necessity.  It  is  not  a 
business  like  that  of  an  ordinary  cor- 
poration engaged  in  the  manufacture 
of  articles  that  may  be  furnished  by 
individual  effort.  .  .  .  Hence,  while 
it  is  justly  argued  that  those  rules 
which  say  that  a  given  contract  is 
agaiust  public  policy  should  not  be 
arbitrarily  extended  so  as  to  interfere 
with  the  freedom  of  contract,  yet,  in 
the  instance  of  business  of  such  char- 
acter that  it  presumably  cannot  be 
restrained  to  any  extent  whatever 
without  prejudice  to  the  public  inter- 
est, courts  tlecline  to  enforce  or  sus- 
tain contracts,  imposing  such  re- 
straint, however  partial,  because 
in  contravention  of  public  policy." 

People  V.  Chicago  Gas  Trust  Co., 
130  111.  293  (1889),  (22  N.  E.  Rep. 
798,  17  Am.  St.  Rep.  319,  8  L.  R.  A. 
497)  :  "The  business  of  manufactur- 
ing and  distributing  illuminating  gas 
by  means  of  pipes  laid  in  the  streets 
of  a  city  is  a  business  of  a  public 
character ;  it  is  the  exercise  of  a 
franchise  belonging  to  the  State ;  the 
services  rendered  and  to  be  rendered 
for  such  a  grant  are  of  a  public  nature  ; 
companies  engaged  in  such  bu.sine.ss 
owe  a  duty  to  the  public  ;  any  un- 
reasonable restraint  upon  the  per- 
formance of  such  duty  is  prejudicial 
to  the  public  interest  and  in  contra- 
vention  of   public    policy." 

See  also  Chicago  Gas  Light,  etc.  Co. 
V.  People's  Gas  Light,  etc.  Co.,  121  111. 
530  (1887),  (13  N.  E.  Rep.  169,  2  Am. 
St.  Rep.  124) ;  State  v.  Portland  Natu- 


ral Gas,  etc.  Co.,  153  Ind.  483  (1899), 
(53  N.  E.  Rep.  1089,  74  Am.  St.  Rep. 
314,  53  L.  R.  A.  413) ;  San  Antonio 
Gas  Co.  V.  State,  22  Tex.  Gv.  App.  118 
(1899),  (54  S.  W.  Rep.  289). 

Compare  these  decisions  with  that 
in  the  case  of  Rafferty  v.  Buffalo  City 
Gas  Co.,  37  App.  Div.  (X.  Y.)  622 
(1899),  (56  N.  Y.  Supp.  288),  where 
the  Court,  in  holding  that  one  gas 
com  pan}'  had  power  to  make  a  con- 
tract to  purchase  stocks  and  bonds  of 
a  competing  company,  said  :  "  It  is 
further  said  that  the  contemplated  pur- 
chase operates  to  effect  a  combination 
with  another  company  for  the  creation 
of  a  monopoly,  or  the  unlawful  restraint 
of  trade,  or  the  prevention  of  competi- 
tion in  a  necessary  of  life,  contrary  to 
the  provisions  of  §  7  of  the  Stock  Cor- 
poration Law.  .\  monopoly  is  not 
constituted.  No  exclusive  pri\Tlege  or 
right  as  against  individuals  or  corpora- 
tions to  manufacture  or  sell  gas  is  ac- 
quired. Nor,  in  a  more  restricteil  u.se 
of  the  word  'monopoly, '  is  that  con- 
dition brought  about  by  force  of  this 
contract.  .  .  .  The  contract  of  pur- 
chase here  involved  does  not  appear 
on  its  face  to  be  in  imlawful  restraint 
of  traile,  nor  to  prevent  lawful  com- 
petition. The  avowed  and  apparent 
purpose  of  it  is  to  prevent  ruinous 
competition.  ...  A  contract  maile 
to  prevent  or  avoid  destructive  com- 
petition is  not  necessarily  invalid." 

A  statute  authorizing  the  con- 
soUdation  of  the  gas  companies  in  a 
city  is  not  invalid  jvs  authorizing  the 
creation  of  a  monopoly. 

Poojile  r.  People's  Gas  Light,  etc. 
Co.,  205  111.  482  (1903),  (68  N.  E.  Rep. 
950,  98  Am.  St.  Rep.  244). 

665 


365 


INTERCORPORATE    RELATIONS 


[part  V 


All  carrier  corporations  which  exercise  public  franchises 
are  governed,  in  respect  of  the  right  of  association,  by  the 
same  rule.  It  is  immaterial  whether  they  physically  carry 
merchandise,  convey  messages  by  means  of  the  electrical 
current,^  or  maintain  a  pipe  line  for  the  transportation  of 
petroleum.^ 


*  In  Benedict  v.  Western  Union  Tel. 
Co.,  9  Abb.  N.  C.  (N.  Y.)  221  (1881), 
when  two  competing  telegraph  com- 
panies entered  into  an  agreement  for 
dividing  expenses  and  earnings,  the 
Court  said:  "In  the  absence  of  any 
legislation,  it  might  be  urged  that  such 
arrangements  were  against  public 
policy  as  tending  to  prevent  competi- 
tion ;  but  in  view  of  the  legislation 
which  authorizes  the  consolidation  of 
these  corporations,  the  purchase  and 
sale  of  their  franchises,  the  joint  con- 
struction and  use  of  telegraph  lines, 
all  of  which  tend  to  prevent  competi- 
tion, it  cannot  be  said  that  any  such 
public  policy  is  countenanced  by  the 
legislature  of  this  State." 

Compare  this  language  with  that  of 
the  New  York  Court  of  Appeals  in  the 
Sugar  Tru.st  Case  (People  v.  North 
River  Sugar  Ref 'g  Co.,  121  N.  Y.  582 
(1890)),  (24  N.  E.  Rep.  834,  18  Am.  St. 
Rep.  843,  9  L.  R.  A.  33),  where  it 
was  said,  in  substance,  that  a  grant  of 
authority  to  consolidate  only  coun- 
tenanced consolidation  according  to  its 
pro\'isions,  and  was  no  indication  of 
public  policy  in  favor  of  combinations. 

An  agreement  between  a  telegraph 
company  and  a  railroad  company, 
wherein  the  latter  grants  to  the  former 
the  exclusive  right  to  maintain  a  tele- 
graph Une  upon  its  right  of  way,  is 
against  public  policy  and  void.     Balti- 


more, etc.  Tel.  Co.  v.  Western  Union 
Tel.  Co.,  24  Fed.  319  (1884) ;  Western 
Union  Tel.  Co.  v.  Burlington,  etc.  R. 
Co.,  11  Fed.  1  (1882)  ;  Union  Trust  Co. 
V.  Atchison,  etc.  R.  Co.,  8  N.  Mex.  327 
(1895),  (43  Pac.  Rep.  701);  Western 
Union  Tel.  Co.  v.  American  Union 
Tel.  Co.,  65  Ga.  160  (1880),  (38  Am. 
Rep.  781).  See  also  United  States  v. 
Union  Pacific  R.  Co.,  160  U.  S.  1 
(1895),  (16  Sup.  Ct.  Rep.  190) ;  West- 
ern Union  Tel.  Co.  v.  Pennsylvania 
R.  Co.,  195  U.  S.  540  (1904),  (25 
Sup.  Ct.  Rep.  133) ;  Georgia  R.,  etc. 
Co.  V.  Atlantic  Postal  Tel.  Coal  Co. 
Co7npare  Western  Union  Tel.  Co.  v. 
Chicago,  etc.  R.  Co.,  86  111.  246  (1877), 
(29Am.  Rep.  28). 

2  West  Virginia  Transp.  Co.  v.  Ohio 
River  Pipe  Line  Co.,  22  W.  Va.  625 
(1883),  (46  Am.  Rep.  527)  :  "If  there 
be  any  sort  of  business,  which  from 
its  pecuUar  character  can  be  restrained 
to  no  extent  whatever  without  preju- 
dice to  the  public  interest,  then  the 
courts  would  be  compelled  to  hold 
void  any  contract  imposing  any  re- 
straint, however  partial,  on  this  pecul- 
iar business ;  pro\'ided,  of  course,  it 
be  clearly  shown  that  the  peculiar 
business  thus  attempted  to  be  re- 
strained is  of  such  a  character,  that 
any  restraint  upon  it,  however 
partial,  must  be  regarded  by  the  court 
as  prejudicial  to  the  public  interest." 


666 


CHAP.  XXXVIl] 


RIGHTS    AND   REMEDIES 


366 


CHAPTER  XXXVIl 


RIGHTS    AND    REMEDIES 


366.    Rights  and    Remedies  of    Members  of    Illegal  Ck)mbinatioiis.     In 
General. 
Rights  and  Remedies  between  Combination  and  its  Members. 
Rights  of  Receivers  and  Assignees. 
Collateral  Attack  upon  Combination.      Remedies  upon  Independent 

Contracts. 
Rights  of  Creditors. 
§  371.    Rights  and  Remedies  of  Stockholders  of  Combining  Corporations. 
§  372.    Remedies  of  State  —  (A)  Quo  Warranto  against  Corporate  Combi- 

•nation. 
§  373.    Remedies  of  State  —  (B)   Quo   WarratUo  against  Combining  Corpo- 
rations. 
§374.    Remedies  of  State  —  (C)   Injunction. 
§  375.    Evidence. 


§367. 
§  368. 
§  369. 

§  370. 


§  366.  Rights  and  Remedies  of  Members  of  Illegal  Combina- 
tions. In  General.  — The  parties  to  a  combination,  formed  in 
contravention  of  a  rule  of  pubhc  poUcy,  stand  in  pari  delicto, 
and  the  law  will  not  aid  them  in  enforcing  any  rights  based 
upon  the  unlawful  contract.'  A  court  of  law  or  equity  will 
take  them  as  it  finds  them,  and  as  it  finds  them  will  leave 
them,  without  assistance  in  any  matter  growing  out  of  the 
illegal  combination. 


'  United  States:  National  Harrow 
Co.  V.  Hench,  84  Fed.  226  (1898). 

California:  Vulcan  Powder  Co.  v. 
Hercules  Powder  Co.,  96  Cal.  510 
(1892),  (31  Pac.  Rep.  581,  31  Am.  St. 
Rep.  242). 

Illinois :  Craft  v.  McConoughy,  79 
111.  346  (1875),  (22  .\m.  Rep.  171); 
Foss  V.  Cummings,  149  111.  .353  (1894), 
(36  N.  E.  Rep.  553).  See  also  Ameri- 
can Strawboard  Co.  v.  Peoria  Straw- 
board  Co.,  65  111.  App.  502  (1895). 

Iowa:  Chapin  i'.  Brown,  83  Iowa, 
156  (1891),  (48  N.  W.  Rep.  1074, 
32  Am.  St.  Rep.  297,  12  L.  R.  A. 
428). 

Kansas:  Greer  r.  Pa>Tie,  4  Kan. 
App.  153  (1896),  (46  Pac.  Rep.  190). 


Louisiana:  Texas,  etc.  R.  Co.  v. 
Southern  Pac.  R.  Co.,  41  La.  Ann.  970 
(1889),  (6  So.  Rep.  888,  17  Am.  St. 
Rep.  445)  ;  India  Bagging  Ass'n  v. 
Kock,  14  La.  Ann.  168  (1859). 

Missouri:  State  r.  Firemen's  Fund 
Ins.  Co.,  152  Mo.  1  (1899),  (52  S.  W. 
Rep.  595,  45  L.  R.  A.  363). 

New  York:  Judd  v.  Harrington, 
139  N.  Y.  105  (1893),  (34  N.  E.  Rep. 
790) ;  Pittsburgh  Carbon  Co.  v.  Mc- 
Millan, 119  N.  Y.  46  (1890),  (23  N.  E. 
Rep.  530,  7  L.  R.  A.  46)  ;  Leonanl  v. 
Poole,  114  N.  Y.  379  (1889),  (21  N.  E. 
Rep.  707,  11  .\m.  St.  Roji.  667,  4  L. 
R.  A.  728)  ;  Gray  v.  Oxnard  Bros.  Co., 
39  Hun.  387  (1891),  (13  N.  Y.  Supp. 
86) ;    Clancy  v.   Onondaga   Fine   Salt 

667 


366 


INTERCORPORATE    RELATIONS 


[part  V 


In  the  application  of  the  maxim  ex  turpi  causa  non  oritur 
actio,  the  test  is  whether  the  plaintiff  is  obliged  to  rely  upon 
the  illegal  contract  in  order  to  establish  his  right  to  relief.^ 
If  he  claims  through  the  medium  of  an  unlawful  transaction, 
he  is  without  standing,  for  the  courts  will  not  assist  in  ad- 
justing differences  growing  out  of,  or  requiring  the  investi- 
gation of,  illegal  transactions,  however  much  they  may  be 
disguised. 

Upon  these  principles,  a  member  of  an  illegal  combination 
cannot  maintain  an  action  to  recover  his  share  of  the  profits 
of  the  enterprise,^  or  for  an  accounting;  ^  nor  can  he  obtain 
redress  for  a  fraud  committed  by  another  member  in  carrying 
out   the   combination   agreement/     He   is   not   only   without 


Mfg.  Co.,  62  Barb.  395  (1862);  De 
Witt  Wire  Cloth  Co.  v.  New  Jersey 
Wire  Cloth  Co.,  16  Daly,  529  (1891), 
(14  N.  Y.  Supp.  277). 

Ohio:  Emery  v.  Ohio  Candle 
Co.,  47  Ohio  St.  320  (1890),  (24 
N.  E.  Rep.  660,  21  Am.  St.  Rep. 
819). 

Pennsylvania:  Nester  v.  Conti- 
nental Brewing  Co.,  161  Pa.  St.  473 
(1894),  (29  Atl.  Rep.  102,  41  Am.  St. 
Rep.  894) ;  Morris  Run  Coal  Co.  v. 
Barclay  Coal  Co.,  68  Pa.  St.  173  (1871), 
(8  Am.  Rep.  159). 

'  Greer  v.  Payne,  4  Kan.  App.  162 
(1896),  (46  Pac.  Rep.  190)  :  "The  con- 
tract of  membership  is,  therefore, 
illegal  and  void,  and  no  right  can  grow 
out  of  it.  Hence,  it  comes  to  this  : 
A  court  of  equity  is  asked  to  assist  the 
plaintiffs  in  carrying  out  an  illegal 
contract,  so  that  they  may  enjoy  its 
fruits,  and  to  aid  them  in  maintaining 
a  position  as  members  of  an  organ- 
ization, which  can  be  done  only  by  a 
continual  violation  of  the  law.  This 
will  not  be  done.  The  law  will  not 
allow  any  effect  to  an  illegal  contract 
either  by  enforcing  it  or  by  aiding  one 
to  secure  benefits  accruing  from  it. 
Whenever  it  is  necessary  for  a  plain- 
tiff to  establish  or  rely  upon  an  illegal 
contract  as  a  basis  of  hi'i  right  to  relief, 
the  courts  will  not  stop  to  inquire  into  the 

668 


merits  of  the  controversy,  but  will  at  once 
refuse  to  exercise  their  jurisdiction  in  his 
behalf." 

See  also  Nester  v.  Continental  Brew- 
ing Co.,  161  Pa.  St.  473  (1894),  (29  Atl. 
Rep.  102,  41  Am.  St.  Rep.  894).  The 
Charles  E.  Wiswall,  86  Fed.  671  (1898) ; 
Getz  Bros.  &  Co.  v.  Federal  Salt  Co., 
147  Cal.  115  (1905),  (81  Pac.  Rep. 
416,   109  Am.  St.  Rep.   114). 

2  Emery  v.  Ohio  Candle  Co.,  47  Ohio 
St.  320  (1890),  (24  N.  E.  Rep.  660,  21 
Am.  St.  Rep.  849) ;  Foss  v.  Cummings, 
149  111.  353  (1894),  (36  N.  E.  Rep. 
553)  ;  Gray  v.  Oxnard  Bros.  Co.,  59 
Hun  (N.  Y.),  387  (1891),  (13  N.  Y. 
Supp.  86).  See  also  Meyers  v.  Meril- 
lion,  118  Cal.  352  (1897),  (50  Pac. 
Rep.  662). 

3  Nester  v.  Continental  Brewing  Co., 
161  Pa.  St.  473  (1894),  (29  Atl.  Rep. 
102,  41  Am.  St.  Rep.  894)  ;  Leonard 
v.  Poole,  114  N.  Y.  379  (1889),  (21 
N.  E.  Rep.  707,  11  Am.  St.  Rep.  667, 
4  L.  R.  A.  728). 

*  Leonard  v.  Poole,  114  N.  Y.  379 
(1889),  (21  N.  E.  Rep.  707,  11  Am. 
St.  Rep.  667,  4  L.  R.  A.  728)  :  "The  re- 
lief sought  would  require  the  court  to 
investigate  all  of  the  various  transac- 
tions of  these  parties,  from  the  begin- 
ning to  the  end  of  their  unlawful 
enterprise,  and  adjust  the  differences 
between  them.     This  is  precisely  what 


CHAP.  XXXVIl] 


RIGHTS   AND   REMEDIES 


367 


remedy  upon  the  agreement  respecting  the  combination,  but 
he  cannot  recover  for  the  breach  of  any  contract  made  in  further- 
ance of  its  objects.^  If  follows,  also,  that  a  court  of  equity 
will  afford  him  no  rehef,  by  injunction  or  otherwise,  for  the 
enforcement  or  protection  of  his  rights  as  a  member  of  an  unlaw- 
ful combination.^ 

§  367.  Rights  and  Remedies  between  Combination  and  its 
Members.  —  An  agreement  for  a  combination  contrary  to 
public  policy  is  invalid;  the  resultant  organization — asso- 
ciation, trust  or  corporate  combination  —  is  unlawful.  Courts 
of  law  or  equity  will  not  lend  such  a  combination  aid  in  the 
enforcement  of  the  invalid  agreement  or  in  any  matter  adhering 
thereto.  If  the  contracts  between  the  combination  and  its 
members  are  executor}',  a  court  will  not  enforce  them  in  favor 
of  or  against  the  combination;  if  fully  executed,  a  court  will  not 
attempt  to  rescind  them  at  the  suit  of  either  party,  or  grant 
other  relief.^     Both  the  combination  and  its  members  \\\\\  be 


courts  have  always  refused  to  do. 
The  fraud  which  the  trial  court  found 
was  practised  by  these  defendants 
upon  their  a-ssociate  cannot  be  too 
strongly  condemned,  but  courts  arc 
not  organized  to  enforce  the  sajnng 
that  there  is  honor  among  law-break- 
ers, and  the  desire  to  punish  must 
not  lead  to  a  decision  establishing  the 
doctrine  that  law-breakers  are  en- 
title^l  to  the  aid  of  courts  to  adjust 
differences  arising  out  of,  and  requir- 
ing an  investigation  of,  their  illegal 
transactions." 

It  affords  no  ground  for  enforcing 
an  illegal  agreement  that  the  defend- 
ant is  more  culpable  than  the  plaintiff. 

Detroit  Salt  Co.  v.  National  Salt 
Co.,  134  Mich.  103  (1903),  (96  N.  W. 
Rep.  1). 

'  Where  a  contract  for  the  sale  of 
grain  bags  providetl  that  the  purchaser 
should  have  the  exclusive  right  to  sell 
such  bags  up  to  a  prescribed  number 
and  for  the  sale  of  a  lesser  number 
pro  rata,  and  such  contract  was  a  part 
of  a  scheme  to  gain  a  monopoly,  it 
was  held  that  the  contract  was  void 


and  that  there  could  be  no  recovery 
for  a  breach  thereof. 

Pacific  Factor  Co.  v.  Adler,  90  Cal. 
110  (1891),  (27  Pac.  Rep.  36,  25 
Am.  St.  Rep.  102).  See  also  Morris 
Run  Coal  Co.  v.  Barclay  Coal  Co., 
68  Pa.  St.  173  (1871),  (8  Am.  St.  Rep. 
159) ;  Beechley  v.  Mulville,  102  Iowa, 
602  (1897),  (70  X.  W.  Rep.  107,  63 
Am.  St.  Rep.  479). 

2  Greer  v.  Payne,  4  Kan.  App.  153 
(1896),  (46  Pac.  Rep.  190).  See  also 
next  section. 

3  Queen  Ins.  Co.  v.  State,  86  Tex. 
2.50  (1893),  (24  S.  W.  Rep.  397, 
22  L.  R.  A.  491). 

See  also  Richardson  v.  Buhl,  77 
Mich.  661  (1889),  (43  N.  W.  Rep.  1102, 
6  L.  R.  \.  457),  where  the  Court 
(per  ChampUn,  J.)  said:  "It  is  also 
well  .settled  that,  if  a  contract  be 
void  as  against  public  policy,  the  court 
will  neither  enforce  it  while  execu- 
tory, nor  relieve  a  party  from 
loss  by  ha\'ing  performed  it  in  part." 
Citing  Foote  i<.  Emerson,  10  Vt.  344 
(1838),  (33  .\m.  Dec.  205);  Hanson 
V.    Power,   8   Dana  (Ky.),  91  (1839); 

669 


§367 


INTERCORPORATE    RELATIONS 


[part  V 


left  where  they  have  placed  themselves.  Thus,  a  corporate 
combination  cannot  maintain  an  action  of  replevin  for  property 
purchased  in  the  formation  of  the  combination  l)ut  which  has 
remained  in  the  possession  of  the  vendor;  ^  nor  sue  for  a  receiver 
and  an  accounting  when  a  member  withdraws.^  Nor  will  a 
bill  for  an  injunction  lie  to  prevent  a  member  from  doing  business 
contrary  to  the  provisions  of  the  combination  agreement,  even 
though  it  retain  the  consideration  paid.^ 

It  has,  however,  been  held  that  a  member,  seeking  to  with- 
draw from  an  illegal  combination  and  returning  the  considera- 


Pratt  V.  Adams,  7  Paige  (N.  Y.),  616 
(1839);  Piatt  v.  Oliver,  1  McLean 
(U.  S.),  294  (1837);  2  McClean 
(U.  S.),  277  (1840);  Stanton  v. 
Allen,  5  Denio  (N.  Y.),  434  (1848), 
(49  Am.  Dec.  282).  In  Hutchins  v. 
Weldon,  114  Ind.  89  (1887),  (15  N.  E. 
Rep.  804),  the  Supreme  Court  of 
Indiana  said  :  "The  law  in  such  case 
will  leave  the  parties  just  where  it 
finds  them.  If  the  contract  has  not 
been  executed,  the  law  will  not  extend 
relief.  When  a  contract,  void  as 
against  sound  morals  or  public  policy, 
has  been  fully  executed  by  both 
parties  and  suit  brought  under,  upon 
or  against  such  contract,  potior  est 
conditio  defendentis." 

*  Bishop  V.  American  Preservers 
Co.,  157  lU.  316  (1895),  (41  N.  E. 
Rep.  765,  48  Am.  St.  Rep.  317)  : 
"  In  the  case  at  bar,  the  appellant  never 
parted  with  the  possession  of  the  prop- 
erty. After  he  executed  the  bill  of 
sale,  he  still  continued  his  business  the 
same  as  before,  though  subject  to  the 
orders  and  direction  of  the  trust.  The 
beginning  of  the  action  of  replevin  ad- 
mits his  possession,  as  replevin  does 
not  lie  against  one  not  in  possession. 
Wells  on  Replevin,  77  ;  Hall  v.  White, 
106  Mass.  599  (1871).  We  see  no 
reason  why  the  doctrine  of  the  Kirk- 
patrick  Case  does  not  apply  here, 
although  the  action  is  replevin  and  not 
ejectment,  and  although  the  property 
involved  is   personalty   and   not   real 

670 


estate.  The  bill  of  sale  rests  under 
the  ban  of  the  law,  as  well  when 
executed  to  carry  out  the  illegal 
agreement  hereinbefore  set  forth,  as 
if  it  had  been  made  for  the  purpose 
of  defrauding  creditors.  The  law 
will  not  aid  the  appellee  to  recover 
the  property,  but  will  leave  both  it 
and  appellant  where  they  were  when 
the  suit  was  begun." 

2  American  Biscuit,  etc.  Co.  v, 
Klotz,  44  Fed.  721  (1891). 

^  American  Preservers  Trust  v. 
Taylor  Mfg.  Co.,  46  Fed.  152  (1891)  : 
"The  ultimate  question  is  whether 
the  covenant  to  discontinue  one 
branch  of  its  business,  made  under  the 
circumstances  and  for  the  considera- 
tions disclosed  by  the  bill,  can  be  en- 
forced in  equity  against  the  defendant 
corporation.  An  injunction  as  prayed 
for,  if  granted,  will  operate,  of  course, 
as  a  specific  enforcement  of  the  cove- 
nant; and  the  general  rule  is  that 
agreements  will  not  be  specifically 
enforced  that  are  inequitable,  or 
tainted  with  illegality,  or  that  are  in 
excess  of  corporate  powers.  .  .  In 
\'iew  of  the  unlawful  character  of  the 
transaction  out  of  which  the  covenant 
arises,  I  conclude  that  a  court  of 
equity  would  not  be  warranted  in 
enforcing  it  by  injunction,  even 
though  the  defendant  company  has 
received,  and  still  retains,  a  portion  of 
the  consideration  which  induced  it  to 
execute  the  covenant." 


CHAP.  XXXVIl] 


RIGHTS   AND  REMEDIES 


§368 


tion  paid,  is  entitled  to  an  injunction  restraining  the  combina- 
tion from  taking  possession  of  its  property,  and  to  a  decree 
declaring  the  combination  agreement  void.' 

An  agreement  contrary  to  a  rule  of  public  policy,  in  its 
effect  upon  the  rights  of  the  parties,  must  ])e  distinguished 
from  an  ultra  vires  agreement.  Property  delivered  to  a  com- 
bination which  is,  in  its  formation,  merely  beyond  the  powers 
of  the  corporations  composing  it,  may  be  recovered  back;- 
while  no  relief  will  be  granted  to  a  party  to  an  agreement  inimi- 
cal to  public  poUcy.  The  distinction  is  between  invalidity  and 
unlawfulness. 

§  368.  Rights  of  Receivers  and  Assignees.  —  As  a  general 
rule,  a  receiver  takes  the  title  of  the  corporation  which  he 
represents,  and  any  defences  which  would  have  been  good 
against  it  are  good  against  him.  Thus,  a  receiver  appointed  in 
proceedings  to  forfeit  the  charter  of  a  corporation  on  account  of 
its  participation  in  an  illegal  combination,  cannot  maintain  an 
action  against  another  member  of  the  combination  to  recover 
a  share  of  the  profits  accruing  from  the  unlawful  enterprise.' 


'  Merz  Capsule  Co.  i\  United  States 
Capsule  Co.,  G7  Fed.  414  (1895)  :  "It 
remains  to  be  considered  what  relief 
should  be  administered  upon  this 
state  of  things.  The  proof  sufficiently 
shows  —  and,  indeed,  the  nature  of 
the  transaction  sufficiently  demon- 
strated this  —  that  the  complainant 
on  its  own  account  is  not  entitled  to 
claim  any  relief  founded  upon  the 
contract ;  but  the  contract  itself 
being  contrary  to  law,  furnishes  no 
support  for  the  aggressive  attitude 
and  conduct  of  the  defendants.  The 
complainant's  conduct  ha-s  been  dis- 
ingenuous, but  I  think  it  has  the  law 
of  the  case.  The  result  is,  as  it  seems 
to  me,  that  the  parties  .stand,  in  re- 
spect of  their  property  rights,  upon 
the  same  footing  a-s  if  the  contract 
had  never  been  made  ;  and,  upon  the 
restoration  by  the  complainant  of 
what  it  ha,s  received  upon  the  footing 
of  the  contract,  it  would  seem  that 
the  complainant  is  entitled  to  pre- 
ventive relief,  and  that  the  defendants, 


or  such  of  them  as  threaten  to  invade 
the  property  of  the  complainant, 
should  be  restrained  from  interfering 
therewith." 

2  Mallory  v.  Hanaur  Oil  Works,  86 
Tenii.  59H  (1888),  (8  S.  W.  Rep.  .396). 
In  this  case  five  companies  engaged 
in  the  manufacture  of  cotton  seed  oil 
formed  a  trust  and  turned  over  their 
mills  to  an  executive  conunittee,  antl 
they  were  operated  by  such  com- 
mittee. One  of  the  corporations 
voted  to  withdraw,  and  brought  an 
action  of  imlawful  detainer  for  the 
recovery  of  its  property.  The  trust 
agreement  was  held  invalid  as  in- 
voh-ing  an  ultra  vires  partnership  of 
corporations  and  the  plaintiff  was 
allowed  a  recovery.  No  question 
appears  to  have  been  rai.sed  as  to 
the  legality  of  the  combination  u\K>n 
considerations  of  public   policy. 

3  Gray  i'.  Oxnard  Bros.  Co.,  59  Hun 
(N.  Y.),  387  (1891),  (13  N.  Y.  Supp. 
86). 

671 


§  369  INTERCORPORATE   RELATIONS  [PART   V 

Upon  similar  principles,  an  assignee  of  a  party  to  an  illegal 
combination  stands  in  the  shoes  of  his  assignor  and  takes  the 
assigned  claim  subject  to  all  disabiUties  attaching  to  it.^ 

An  exception  to  the  general  rule  that  defences  good  against 
a  corporation  are  available  against  its  receiver  exists  where 
the  corporation  is  insolvent.  Thus,  the  receiver  of  an  insolvent 
corporate  combination  may  collect  debts  due  it,  and  apply 
them  in  satisfaction  of  the  claims  of  creditors,  even  though  the 
defence  of  illegality  might  have  been  available  if  the  action  had 
been  brought  by  the  combination.^  It  is  manifest,  however, 
that  this  exception  applies  only  to  collateral  agreements.  A 
receiver,  even  of  an  insolvent  corporation,  could  not  maintain 
an  action  based  upon  an  unlawful  contract. 

§  369.  Collateral  Attack  upon  Combination.  Remedies  upon 
Independent  Contracts.  —  The  due  and  regular  administration 
of  justice  requires  that  the  validity  of  combinations,  — trusts, 
corporate  combinations  or  associations,  — according  to  the 
rules  of  public  policy,  should  be  determined  in  direct  pro- 
ceedings instituted  for  the  purpose;  or  in  actions  based  upon, 
or  growing  out  of,  the  alleged  illegal  contract.  The  mere 
fact  that  the  general  object  of  a  corporation  is  opposed  to 
public  policy  —  that  it  constitutes  an  unlawful  combination 
—  does  not  serve  ipso  facto  to  create  a  default  upon  its  obliga- 

1  Nester  v.  Continental  Brewnng  very  strange  application  of  the  doc- 
Co.,  161  Pa.  St.  473  (1894),  (29  Atl.  trine  that  no  right  of  action  can  spring 
Rep.  102,  41  Am.  St.  Rep.  894).  from    an    illegal    transaction,    which 

*  Pittsburgh  Carbon  Co.  v.  McMil-  should  deny  to  innocent  creditors  of 

Ian,   119  N.  Y.  46  (1890),   (23  N.  E.  the   combination,   or   to   the   receiver 

Rep.  530,    7  L.  R.  A.  46):   "The  gen-  who  represents  them,  the  right  to  have 

eral   rule   is   well   established   that   a  the  debt  collected  and  applied  in  sat- 

receiver  takes  the  title  of  the  corpora-  isfaction    of    their    claim.     The    just 

tion  or  indi^^dual  whose  receiver  he  rule  of  the  common  law,  that  courts 

is,  and  that  any  defence  which  would  will    not    lend    their    aid    to    enforce 

have   been   good   against   the   former  illegal  transactions  at  the  instance  of 

may  be   asserted   against   the   latter.  a   party   to   the   illegality,    would   be 

But  there  is  a  recognized  exception  misapplied  if  permitted  to  be  used  to 

which  permits  a  receiver  of  an  insol-  prevent  the  application  of  the  fund  in 

vent  indiv-idual  or  corporation,  in  the  question  to  the  payment  of  creditors 

interest  of  creditors,  to  disaffirm  deal-  of  the  combination." 

ings  of  the  debtor  in  fraud  of  their  See  also  American  Handle  Co.  v. 

rights.     Assuming    that    the    trustee  Standard    Handle   Co.    (Term.    1900), 

could  not  have  recovered  of  the  debtor  59  S.  W.  Rep.  709. 
for  the  reason  suggested,  it  would  be  a 

672 


CHAP.  XXXVIl] 


RIGHTS    AND   REMEDIES 


369 


tions  nor  to  deprive  it  of  standing  to  protect  its  rights ;  and 
such  fact  cannot  be  invoked  collaterally  to  affect  in  any  manner 
its  independent  rights  or  obligations.* 

The  rule  for  determining  the  independent  character  of  a 


'  Dennehy  v.  McNulta,  86  Fed. 
825  (1898),  (41  L.  R.  A.  609) ;  Lafay- 
ette Bridge  Co.  V.  City  of  Streator, 
105  Fed.  731  (1900);  Olmstead  v. 
Distilling,  etc.  Co.,  73  Fed.  49 
(1895). 

In  Liverpool,  etc.  Ins.  Co.  v.  Clunie, 
88  Fed.  169  (1898),  the  Court  said: 
"It  is  further  objected  by  the  de- 
fendant that  the  complainants  should 
not  be  allowed  to  come  into  a  court  of 
equity  for  rcUef ;  and,  in  support  of 
this  objection,  he  invokes  the  maxim 
that  he  who  comes  into  a  court  of 
equity  must  do  so  with  clean  hands. 
The  inequitable  conduct  charged 
against  the  complainants  is  that  they 
are  members  of  an  illegal  combina- 
tion .  .  .  ;  that  the  main  purpose  of 
this  association  is  to  prevent  and  sup- 
press competition  in  the  insurance 
business  of  this  State,  to  control  the 
fixing  of  premium  rates  to  be  charged 
on  insurance,  to  regulate  and  prevent 
rebates,  to  fix  compensation  for  in- 
surance, to  regulate  premium  collec- 
tions, and  to  appoint  agencies ;  that 
seven-eighths  of  the  insurance  com- 
panies authorized  to  transact  business 
in  the  State  are  members  of  this  con- 
federation. ...  It  will  not  be  neces- 
sary to  enter  into  a  discussion  of  the 
facts  thus  presented  for  the  purpose 
of  determining  the  legality  of  the 
Hoard  of  L^nderwriters  in  this  action, 
or  to  ascertain  how  far  its  acts  are 
opened  to  just  criticism.  It  is  mani- 
fest that,  if  such  a  controversy  is  dis- 
closed, it  is  foreign  to  the  one  now 
before  the  court.  The  maxim  that 
he  who  comes  into  equity  mu.st  come 
with  clean  hands  has  its  limitations. 
It  docs  not  apply  to  every  uncon- 
scientious or  inequitable  conduct  on 
the  part  of  the  complainants.     The 


inequity  which  deprives  a  suitor  of  a 
right  to  justice  in  a  court  of  eijuity  is 
not  general  iniquitous  conduct  uncon- 
nected with  the  act  of  the  defendant 
which  the  complaining  partj-  states 
as  his  ground  or  cause  of  action,  but 
it  mu.st  be  evil  practice  or  wrong  con- 
duct in  the  particular  matter  or  trans- 
action in  respect  to  which  judicial  pro- 
tection or  redress  is  sought." 

The  objection  that  a  corporation 
is  an  unlawful  combination  cannot 
be  made  by  a  party  who  has  entered 
into  a  contract  with  it  wholly  inde- 
pendent of  its  alleged  illegal  purpose. 

Harrison  v.  Glucose  Sugar  Refg. 
Co.,  116  Fed.  304  (1902),  (58  L.  R.  A. 
915). 

The  question  whether  an  asso- 
ciation of  railroad  companies  amounts 
to  an  unlawful  combination  cannot 
be  determined  in  an  action  to  enjoin 
the  sale  of  non-transferable  tickets 
issued  by  one  of  the  members  of  such 
as.sociation. 

Kinner  v.  Lake  Shore,  etc.  R.  Co., 
23  Ohio  Cir.  Ct.  Rep.  294  (1902). 

A  person  who  has  entered  into  a 
combination  agreement  contrary  to 
public  policy  may,  upon  repudiating 
it,  enforce  a  cause  of  action  existing 
independently  of  it.  The  maxim 
in  pan  delicto  is  inapplicable  under 
such  circumstances. 

Brennan  J',  fnited  Hatters,  73 
N.  J.  729  (1906),  (65  Atl.  Rep.  165, 
118  Am.  St.  Rep.  727). 

See  also  National  Distilling  Co.  v. 
Cream  City  Importing  Co.,  86  Wis. 
356  (1893),  (56  N.  W.  Rep.  864,  39 
Am.  St.  Rep.  902) ;  Anheuser-Bu.sch 
Brewing  Ass'n  v.  Houck  (Tex.  1894), 
27  S.  W.  Rep.  692;  Arnot  r.  Pittston, 
etc.  Coal  Co.,  68  N.  Y.  558  (1877), 
(23  Am.  Rep.  190). 

673 


§369 


INTERCORPORATE    RELATIONS 


[part  V 


demand  is  clearly  stated  by  Judge  Lacombe  in  the  case  of  The 
Charles  E.  Wiswall:  ^  "The  test,  whether  a  demand  connected 
with  an  illegal  transaction  is  capable  of  being  enforced  at  law, 
is  whether  the  plaintiff  requires  the  aid  of  the  illegal  transac- 
tion to  estabUsh  his  case.  If  he  cannot  open  his  case,  with- 
out showing  that  he  has  broken  the  law,  a  court  will  not  assist 
him.  But  if  he  does  not  claim  through  the  medium  of  the 
illegal  transaction,  but  upon  a  new  contract  bottomed  on  an 
independent  consideration,  he  may  recover."  ^ 

The  sale  of  goods  by  a  combination  to  a  purchaser,  in  the 
course  of  its  business,  is  not  connected  with  the  illegal  char- 
acter of  the  combination,  but  is  based  upon  an  essentially 
different  consideration.  It  is  an  independent  contract,  and 
the  purchaser  cannot  avoid  his  contract  obligation  by  setting 
up  the  invalidity  of  the  plaintiff  combination.^     Upon  simi- 


>  The  Charles  E.  Wiswall,  86  Fed. 
674  (1898). 

2  Citing  Swan  v.  Scott,  11  Serg.  & 
R.  155  (1824);  Armstrong  v.  Toler, 
11  Wheat.  (U.  S.)  258  (1826); 
McBlair  v.  Gibbes,  17  How.  (U.  S.) 
236  (1854). 

*  In  Connolly  v.  Union  Sewer  Pipe 
Co.,  184  U.  S.  545  (1902),  (22  Sup. 
Ct.  Rep.  431),  the  Supreme  Court 
of  the  United  States  said:  "Assum- 
ing, as  defendants  contend,  that  the 
alleged  combination  was  illegal  if 
tested  by  the  principles  of  the  com- 
mon law.  still  it  would  not  follow  that 
they  could,  at  common  law,  refuse  to 
pay  for  pipe  bought  by  them  under 
special  contracts  with  the  plaintiff. 
The  illegaUty  of  such  combination 
did  not  prevent  the  plaintiff  corpora- 
tion from  selling  pipe  that  it  obtained 
from  its  constituent  companies,  or 
either  of  them.  It  could  pass  title 
by  a  sale  to  any  one  desiring  to  buy, 
and  the  buyer  could  not  justify  a  re- 
fusal to  pay  for  what  he  bought  and 
received  by  proving  that  the  seller 
had  pre^^ously,  in  the  prosecution  of 
its  business,  entered  into  an  illegal 
combination  with  others  in  reference 
generally  to  the  sale  of  Akron  pipe. 

674 


.  .  .  (p.  549).  This  is  not  an  action 
to  enforce,  or  which  involves  the  en- 
forcement of,  the  alleged  arrangement 
or  combination  between  the  plaintiff 
corporation  and  other  corporations, 
firms  and  companies  in  relation  to  the 
sale  of  Akron  pipe.  As  already  sug- 
gested, the  plaintiff,  even  if  part  of  a 
combination  illegal  at  common  law, 
was  not,  for  that  reason,  forbidden  to 
sell  property  it  acquired  or  held  for 
sale.  The  purchases  by  the  defend^ 
ants  had  no  necessary  or  direct  con- 
nection witli  the  alleged  illegal  com- 
bination ;  for  the  contracts  between 
the  defendants  and  the  plaintiff  could 
have  been  proven  without  any  refer- 
ence to  the  arrangement  whereby  the 
latter  became  an  illegal  combination. 
If,  according  to  the  principles  of  com- 
mon law,  the  Union  Sewer  Pipe  Com- 
pany could  not  have  sold  or  passed 
title  to  any  pipe  it  received  and  held 
for  sale,  because  of  an  illegal  arrange- 
ment pre\-iously  made  with  other 
corporations,  firms  or  companies,  a 
different  question  would  be  presented. 
But  we  are  aware  of  no  decision  to  the 
effect  that  a  sale  similar  to  that  made 
by  the  present  plaintiff  to  the  de- 
fendants respectively  would,  in  itself. 


CHAP.  XXXVIl] 


RIGHTS   AND   REMEDIES 


§  369 


lar  principles,  an  insurance  company  cannot  escape  responsi- 
bility upon  its  contract  of  insurance  by  alleging  that  the  plain- 
tiff has  joined  an  unlawful  combination;  *  and  infringers  of 
patents  cannot  evade  liability  for  their  own  wrongs  by  pleading 
that  the  plaintiff  has  entered  into  a  combination  to  control 
the  market  for  the  patented  article.^ 

The  principles  stated  in  this  section  are,  however,  mate- 
rially modified  in  the  anti-trust  statutes  of  many  States,  which 
expressly  provide  that  the  illegality  of  a  combination  may  be 
pleaded  as  a  defence  to  suits  upon  its  independent  contracts.' 


be  illegal  and  void  under  the  princi- 
ples of  the  common  law." 

And  in  National  Distilling  Co.  r. 
Cream  City  Importing  Co.,  86  Wis. 
356  (1893),  (56  N.  W.  Rep.  864,  39 
Am.  St.  Rep.  902),  the  Supreme 
Court  of  Wisconsin  said  :  "The  argu- 
ment, if  any  the  case  admits  of,  is 
that,  as  the  plaintiff  was  a  member 
of  the  so-called  'trust'  or  'combina- 
tion,' the  defendant  might  voluntarily 
purchase  the  goods  in  question  of  it  at 
an  agreed  price,  and  convert  them  to 
its  own  use,  and  be.  justified  in  a  court 
of  justice  in  its  refusal  to  pay  the 
plaintiff  for  them,  because  of  the  con- 
nection of  the  vendor  with  such  trust 
or  combination.  The  plaintiff's  cause 
of  action  is,  in  no  legal  sense,  de- 
pendent vipon  or  affected  by  the 
alleged  illegality  of  the  tru.st  or  com- 
bination, because  the  illegality,  if 
any,  is  entirely  collateral  to  the  trans- 
action in  question,  and  the  court  is 
not  called  upon,  in  this  action,  to  en- 
force any  contract  tainted  with  ille- 
gality, or  contrary  to  public  policy. 
The  mere  fact  that  the  plaintiff  is  a 
member  of  a  trust  or  combination, 
created  with  the  intent  and  for  the 
purposes  set  forth  in  the  answer,  will 
not  disable  or  prevent  it  at  law  from 
selling  goods,  and  recovering  their 
price  or  value." 

A  sale  and  conveyance  of  its  assets 
and  good-will  by  one  corporation  to 
another  cannot  be  repudiated  by  the 


purchaser  upon  the  ground  that  the 
vendor  acquired  the  property  sold 
with  the  object  of  forming  an  unlaw- 
ful combination. 

Mctcalf  V.  American  School  Fur- 
niture Co.,  122  Fed.  115  (1903). 

See  also  Wiley  v.  National  Wall 
Paper  Co.,  70  lU.  App.  543  (1896)  ; 
Chicago  Wall  Paper  Mills  i'.  General 
Paper  Co.,  147  Fed.  491  (1906). 

'  Springfield  Fire,  etc.  Ins.  Co.  v. 
Cannon  (Tex.  Gw  App.  1898).  46  S. 
W.  Rep.  376:  "The  evidence  in  the 
case  hardly  raises  the  question,  but 
we  are  of  the  opinion  that,  even  if  it 
did,  it  would  not  prevent  the  owner 
of  the  bagging  from  insuring  it, 
although  he  may  have  been  a  mem- 
ber of  a  trust  with  respect  to  control- 
ling the  prices  of  bagging  in  the  State 
of  Texas." 

2  National  Folding  Box,  etc.  Co.  r. 
Robert  .son,  99  Fed.  985  (1900)  ;  Hon- 
sack  Mach.  Co.  v.  Smith,  70  Fed.  383 
(1895)  ;  American  Soda  l-'ountain  Co. 
V.  Green,  69  Fed.  333  (1895)  ;  Kdison 
Electric  Light  Co.  r.  Sawyer-Man 
F:iectric  Co.,  53  Fed.  .592  (1892); 
Strait  I'.  National  Harrow  Co.,  51 
Fed.  819  (1892)  ;  Columbia  Wire  Co. 
V.  Freeman  Wire  Co.,  71  Fed.  306 
(1895) ;  Contra,  National  Harrow  Co. 
V.  Quick,  67  Fed.  130  (1895). 

3  See  post,  ch.  XLIII.:  "Rights, 
Remedies  and  Procedure  under  State 
Anti  Trust  Statutes." 

675 


§   370  INTERCORPORATE    RELATIONS  [PART   V 

§  370.  Rights  of  Creditors.  —  The  legality  of  a  combination 
cannot  be  made  the  subject  of  collateral  attack  in  enforcing 
its  independent  demands.  A  fortiori,  the  combination  cannot, 
itself,  set  up  its  illegality  as  a  defence  to  demands  against  it. 
It  cannot  take  advantage  of  its  own  wrong-doing.  That  a 
combination  is  unlawful,  tested  by  the  rule  of  public  policy,  is 
no  defence  to  actions  by  its  creditors.^ 

The  fact  that  the  creditor  knew  the  character  of  the  com- 
bination when  the  debt  was  incurred,  does  not  affect  his  right 
to  recover,  unless  he  in  some  way  participated  in  the  illegal 
project.  In  Arnot  v.  Pittston,  etc.  Coal  Co.j^  the  Court  of 
Appeals  of  New  York  said:  "He  had  a  right  to  dispose  of  his 
own  goods,  and  (under  certain  limitations)  a  vendor  of  goods 
may  recover  for  their  price,  notwithstanding  that  he  knows 
that  the  vendee  intends  an  improper  use  of  them,  so  long  as  he 
does  nothing  to  aid  in  such  improper  use,  or  in  the  illegal  plans 
of  the  purchaser.  This  doctrine  is  established  by  authority, 
and  is  sufficiently  liberal  to  vendors.  But  —  and  this  is  a  very 
important  distinction  —  if  the  vendor  does  anything  beyond 
making  the  sale,  to  aid  the  illegal  scheme  of  the  vendee,  he 
renders  himself  particeps  criminis,  and  cannot  recover  for  the 
price." 

An  agreement  for  the  sale  of  all  its  products,  entered  into  by 
a  manufacturing  company,  in  good  faith,  and  in  ignorance 
of  any  ulterior  purpose  on  the  part  of  the  purchaser,  is  not 
rendered  unenforceable  by  the  fact  that  the  latter  has  made 
similar  contracts  with  other  manufacturers  — each  in  igno- 
rance of  the  other  —  for  the  purpose  of  controlling  the  market 
for  the  commodity.^ 

*  Globe  Tobacco  "Warehouse  Co.  v.  '  In  Carter-Crume  Co.  v.  Peurrung, 

Leach,   19  Ky.  L.  Rep.   1287  (1897),  86    Fed.    439    (1898),    Judge    Lurton 

(43    S.    W.    Rep.    423);     Pittsburgh  said:    "Another  question  might  arise 

Carbon  Co.   v.   McMillan,    119   N.   Y.  if  all  or  a  large  proportion  of  all  the 

46  (1890),  (23  N.  E.  Rep.  520,  7  L.  producers     of     a     particular     article 

R.    A.    46);    Arnot   v.    Pittston,    etc.  should  agree  to  sell  their  entire  product 

Coal  Co.,   68   N.   Y.   558   (1877),    (23  to  one  buyer,  who  would  thereby  be 

Am.    Rep.    190) ;     Catskill    Bank    v.  enabled    to   monopolize    the    market. 

Gray,  14  Barb.  (N.  Y.)  479  (1851).  But    if    each    independent    producer 

2  Arnot  V.  Pittston,  etc.  Coal  Co.,  contract  to  sell  his  product  or  to  sell 

68  N.  Y.  558  (1877),   (23  Am.   Rep  or   lease    his    plant,    without   concert 

190).  with  others,  or  knowledge  of  or.  pur- 

676 


CHAP.  XXXVIl] 


RIGHTS    AND    REMEDIES 


§371 


§  371.  Rights  and  Remedies  of  Stockholders  of  Combining 
Corporations.  — An  unlawful  act  is  an  ultra  vires  act.  A  cor- 
poration has  no  legal  power  to  enter  a  combination  against 
public  policy.  Equity  will  enjoin  the  formation  or  continued 
operation  of  an  illegal  combination,  at  the  instance  of  any 
stockholder  of  a  constituent  corporation  ^  who  has  not  par- 
ticipated in  the  illegal  scheme  and  who  acts  with  diligence.^ 


pose  to  participate  in  the  plans  of  the 
buyer,  he  cannot  be  said  to  have  con- 
spired against  freedom  of  commerce, 
or  to  have  made  a  contract  in  illegal 
restraint  of  trade.  .  .  .  The  proof 
must  show  that  the  illegal  purpose 
was  mutual." 

'  In  Stewart  v.  Erie,  etc.  Transp. 
Co.,  17  Minn.  395  (1871),  the  Supreme 
Court  of  Minnesota  said  :  "We  agree 
with  the  plaintiff's  counsel,  and  with 
the  cases  by  him  cited,  that  it  is 
against  the  general  policy  of  the  law 
to  destroy  or  interfere  with  free  com- 
petition. .  .  .  An  unauthorized  mo- 
nopoly is,  therefore,  against  pubUc 
policy  as  destroying  or  interfering 
with  free  competition.  .  .  .  (p.  398). 
If  a  corporation  is  employing  its  statu- 
tory powers,  funds,  etc.  for  purposes 
not  witliin  the  scope  of  its  institution, 
a  court  of  equity  will,  upon  the  appli- 
cation of  a  single  dissentient  stock- 
holder, interfere  by  injunction.  .  .  . 
The  right  of  a  stockholder  to  this  inter- 
ference seems  to  be  placed  upon  the 
ground  that,  from  the  fact  that  the 
corporation  was  created  for  certain 
purposes  there  is  an  implied  contract 
that  it  shall  not  divert  its  powers  or 
funds  to  other  purposes,  and  that  such 
diversion  would  be  a  species  of  breach 
of  trust  ...  as  well  as  a  violation  of 
law  which  might  endanger  the  exist- 
ence of  its  charter.  Hut  it  is  to  a 
dissenlient  stockholder  that  the  relief 
is  granted,  and  to  a  stockholder  who 
comes  with  diligence  to  assert  his 
rights." 

See  also  Harding  v.  American  Glu- 
cose Co.,   182  111.  551  (1899),  (55  N. 


E.  Rep.  577,  74  Am.  St.  Rep.  189,  64 
L.  R.  A.  738) ;  Leshe  v.  Lorillard,  110 
N.  Y.  519  (1888),  (18  N.  E.  Rep.  363, 
1  L.  R.  A.  456);  Central  R.  Co.  v. 
ColUns,  40  Ga.  582  (1869).  See  also 
ante,  §  46:  "Rights  and  Remedies  of 
Dissenting  Stockholders "  (consolida- 
tion);  ante,  §  114:  "  Remedies  of  Dis- 
senting Stockholders  in  Case  of  Invalid 
or  Unfair  Sales" ;  ante,  §  151  : 
"Rights  and  Remedies  of  Dissenting 
Stockholders "  (sales  of  railroads) ; 
ante,  §  191  :  "Remedies  of  Dissenting 
Stockholders"  (lea.ses) ;  ante,  §293: 
"Remedies  in  Case  of  Ultra  Vires 
Stockholding. " 

^  Le\-in  v.  Chicago  Gas  Light,  etc. 
Co.,  64  111.  App.  400  (1896):  "He 
alleges  that  he  acquired  the  certifi- 
cate without  knowledge  that  the  same 
was  tainted  with  any  conspiracy  or 
combination  ;  but  that  is  not  enough. 
.  .  .  Every  inference  deducible  from 
his  bill  is,  that  he  not  only  knew  of, 
but  participated  in,  all  that  he  com- 
plained of.  One  who  ha.s  pnrticipatetl 
in  illegal  acts  and  consjiiracics,  and 
partaken  of  the  fruits  thoroof,  may  not 
tear  down  the  structure  he  ha.s  helpctl 
to  rear  simply  because  he  did  not 
know  that  he  had  been  engaged  in 
illegality  and  conspiracy.  .  .  .  (p.  402). 
To  entitle  stockholders  to  the  sum- 
mary interference  of  a  court,  they 
must  applj'  so  recentlj-  after  the  doing 
of  the  acts  complained  of  that  the 
court  may  sto]>  or  undo  the  wrong  to 
them  without  iloing  eciual  or  greater 
wrong  to  some  other  person  ;  or,  in 
other  words,  if  a  stockholder  wants 
protection    against    the   con.sequences 

677 


§371 


INTERCORPORATE    RELATIONS 


[part  V 


It  has  been  contended  that  the  illegaUty  of  a  corporate 
combination  is  the  illegahty  of  that  corporation ;  that  stock- 
holders of  a  vendor  corporation  can  maintain  a  bill  for  an 
injunction  only  when  their  pecuniary  interests  are  affected, 
and  not  for  the  protection  of  the  general  public,  and,  conse- 
quently, that  they  are  without  standing  to  complain  of  the 
unlawful  character  of  the  purchasing  corporation.  The  defect 
of  the  argument  is  in  its  assumptions.  The  pecuniary  interests 
of  a  stockholder  of  a  vendor  corporation  are  affected  by  a  trans- 
fer of  its  property  to  an  illegal  combination.  The  combina- 
tion, if  carried  out,  may  lead  to  a  forfeiture  of  the  charter  of  the 
vendor  corporation,  and  consequent  loss  of  the  stockholder's 
shares.  Moreover,  the  pecuniary  status  of  a  stockholder  is 
changed  by  the  transfer  of  the  property  and  business  of  his  cor- 
poration to  another  corporation,  although  he  may  receive  his 
share  of  the  proceeds.  He  has  the  right  to  object  to  such  a 
change  in  the  form  of  his  investment,  especially  where  the  pro- 
ceeds of  the  sale  are  tainted  with  the  illegality  of  the  combina- 
tion.^ 


of  an  ultra  vires  act,  he  must  ask  for 
it  with  sufficient  promptness  to  en- 
able the  court  to  do  justice  to  him 
without  doing  injustice  to  others." 

See  also  Coquard  v.  National  Lin- 
seed Oil  Co.,  171  111.  480  (1898),  (49 
N.  E.  Rep.  563) ;  Stewart  v.  Erie,  etc. 
Transp.  Co.,  17  Minn.  395  (1871). 
See  also  ante,  §  49  :  "Laches  of  Stock- 
holders" (consolidation);  ante,  §  116: 
"Defences  to  Stockholders'  Actions. 
Estoppel"  (sales);  §  192:  "Acqui- 
escence and  Laches  of  Stockholders" 
(leases) . 

*  In  Harding  v.  American  Glucose 
Co.,  182  111.  625  (1899),  (55  N.  E.  Rep. 
577,  74  Am.  St.  Rep.  189,  64  L.  R. 
A.  738),  the  Supreme  Court  of  Illinois 
said  :  "The  position  of  counsel  is  that 
a  stockholder  can  only  file  a  bill  to 
prevent  the  corporation  frona  dis- 
posing of  its  properties,  upon  the 
ground  that  it  will  affect  his  pecuniary 
interests  and  because  of  the  necessity 
of  protecting  liis  property  rights  and 
because  of  the  necessity  of  protecting 

678 


himself  from  pecuniary  loss  or  injury  ; 
and  that  a  stockholder  in  a  vendor 
corporation  has  no  right  to  enjoin  a 
sale  and  transfer  of  a  factory,  owned 
by  such  vendor,  upon  the  ground  that 
the  vendee  corporation  proposes  to 
create  a  monopoly.  ...  It  is  idle  to 
say  that  a  stockholder  in  a  corpora- 
tion would  suffer  no  injury  from  a  for- 
feiture of  its  charter  rights  and  from 
its  dissolution.  In  such  a  case,  the 
corporation  being  destroyed,  his  stock 
therein  would  be  completely  wiped 
out  and  be  made  of  no  effect.  The 
stockholder  has  a  right  to  protest 
against  such  use  of  its  property  by  the 
managing  officers  of  a  corporation  as 
will  lead  to  such  forfeiture  and  disso- 
lution. ...  (p.  628).  What  was 
there  attempted  was  an  abandonment 
of  the  business  and  sale  of  the  assets 
without  legal  termination  or  di.ssolu- 
tion  of  the  company.  It  makes  no 
difference  that  the  stockholder  is  to  be 
allowed  to  receive  his  proportionate 
share  of  the  proceeds  of  the  sale  of  the 


CHAP.  XXXVIl] 


RIGHTS   AND    REMEDIES 


§371 


A  stockholder  may  maintain  a  bill  in  his  own  name  against 
the  corporation  and  its  officers,  whenever  it  is  reasonably 
certain  that  a  demand  upon  the  officers  to  bring  the  suit  in 
the  name  of  the  corporation  would  be  unavailing.* 


propertj-.  He  has  a  right  to  hold  his 
investment  in  the  form  of  stock,  and  a. 
change  of  such  investment  against  his 
consent  is  a  change  which  affects  his 
pecuniary  or  financial  interests.  He 
has  the  right  to  be  the  judge  whether 
such  change  in  his  pecuniary  status 
shall  be  made  or  whether  he  shall 
continue  his  investment  in  the  form 
of  stock." 

Compare,  however,  MacGinnis  v. 
Boston,  etc.  Mining  Co.,  29  Mont.  446 
(190.3),  (75  Pac.  Rep.  89),  where  the 
Supreme  Court  of  Montana  said : 
"The  plaintiff  sues  as  a  private  citizen. 
He  is  not  as  such  authorized  to  present, 
through  the  medium  of  a  ci\il  action, 
and  try  the  issue  whether  the  defend- 
ant Amalgamated  Company  is  doing 
business  in  this  State  in  violation  of 
law.  A  determination  of  this  issue 
as  an  independent  ground  of  relief 
must  be  had,  if  at  all,  by  the  State, 
and  in  its  own  behalf  through  the 
attorne3--general.  It  is  no  concern 
of  the  plaintiff  if  the  State  neglects  or 
•waives  its  right  to  call  the  defendant 
to  account.  In  general  the  same 
may  be  said  as  to  the  issue  whether 
the  combination  formed  by  the 
defendant  Amalgamated  Company 
through  its  officers  and  the  stock- 
holders of  the  Montana  Company  and 
other  corporations  is  a  monopoly  in 
\-iolation  of  the  Penal  Code  of  the 
State,  rendered  the  defendant  Mon- 
tana Company  liable  to  punishment 
and  a  forfeiture  of  its  franchises  and 
property.  .  .  .  Nor  do  we  know  any 
pro\'ision  of  law  authorizing  a  court 
of  equity,  at  the  instance  of  a  minority 
stockholder,  to  ilecree  a  forfeiture  of 
the  stock  of  any  stockholder  in  the 
same  corporation  to  the  corporation, 
on  the  grovind  that  the  title  of  such 
stocklioldcr  has  been  acquired  and  is 


held  in  violation  of  the  charter  of  the 
corporation.  Nevertheless,  .so  far  as 
the  participation  of  the  Montana  cor- 
poration and  its  officers  in  an  unlaw- 
ful combination  to  create  a  monoi>oly 
subjects  its  property  and  franchises  to 
a  forfeiture  and  thus  inqjerils  the 
property  rights  of  the  minority  stock- 
hoKler  he  has  a  cause  of  complaint 
against  it  and  them,  and  may,  through 
the  medium  of  a  court  of  equity,  com- 
pel it  and  them  to  abandon  such  un- 
lawful connection  and  return  to  a 
performance  of  their  obligations  under 
the  charter  contract  of  the  company, 
to  wit :  to  accomplish,  through  its 
board  of  directors,  the  purpose  for 
which  it  was  formed,  and  by  lawful 
means." 

In  Dittman  v.  Distilling  Co.,  64  N.  J. 
(Eq.537(1903), 54  Atl.Rep.570),  whore 
it  was  charged  that  a  corporation  had 
created  a  monojwly  and  it  apjieared 
that  such  monopoly,  if  it  existeil,  arose 
from  the  exercise  by  the  corporation 
of  the  power  conferred  by  its  charter 
to  purchase  the  shares  of  other  cor- 
porations, the  \-ice-chancellor  held 
that  the  question  of  a  monopoly 
could  not  be  determined  by  a  court 
of  equity  in  a  suit  by  a  stockholder, 
and  could  only  be  consitlered  in  qitn 
warranto  proceedings  instituted  by 
the  attorney-general  to  oust  the 
corporation  from  its  franchises. 

'  In  Harding  r.  American  Glucose 
Co.,  182  111.  628  (1899),  (55  X.  K. 
Rep.  577,  74  Am.  St.  Rep.  189,  64 
L.  R.  A.  738),  the  Court  further  .said  : 
"The  bill  in  this  ca.se  recites  that  the 
complainants  therein  filed  it,  not  only 
in  their  own  behalf,  but  in  behalf  of 
all  other  stockholders,  who  might 
see  fit  to  come  into  the  suit  and  join 
therein.  Where  tiie  oflicers  of  a  cor- 
poration   wrongfully    deal     with    its 

079 


§372 


INTERCORPORATE   RELATIONS 


[part  V 


Foreign  corporations  are  subject  to  the  same  rules  of  public 
policy,  within  the  State,  as  domestic  companies.  A  court  of 
equity  will  grant  relief,  touching  property  within  the  State, 
to  a  stockholder  of  a  foreign  corporation  which  is  participat- 
ing in  an  unlawful  combination.^ 

§  372.  Remedies  of  State  —  (A)  Quo  Warranto  against  Cor- 
porate Combination.  —  The  scope  of  the  remedy  of  quo  warranto 
—  applied  to  corporations  — is  the  forfeiture  of  the  franchises 
of  a  corporation  for  non-user  or  misuser.  The  object  of  the 
writ  is  the  protection  of  the  public  and  not  the  redress  of 
private  wrongs.  In  order  to  secure  a  judgment  of  ouster, 
misuser  must  be  shown  working  or  threatening  injury  to  the 


property  to  the  injury  of  the  stock- 
holders, the  latter  may  maintain  a 
bill  against  the  company  and  its 
officers  for  relief  against  such  misap- 
propriations. Originally,  the  rule 
was  that  such  a  suit  should  be  brought 
by  the  corporation  itself;  but  equity 
permits  a  stockholder,  either  indi- 
vidually or  in  behalf  of  other  stock- 
holders similarly  situated,  to  bring 
such  a  suit,  where  the  corporation 
itself  either  refuses  to  do  so,  or  where 
the  facts  show  that  the  wrong-doing 
defendants  constitute  a  majority  of 
the  managing  body,  or  where  it  is 
reasonably  certain  that  a  demand 
made  upon  the  proper  officers  of  the 
corporation  to  bring  the  action  would 
be  unavailing." 

See  also  ante,  §  48:  "Procedure  in 
Stockholders'  Actions"  (consolidation) ; 
ante,  §  115  :  "  Procedure  in  Stockhold- 
ers' Actions"  (sales). 

'  In  Harding  v.  American  Glucose 
Co.,  182  111.  635  (1899),  (55  N.  E.  Rep. 
577,  74  Am.  St.  Rep.  189,  64  L.  R. 
A.  738)  the  Court  also  said :  "  It  is 
the  settled  doctrine  of  this  State, 
estabUshed  by  many  decisions  of  this 
court,  that  foreign  corporations  do 
not  come  into  this  State  as  a  matter 
of  legal  right,  but  only  by  comity, 
and  that  said  corporations  are  subject 
to   the   same   restrictions   and   duties 

680 


as  corporations  formed  in  this  State, 
and  have  no  other  or  greater  powers. 
.  .  .  Foreign  corporations  cannot 
be  permitted  to  come  into  this  State 
for  the  purpose  of  asserting  rights  ia 
contravention  of  our  laws.  .  .  .  Cit- 
izens of  Illinois  cannot  evade  the  laws 
of  Illinois  passed  against  trusts 
and  combines  by  going  into  a  foreign 
State  and  chartering  a  corporation  to 
do  business  in  this  State  in  violation 
of  its  laws.  When  these  foreign  cor- 
porations come  into  this  State  they 
must  conform  to  the  laws  and  policy 
of  this  State.  ...  If  real  estate  in 
Illinois,  owned  by  domestic  corpora- 
tions, cannot  be  used  for  the  purpose 
of  carrying  out  the  business  of  an 
illegal  trust  or  combination,  real  estate 
in  Illinois,  owned  bj"^  a  foreign  cor- 
poration, cannot  be  used  for  such  a 
purpose." 

Compare,  however,  the  extract 
from  MacGinnis  v.  Boston,  etc.  Mining 
Co.,  29  Mont.  428  (1903),  (75  Pac. 
Rep.  89)  in  a  preceding  note  to  this 
section. 

Compare  also  Small  v.  Minneapolis, 
etc.  Co.,  57  Hun  (N.  Y.),  587  (1890), 
(10  N.  Y.  Supp.  456),  where  an  in- 
junction was  refused  in  a  stockholder's 
suit  because  both  corporations  — • 
vendor  and  purchaser  —  were  foreign 
corporations. 


CHAP.  XXXVIl] 


RIGHTS    AND   REMEDIES 


§372 


public,  or  violating  fundamental  conditions  attached   to  the 
grant  of  the  franchise.* 

The  formation  of  a  combination  of  competing  corporations 
by  means  of  a  holding  or  purchasing  corporation,  in  violation 
of  a  rule  of  public  policy,  constitutes  a  misuser  of  the  franchises 
of  the  latter  corporation  —  the  corporate  combination  —  and 
subjects  them  to  forfeiture  in  quo  warranto  proceedings.-  The 
combination  is  injurious  to  public  welfare  because  it  is  inimical 
to  public  policy.  If  involving  ^wasi-public  corporations  it 
breaks  the  primary  contract  with  the  State. 


'  State  V.  Minnesota  Thresher  Mfg. 
Co.,  40  Minn.  213  (1889),  (41  N.  W. 
Rep.  1020,  3  L.  R.  A.  .510). 

In  People  v.  North  River  Sugar 
Refg.  Co.,  121  N.  Y.  608  (1889), 
(24  N.  E.  Rep.  834,  18  Am.  St. 
Rep.  843,  9  L.  R.  A.  33),  Judge 
Finch  said:  "The  judgment  sought 
against  the  defendant  i.s  one  of  corpo- 
rate death.  The  State  which  created 
asks  us  to  destroy,  and  the  penalty 
invoked  represents  the  extreme  rigor 
of  the  law.  Its  infliction  must  rest 
upon  just  cau.se  and  be  warranted  by 
material  misconduct.  The  hfe  of  a 
corporation,  is,  indeed,  less  than  that 
of  the  humblest  citizen,  and  yet  it  en- 
velops great  accumulations  of  prop- 
erty, moves  and  carries  in  large  vol- 
ume the  business  and  enterprise  of 
the  people,  and  may  not  be  destroyed 
without  clear  and  abundant  reason. 
...  It  appears  to  be  settled  that 
the  State,  as  prosecutor,  nmst  show 
on  the  part  of  the  corporation  accused 
.some  sin  against  the  law  of  its  being 
which  has  produced,  or  tends  to  pro- 
duce, injury  to  the  public.  The 
transgression  must  not  be  merely 
formal  or  incidental  but  material  and 
serious,  and  such  as  to  harm  the  public 
welfare ;  for  the  State  does  not  con- 
cern itself  with  the  quarrels  of  private 
litigant'!." 

2  DistiUing,  etc.  Co.  v.  People,  156 
111.  448  (1895),  (41  N.  E.  Rep.  188,  47 
.\m.  St.  Rep.  200)  ;  People  v.  Chicago 
Gas  Trust  Co.,  130  111.  268  (1889),  (22 


N.  E.  Rep.  798,  17  Am.  St.  Rep.  319, 
8  L.  R.  A.  497).  Also  People  i-. 
Chicago  Live  Stock  Exch.,  170  111. 
556  (1897),  (48  N.  E.  Rep.  1(Xj2,  62 
Am.  St.  Rep.  404,  39  L.  R.  A.  373) ; 
Coquard  v.  National  Linseed  Oil  Co., 
171  111.  480  (1898>,  (49  N.  E.  Rep.  563) ; 
People  V.  Milk  Exch.,  145  N.  Y.  267 
(1898),  (39  N.  E.  Rep.  1062,  45  Am. 
St.  Rep.  609,  27  L.  R.  A.  437); 
Stockton  V.  American  Tobacco  Co., 
55  N.  J.  Eq.  52  (1897),  (36  Atl.  Rep. 
971). 

Where  several  corporations  form 
a  combination  by  means  of  a  holding 
corporation  for  the  elimination  of 
competition,  the  State  may  pro- 
ceed against  the  holding  corporation 
whether  it  be  a  domestic  or  foreign 
corporation. 

Southern  El.  Securities  Co.  v. 
State,  (Miss.  1907),  (44  So.  Rep. 
785). 

A  combination  between  several 
corporations  entered  into  for  the 
purpo.se  of  sui)])rossing  competition, 
fixing  prices,  aiul  controlling  prinluc- 
tion,  cannot  be  declared  voiil  in  a  suit 
in  equity  brought  bj'  an  outside 
dealer  having  no  contractual  relations 
with  it  but  claiming  to  be  injured, 
as  such  result  can  only  be  accomplished 
at  the  suit  of  the  Government.  .Vn 
injunction,  however,  may  be  obtained 
against  the  continuance  of  wrongfid 
acts  of  intimidation. 

Leonaril  v.  ,\bner-Drury  Brewing 
Co.,  25  App.  D.  C.  161  (1905). 

081 


§   373  INTERCORPORATE    RELATIONS  [PART   V 

The  fact  that  a  corporation,  under  its  charter,  has  power 
to  purchase  and  hold  property  necessary  for  its  business,  does 
not  authorize  it  to  acquire  competing  phints  in  order  to  obtain 
control  of  the  market  for  a  commodity,  contrary  to  the  rule  of 
public  policy.  In  Distilling,  etc.  Co.  v.  People,^  the  Supreme 
Court  of  Illinois  said:  "The  defendant  is  authorized  to  own 
such  property  as  is  necessary  for  carrying  on  its  distillery 
business  and  no  more.  Its  power  to  acquire  and  hold  property 
is  limited  to  that  purpose,  and  it  has  no  power  by  its  charter  to 
enter  upon  a  scheme  of  getting  into  its  hands,  and  under  its 
control,  all,  or  substantially  all,  the  distilling  plants  and  the 
distillery  business  of  the  country,  for  the  purpose  of  controlling 
production  and  prices,  of  crushing  out  competition  and  of 
establishing  a  virtual  monopoly  in  that  business.  Such  purposes 
are  foreign  to  the  powers  granted  by  the  charter.  Acquisitions 
of  property  to  such  extent  and  for  such  purpose,  do  not  come 
within  the  authority  to  own  the  property  necessary  for  the 
purpose  of  carrying  on  a  general  distillery  business.  In  acquir- 
ing distillery  properties,  in  the  manner  and  for  the  purposes 
shown  by  the  information,  the  defendant  has  not  only  mis- 
used and  abused  the  powers  granted  by  its  charter,  but  has 
usurped  and  exercised  powers  not  conferred  by,  but  which  are 
wholly  foreign  to,  that  instrument.  It  has  thus  rendered  itself 
liable  to  prosecution  by  the  State  by  quo  warranto." 

A  stockholder  is  without  authority  to  institute  proceedings 
to  forfeit  the  franchises  of  a  corporation,  upon  the  ground 
that  it  constitutes  an  unlawful  combination.  The  remedy  of 
quo  warranto  can  only  be  enforced  by  the  State. ^ 

§  373.    Remedies  of  State  —  (B)    Quo  Warranto  against  Com- 

*  Distilling,  etc.  Co.  v.  People,  156  the  complainant  for  the  forfeiture  of 
111.  44S  (1895),  (41  N.  E.  Rep.  188,  47  the  charter.  Only  the  State  can  corn- 
Am.  St.  Rep.  200).  plain  of  injury  to  the  public,  or  that 

^  Coquard  v.  National  Linseed  Oil  public  rights  are  being  interfered  with, 

Co.,  171  111.  484  (1898),  (49  N.  E.  Rep.  and   enforce    a    forfeiture   of   defend- 

563):  "The  facts  pleaded  are  insuffi-  ant's  franchise  for  that  reason." 
cient  to  show  the  existence  of  a  trust.  See  also  MacGinnis  v.  Boston,  etc. 

but  if  they  met  the  requirements  in  Mining     Co.,   29    Mont.    446    (1903), 

that  regard,  yet,  so  far  as  the  pviblic  (75  Pac.  Rep.  89) ;    Dittman  v.  Dis- 

right  is  concerned  which  is  the  subject  tilling  Co.,  64  N.  J.  Eq.   537    (1903), 

of  so  much  argument,  that  fact  would  (54  Atl.   Rep.   570). 
not  authorize  the  filing  of  the  bill  by 

682 


CHAP.  XXXVIl] 


RIGHTS    AND   REMEDIES 


§373 


bining  Corporations.  —  Upon  the  principles  considered  in  the 
last  section,  a  corporation  which  becomes  a  member  of  an 
illegal  association,  or  participates  in  the  formation  of  an  un- 
lawful trust  or  corporate  combination,  is  guilty  of  a  misuser 
of  its  franchises,  and  they  are  subject  to  forfeiture  in  pro- 
ceedings in  quo  warranto  instituted  l)y  the  State. ^ 

A  private  corporation  in  entering  such  a  combination  exceeds 
its  powers  in  a  manner  prejudicial  to  the  public  interest; 
a  gwasi-public  corporation  fails  in  the  discharge  of  its  public 
obligations  and  transgresses  the  law  of  its  creation.^ 


'  California.  Havemeyer  v.  Supe- 
rior Court,  84  Cal.  378  (1890),  (24  Pac. 
Rep.  121,  18  Am.  St.  Rep.  192,  10  L. 
R.  A.  641)  :  "The  doctrine  is  that  cor- 
'porate  charters  are  granted  upon  the 
implied  condition  that  the  privileges 
conferred  will  be  used  for  the  advan- 
tage, or  at  least  not  to  the  disadvan- 
tage, of  the  State.  If  this  condition  is 
broken,  the  charter  which  the  State 
has  given  is  taken  back  by  the  State." 

See  also  People  v.  American  Sugar 
Refg.  Co.  (Super.  Ct.  San  Francisco, 
1890),  7  Ry.  &  Corp.  L.  J.  83. 

Indiana.  State  v.  Portland  Nat- 
ural Gas,  etc.  Co.,  153  Ind.  483  (1899), 
(53  N.  E.  Rep.  1089,  74  Am.  St.  Rep. 
314,  .53  L.  R.  A.  413). 

Mississippi.  W'here  several  cor- 
porations form  an  unlawful  combina- 
tion for  the  purpose  of  stifling  com- 
petition by  means  of  a  holding  cor- 
poration to  which  controlling  stock 
interests  are  transferred,  the  State 
may  proceed  against  any  of  the 
domestic  constituent  companies. 

Southern  Electric  Sec.  Co.  v.  State 
(Miss.  1907),  (44  So.  Rep.  785). 

A^ebra.'ika.  State  v.  Nebraska  Dis- 
tilling Co.,  29  Neb.  719  (1890),  (40  N. 
W.  Rep.  1.55)  :  "The  findings  in  this 
case,  to  which  no  objections  are  made, 
clearly  show  that  the  object  of  the 
distilling  company,  in  entering  into  the 
illegal  combination,  was  to  ilestroy 
competition  and  create  a  monopoly 
not  only  by  limiting  the  production  of 
alcohol,  but,  by  dismantling  as  many 


distilleries  as  the  trust  saw  fit,  abso- 
lutely prevent  the  manufacture  of  the 
article  except  in  the  few  establish- 
ments controlled  by  the  trust,  and 
thus  it  would  be  enabled  to  control 
prices,  prevent  production  and  create 
a  monopoly  of  the  most  offensive 
character.  Any  contract  entered  into 
with  such  an  object  in  view  is,  under 
the  laws  of  this  State,  null  and  void, 
and  the  conveyance  from  the  distilling 
companj'  to  the  trust  was  in  contra- 
vention of  the  authority  conferred  by 
the  statute  on  that  company,  in 
excess  of  the  powers  granted  by  its 
charter  and  against  public  policy 
and  void,  and  no  title  pas.sed  by  such 
conveyance.  .  .  .  As  there  has  been 
an  abuse  of  the  corporate  franchise,  it 
will  be  dissoh-ed  and  annulled." 

In  this  case  it  was  also  helil  that  a 
transfer  of  property  pending  quo  war- 
ranto proceedings  would  not  serve  to 
evade  the  effect  of  the  judgment. 

New  York.  People  r.  North  River 
Sugar  Refg.  Co..  121  N.  Y.  582  (1889), 
(24  N.  E.  Rep.  834,  18  Am.  St.  Rep. 
843,  9  L.  R.  A.  33). 

Ohio.  State  v.  Standard  Oil  Co., 
49  Ohio  St.  137  (1892),  (.30  N.  E.  Rep. 
279,  34  Am.  St.  Rep.  541,  15  L.  R.  A. 
145). 

Texas.  San  Antonio  Gas  Co.  v. 
State,  22  Tex.  Civ.  App.  118  (1899), 
(54  S.  W.  Rep.  118),  (with  especial 
reference  to  the  Texas  anti-trust 
statute). 

2  In  State  r.  Portland  Natural  Gas, 

683 


§374 


INTERCORPORATE   RELATIONS 


[part  V 


Upon  proof  in  quo  warranto  proceedings  that  a  defendant 
corporation  has  entered  into  an  illegal  agreement  for  a  com- 
bination, the  courts  may  declare  a  forfeiture  of  its  corporate 
franchise;  or,  it  is  held,  may  render  a  judgment  of  ouster  from 
the  right  to  make  or  carry  out  the  combination  agreement.^ 

§  374.  Remedies  of  State  —  (C)  Injunction.  — The  State  may 
file  a  bill  for  an  injunction  to  restrain  any  ultra  vires  act  of  a 
corporation  of  a  nature  to  produce  public  injury.  It  may  en- 
join the  formation  of  an  unlawful  combination  —  association, 
trust  or  corporate  combination.  It  is  not  obliged  to  wait 
until  the  organization  has  been  completed,  and  all  the  injury 
possible  is  in  process  of  infliction.^ 


etc.  Co.,  153  Ind.  491  (1899),  (53  N.  E. 
Rep.  1089,  74  .Ajn.  St.  Rep.  314, 
53  L.  R.  A.  413),  the  Supreme  Court 
of  Indiana  said:  "While  appellee, 
by  the  agreement  in  controversy, 
cannot  be  said  to  have  fully  renounced 
autonomy,  still  it  did  so  to  the  extent, 
at  least,  that  it  thereby  disabled  itself 
from  supplying  persons  with  gas  who 
were  patrons  of  the  other  company. 
By  entering  into  this  agreement, 
and  carrying  it  into  execution, 
appellee  violated  the  principles  of 
public  policy,  and  clearly  abused  the 
rights  and  powers  conferred  upon  it  by 
the  State,  and  may  be  said  to  have  of- 
fended against  the  laws  of  its  creation. 
Such  an  illegal  act  or  agreement,  upon 
the  part  of  a  corporation  like  appellee, 
cannot  be  permitted  to  override  the 
law,  and  it  was  the  manifest  duty  of 
the  State  to  interpose  as  it  has  done, 
and  call  it  to  account ;  and  if  the 
charge  made  is  established,  a  deserv- 
ing penalty  ought  to  be  inflicted." 
See  also,  People  v.  Chicago  Gas  Trust 
Co.,  130  111.  268  (1889),  (22  N.  E. 
Rep.  798,  17  Am.  St.  Rep.  319,  8  L. 
R.  A.  497). 

'  In  State  v.  Portland  Natural  Gas, 
etc.  Co.,  153  Ind.  491  (1899),  (53  N.  E. 
Rep.  1089,  74  Am.  St.  Rep.  314, 
53  L.  R.  A.  413),  the  Court  further 
said :  "The  rule  is  well  settled  that  a 
court,  in  cases  in  quo  warranto  pro- 

684 


ceedings  like  this,  if  the  facts  justify, 
may,  in  the  exercise  of  its  discretion, 
render  a  judgment  against  the  de- 
fendant declaring  a  forfeiture  of  its 
corporate  francliises,  or  the  judgment 
may  be  a  forfeiture  or  ouster  only  of 
the  right  of  the  defendant  to  carry  out 
or  continue  the  illegal  act  or  acts 
charged  and  established."  See  also, 
State  V.  Standard  Oil  Co.,  49  Ohio  St. 
137  (1892),  (30  N.  E.  Rep.  279,  34 
Am.  St.  Rep.  541,  15  L.  R.  A.  145). 

In  quo  warranto  proceedings  against 
a  corporation  upon  the  ground  that  it 
is  a  party  to  an  unlawful  combination, 
the  respondent  corporation  cannot 
object  that  the  other  members  of  the 
combination  are  not  joined  as  de- 
fendants. 

Attorney-General  v.  A.  Booth  & 
Co.,  143  Mich.  89  (1906),  (106  N. 
W.  Rep.  868). 

2  In  Trust  Co.  v.  State,  109  Ga.  747 
(1900),  (35  S.  E.  Rep.  323),  the  Su- 
preme Court  of  Georgia  said  :  "We 
have  reached  the  conclusion  that  the 
sounder  reasoning  is  in  favor  of  allow- 
ing to  the  State  relief  by  injunction 
whenever  it  is  proceeding  in  the  in- 
terest of  the  public  to  prevent  a 
threatened  injury.  As  harsh  as  the 
remedy  by  injunction  is  generally 
considered,  it  is  certainly  not  as  severe 
as  would  be  a  proceeding  in  the  nature 
of    quo    warranto,    instituted    for    the 


CHAP.  XXXVIl] 


RIGHTS   AND   REMEDIES 


§374 


If  the  State  waits  until  the  combination  has  been  perfected, 
it  may  be  partially  deprived  of  its  equitable  remedy.  An 
injunction  will  undoubtedly  lie  to  restrain  the  continued 
operation  of  an  association  or  trust,  but  it  cannot  be  employed, 
as  a  substitute  for  quo  warranto  proceedings,  to  attack  the 
corporate  existence  of  a  corporate  combination.  When  a 
corporate  combination  has  been  formed,  has  acquired  the  plants 
of  other  companies  and  is  transacting  business,  —  all  in  the 
exercise  of  its  apparent  powers,  —  an  injunction  restraining 
it  from  the  exercise  of  those  powers,  upon  the  ground  that  it 
was  formed  for  an  unlawful  purpose,  would  be  equivalent  to 
an  annulment  of  its  charter.  In  such  a  case,  quo  warranto 
is  the  onlv  remedv.* 


purpose  of  forfeiting  the  charter  of 
a  corporation.  The  one  is  instituted, 
not  for  the  purpose  of  causing  a  de- 
struction of  the  corporation,  but  to 
prevent  it  from  entering  into  trans- 
actions \'iolative  of  the  pubUc  poUcy 
of  the  State,  and  to  protect  the  inter- 
est of  the  pubHc  against  a  threatened 
wrong.  The  other  remedy,  if  en- 
forced, would  cause  the  death  of  the 
corporation,  thus  forever  preventing 
it  from  ser\ing  the  pubhc  interests, 
or  meeting  the  pubhc  demands  upon 
its  business,  and  often  result  in  a 
wreckage  of  the  property  of  its 
owners.  We  can,  therefore,  see  no 
reason  why,  if  the  remedy  for  the 
wrongs  threatened  can  be  as  well  pre- 
vented by  injunction,  it  would  not  be 
the  more  readily  and  properly  ap- 
plied than  the  harsher  one  of  for- 
feiture or  confi.scation. " 

See  also,  Stockton  v.  Central  R.  Co., 
50  N.  J.  Eq.  52  (1892),  (24  Atl.  Rep. 
964,  17  L.  R.  A.  97) ;  People  v.  Aachen, 
etc.  Fire  Ins.  Co.,  126  111.  App.  636 
(1906);  Queen  Ins.  Co.  v.  State  (Tex. 
Civ.  App.  1893),  22  S.  W.  Rep.  1048; 
Attorney-General  v.  Great  Northern 
R.  Co.,  1  Drew  &  S.  154  (1860),  (6 
Jur.  (n.  s.),  1009).  As  to  injunction 
against  unincorporated  combination, 
see  State  v.  American  Cotton  Oil 
Trust,  40  La.  Ann.  8  (1888),  (3  So. 


Rep.  409,  19  Am.  &  Eng.  Corp.  Cas. 
448). 

'  Stockton  V.  American  Tobacco  Co., 
55  N.  J.  Eq.  368  (1897),  (36  Atl.  Rep. 
971)  :  "The  first  question  which  con- 
cerns us  is  whether  these  attacks  upon 
the  manner  of  creating  the  company 
do  not  directly  challenge  the  existence 
of  the  corporation  itself,  for  if  this  be 
so,  it  is  entirely  settled,  in  this  State, 
that  a  court  of  equity  has  no  juris- 
diction to  consider  the  matter  at 
all.  ...  (p.  370.)  Now,  in  the  case 
at  bar  it  is  charged  that  the  purpose 
of  the  five  concerns,  the  owners  of 
which  projected  a  scheme  of  incor- 
poration, was  to  coalesce  their  sepa- 
rate competing  business  into  one 
organization,  for  the  purpose  of  de- 
stro^^ng  competition  and  controlling 
the  trade  in  cigarettes.  Whether 
the  contracts  preceding  the  act  of 
incorporation  .  .  .  were  inimical  to 
public  policy,  I  shall  not  stop  to  con- 
sider. If  so,  the  agreement  or  agree- 
ments would  have  been  unenforceable 
in  any  court,  and  it  may  be  that  \ipon 
a  bill  filed  by  the  attorney-general 
such  contract  would  have  been  an- 
nulled. But  that  contract  has  been 
executed.  As  a  contract  it  has 
ceased  to  have  any  efficacy  what- 
ever. All  that  can  be  said  of  it  in  this 
case  is  that  its  prox-isions  exhibit  the 

685 


§375 


INTERCORPORATE    RELATIONS 


[part  V 


§  375.  Evidence.  —  The  existence  of  an  unlawful  combina- 
tion must  be  shown  by  evidence.  Proof  that  a  combination 
exists  is  not  proof  of  its  illegaUty.^ 

In  establishing  the  illegal  character  of  a  combination,  how- 
ever, direct  evidence  of  an  unlawful  object  is  not  necessarj'.^ 


purposes  for  which  the  corporation 
was  organized,  and  the  sole  question 
here  is  whether,  if  such  purpose 
appears  to  have  been  to  establish  a 
monopoly  through  the  instrumentality 
of  this  corporate  organization,  this 
court  can,  upon  that  ground,  restrain 
any  act  done  by  the  corporation  itself 
within  its  corporate  power.  Now 
that  such  an  exertion  of  power  by 
a  court  of  equitj-  would  strike  at  the 
authority  of  the  corporation  to  act 
at  all  as  a  corporation  is  perfectly 
clear.  The  corporation  must  be 
either  a  legal  or  an  illegal  entity.  If 
legal,  then,  as  I  have  already  observed, 
it  possesses  the  right  to  dispose  of  its 
goods  in  its  adopted  manner.  If 
illegal,  it  has  no  right  to  transact  any 
business  at  all  as  a  corporation.  An 
injunction  which  would,  in  the  lan- 
guage of  the  prayer  of  the  bill,  restrain 
the  company  from  using  the  corporate 
organization  in  the  conduct  of  their 
business  of  making  and  selling  paper 
cigarettes,  and  from  carrjdng  on  any 
portion  of  their  business  in  the  name 
of  the  American  Tobacco  Company, 
would  be  as  efficient  an  annulment  of 
their  franchise  as  would  be  a  judgment 
against  them  upon  qiio  warranto." 

1  Herriman  v.  Menzies,  115  Cal.  16 
(1896),  (44  Pac.  Rep.  660,  56  Am.  St. 
Rep.  82,  35  L.  R.  A.  319)  :  "We  are 
not  at  liberty  to  indulge  in  inferences 
which  would  restrict  the  parties  in 
their  right  to  combine  their  interests. 
Parties  are  to  be  given  the  widest 
latitude  to  make  contracts  with  ref- 
erence to  their  private  interests,  and 
the  invalidity  of  such  contracts  is 
never  to  be  inferred,  but  must  be 
clearh'  made  to  appear." 

See   also   Leslie   v.   Lorillard,    110 

686 


N.  Y.  533  (1888),  (18  N.  E.  Rep. 
363,  1  L.  R.  A.  456) ;  Central  Shade 
Roller  Co.  v.  Cushman,  143  Mass.  353 
(1887),  (9  N.  E.  Rep.  629). 

Where  in  an  action  upon  a  lease 
the  defence  is  set  up  that  it  is  invalid 
as  being  part  of  a  scheme  to  create 
an  unlawful  combination,  the  question 
whether  it  was  made  for  such  purpose 
is  for  the  jury. 

Hartz  V.  Eddy,  140  Mich.  479 
(1905),  (103  N.  W.  Rep.  852). 

But  if  all  the  evidence  concerning 
a  contract  —  the  circumstances  at- 
tending its  execution,  the  result  to 
be  accomplished  and  the  practical 
construction  of  the  parties  — ■  is  con- 
sistent only  with  an  unlawful  purpose, 
the  question  of  illegality  should  not 
be  submitted  to  the  jury.  And  this 
is  true  notwithstanding  the  contract 
is  not  illegal  upon  its  face. 

Detroit  Salt  Co.  v.  National  Salt 
Co.,  134  Mich.  103  (1903),  (96  N. 
W.  Rep.  1). 

^  Harding  v.  American  Glucose  Co., 
182  111.  635  (1899),  (55  N.  E.  Rep. 
577,  74  Am.  St.  Rep.  189,  64  L.  R.  A. 
738)  :  "It  makes  no  difference  that 
the  agreement  for  the  illegal  combi- 
nation is  not  a  formal  written  agree- 
ment. It  may  be  a  verbal  agreement 
or  understanding,  or  a  scheme  not 
embodied  in  writing,  but  e^•idenced 
by  the  action  of  the  parties."  See 
also  Pocahontas  Coke  Co.  i'.  Pow- 
hatan Coal,  etc.  Co.,  60  W.  Va.  508 
(1906),  (56  S.  E.  Rep.  269,  116  .\m. 
St.  Rep.  901,  10  L.  R.  A.  (x.  s.)  268). 

In  quo  warranto  proceedings  to 
oust  certain  corporations  from  the 
State  as  constituting  an  unlawful 
combination,  statements  of  the  au- 
thorized representatives  of    such  cor- 


CHAP.  XXXVIl] 


RIGHTS    AND    REMEDIES 


§375 


The  purpose  of  a  combination  to  control  the  market  is  seldom 
evidenced  by  a  single  instrument,  or  expressly  stated  in  any 
instrument.  It  is  shown  by  a  series  of  acts  and  transactions. 
Similarly,  an  illegal  combination  of  quasi-puhlic  corporations 
may  be  of  the  most  innocent  character  in  its  stated  purpose. 

It  is  the  duty  of  the  court  to  view  the  agreement  of  the 
parties  in  the  light  of  all  the  surrounding  circumstances,  and 
to  receive  any  evidence  tending  to  show  the  true  situation 
and  real  purposes  of  the  parties  to  the  combination.  This 
course  has  been  followed  by  the  courts  in  the  leading  cases  of 
quo  warranto  which  have  already  been  adverted  to.^ 


porations  with  respect  to  the  methods 
of  transacting  business  are  admissible 
in  e\'idencc  against  such  corporations. 

State  V.  Armour  Packing  Co., 
173  Mo.  356  (1903),  (73  S.  W.  Rep. 
645,  96  Am.  St.  Rep.  515). 

'  People  V.  North  River  Sugar 
Refg.  Co.,  121  N.  Y.  582  (1889),  (24 
N.  E.  Rep.  834,  18  Am.  St.  Rep.  843, 
9  L.  R.  A.  33) ;  State  v.  Standard 
Oil  Co.,  49  Ohio  St.  137  (1892),  (30 


N.  E.  Rep.  279,  34  Am.  St.  Rep. 
541,  15  L.  R.  A.  145) ;  DistilUng,  etc. 
Co.  V.  People,  156  111.  448  (1895), 
(41  N.  E.  Rep.  188,  47  Am.  St.  Rep. 
200) ;  People  v.  Chicago  Gas  Trust 
Co.,  130  111.  268  (1889),  (22  N.  E. 
Rep.  798,  17  Am.  St.  Rep.  319,  8  L. 
R.  A.  497) ;  State  v.  Nebraska  Dis- 
tilling Co.,  29  Neb.  700  (1890),  (46 
N.  W.  Rep.  155). 


687 


§  376  INTERCORPORATE   RELATIONS  [PART  V 


Article   III 

LEGISLATION    AFFECTING    COMBINATIONS 


I 

Federal  Anti-trust  Statute 


CHAPTER    XXXVIII 

THE    STATUTE    AND   ITS    CONSTITUTIONALITY 

§  376.     The  Statute. 

§  377.     Analysis  of  Statute. 

§  378.     Object  of  Statute.      , 

§  379.     Constitutionality  of  Act  —  (A)  Power  of  Congress  under  Conunerce 

Clause  to  legislate  concerning  Private  Contracts  affecting  Interstate 

Commerce. 
§  380.     Constitutionality  of  Act  —  (B)   Power  of  Congress  under  Commerce 

Clause  to  legislate  concerning  Contracts  and  Combinations  under 

State  Laws. 
§  381.     Constitutionality  of  Act  —  (C)   Power  of  Congress  under  Commerce 

Clause  to  prohibit  Combinations  of  Competing  Railroads. 
§  382.     Constitutionality  of  Act  —  (D)  Act  is  Constitutional. 
§  383.     Legislation  supplementing  the  Statute  —  (1)  Anti-trust   Provisions  of 

Wilson  Tariff  Act. 
§  384.     Legislation  supplementing  the  Statute  —  (2)  The  Expedition  Act. 
§  385.     Legislation  supplementing  the  Statute  —  (3)  The  Immunity  Provdso. 

§  376.  The  Statute.  — The  federal  anti-trust  act,  generally 
called  the  "  Sherman  Act,"  and  entitled  "An  Act  to  protect 
trade  and  commerce  against  unlawful  restraints  and  monopo- 
lies," was  approved  July  2,  1890.  It  is  printed  in  full  in  the 
footnote.^ 

*  "§    1.     Every    contract,     combi-  is     hereby     declared     to     be     illegal. 

nation  in  the  form  of  trust  or  other-  Every   person   who    shall    make    any 

wise,    or   conspiracy,    in   restraint    of  such  contract,  or  engage  in  any  such 

trade   or   commerce    among   the   sev-  combination   or   conspiracy,   shall  be 

eral  States,  or  with   foreign  nations,  deemed  guilty  of  a  misdemeanor,  and, 

688 


CHAP.  XXXVIIl]      STATUTE   AND   ITS  CONSTITUTIONALITY 


§377 


§  377.  Analysis  of  Statute.  — The  sections  of  the  act  may- 
be classified,  primarily,  into 

(I)  Sections  declaring  what  "restraints  and  monopolies" 
the  act  is  directed  against,  and  prescribing  penalties  —  sec- 
tions 1,  2,  and  3. 


on  conviction  thereof,  shall  be  pun- 
ished by  fine  not  exceeding  five  thou- 
sand dollars,  or  by  imprisonment 
not  exceeding  one  year,  or  by  both 
said  punishments,  in  the  discretion 
of  the  court. 

"  §  2.  Every  person  who  shall 
monopolize,  or  attempt  to  monopo- 
lize, or  combine  or  conspire  with  any 
other  person  or  persons,  to  monopo- 
lize any  part  of  the  trade  or  com- 
merce among  the  several  States,  or 
with  foreign  nations,  shall  be  deemed 
guilty  of  a  misdemeanor,  and,  on 
conviction  thereof,  shall  be  punished 
by  fine  not  exceeding  five  thousand 
dollars,  or  by  imprisonment  not  ex- 
ceeding one  year,  or  by  both  said 
punishments,  in  the  discretion  of  the 
court. 

"  §  3.  Every  contract,  combination 
in  form  of  trust  or  otherwise,  or  con- 
spiracy, in  restraint  of  trade  or  com- 
merce in  any  Territory  of  the  United 
States  or  of  the  District  of  Columbia, 
or  in  restraint  of  trade  or  commerce  be- 
tween any  such  Territory  and  another, 
or  between  any  such  Territory  or  Ter- 
ritories and  any  State  or  States  or  the 
District  of  Columbia,  or  with  foreign 
nations,  or  between  the  District  of 
Columbia  and  any  State  or  States 
or  foreign  nations,  is  hereby  declared 
illegal.  Every  person  who  shall  make 
any  such  contract  or  engage  in  any 
combination  or  conspiracy,  shall  be 
deemed  guilty  of  a  misdemeanor,  and, 
on  conviction  thereof,  shall  be  pun- 
ished by  fine  not  exceeding  five  thou- 
sand dollars,  or  by  imprisonment  not 
exceeding  one  year,  or  by  both  said 
punishments,  in  the  discretion  of  the 
court. 

"  §  4.    The  several  circuit  courts  of 


the  United  States  are  hereby  invested 
with  jurisdiction  to  prevent  and  re- 
strain violations  of  this  act ;  and  it 
shall  be  the  duty  of  the  several  dis- 
trict attorneys  of  the  United  States, 
in  their  respective  districts,  under 
the  direction  of  tlie  Attorney-General, 
to  institute  proceedings  in  equity 
to  prevent  and  restrain  such  viola- 
tions. Such  proceedings  may  be 
by  way  of  petition  setting  forth  the 
case  and  prajing  that  such  violation 
shall  be  enjoined  or  otherwise  pro- 
hibited. When  the  parties  com- 
plained of  shall  have  been  duly  noti- 
fied of  such  petition,  the  court  shall 
proceed,  as  soon  as  may  be,  to  the 
hearing  and  determination  of  the 
case;  and  pending  such  petition  and 
before  final  decree,  the  court  may 
at  any  time  make  such  temporary 
restraining  order  or  prohibition  as 
shall  be  deemed  just  in  the  premises. 
"  §  5.  Wlienever  it  shall  appear  to 
the  court  before  which  any  proceeding 
under  section  four  of  this  act  may  be 
pending,  that  the  ends  of  justice  re- 
quire that  other  parties  should  be 
brought  before  the  court,  the  court 
may  cause  them  to  be  summoned, 
whether  they  reside  in  the  district 
in  which  the  covirt  is  held  or  not ; 
and  subpcenas  to  that  end  may  be 
served  in  any  district  by  the  marsiial 
tlicreof. 

"  §  6.  .\ny  property  owned  under 
any  contract  or  by  any  combination, 
or  pursuant  to  any  conspiracy  (and 
being  the  subject  thereof)  mentioned 
in  section  one  of  this  act,  and  being 
in  the  course  of  transportation  from 
one  State  to  another,  or  to  a  foreign 
country,  .shall  be  forfeited  to  the 
United    States,    and    may    be    seized 

689 


§  377  INTERCORPORATE  RELATIONS  [PART  V 

(II)  Sections  relating  to  remedies  and  procedure  —  sec- 
tions 4,  5,  6  and  1 } 

(III)  Section  declaring  rule  of  construction  —  section  8. 
The  last  section  —  forming  Class  III  and  providing  that  the 

word  "  person  "  or  "  persons  "  shall  include  corporations  and 
associations  —  requires  no  analysis.  Class  II  —  the  sections 
relating  to  remedies  and  procedure  —  will  be  the  subject  of 
consideration  in  another  chapter.  The  several  sections  in 
Class  I  may  be  subdivided  into 

(1)  Definitions  of  offences. 

(2)  Statements  of  penalties. 

The  penalties  prescribed  in  the  act  will  be  considered  in 
connection  with  remedies  and  procedure.  The  offences  de- 
scribed in  the  several  sections  of  Class  I  are  as  follows: 

Under  section  1 :  Every  (a)  contract,  (6)  combination  in 
the  form  of  trust  or  otherwise,  or  (c)  conspiracy,  in  restraint 
of  trade  or  commerce  among  the  several  States  or  with  foreign 
nations,  is  illegal. 

Under  section  2 :  Every  person  who  shall  (a)  monopolize, 
or  (6)  attempt  to  monopolize,  or  (c)  combine  or  {d)  conspire 
with  any  other  person  or  persons,  to  monopolize,  any  part  of 
the  trade  or  commerce  among  the  several  States  or  with  foreign 
nations,  shall  be  deemed  guilty  of  a  misdemeanor. 

Under  section  3:  The  acts  and  agreements  described  in 
section  1,  if  in  restraint  of  trade  or  commerce  in  any  Terri- 
tory (including  the  District  of  Columbia),  or  between  Territories 
and  other  Territories,  States  and  foreign  nations,  are  illegal. 

and  condemned    by  like   proceedings  threefold    the    damages   by  him   sus- 

as  those  provided  by  law  for  the  for-  tained,  and  the  costs  of  suit,  including 

feiture,  seizure,  and  condemnation  of  a  reasonable  attorney's  fee. 

property  imported    into    the  United  "  §  8.   That  the  word  'person'  or 

States  contrary  to  law.  'persons,    wherever  used  in  this  act, 

"  §  7.   Any  person  who  shall  be  in-  shall  be  deemed  to  include  corpora- 

jured  in  his  business  or  property  by  tions  and  associations  existing  under 

any  other  person   or    corporation  by  or  authorized  by  the  laws  of  either  the 

reason  of  anything  forbidden  or  de-  United  States,  the  laws  of  any  of  the 

clared  to  be  unlawful  by  this  act,  may  Territories,  the  laws  of  any  State,  or 

sue   therefor   in   any    circuit   court   of  the  laws  of  any  foreign  country." 

the  United   States  in  the  district  in  ^  Section   6  also    pro\-ides    an    ad- 

which    the    defendant    resides    or    is  ditional    penalty    of    forfeiture,    and 

found,  without  respect  to  the  amount  section  7,   of  treble  damages, 
in     cont  rovers  J',    and     shall    recover 

690 


CHAP.  XXXVIIl]      STATUTE   AND   ITS   CONSTITUTIONALITY  §  378 

From  this  analysis  the  following  conclusions  follow: 

1,  The  "  restraints  and  monopolies  "  referred  to  in  the  title 
to  the  act  are 

(A)  Contracts,  combinations  and  conspiracies  in  restraint 
of  interstate  (including  territorial  and  interterritorial)  and 
foreign  trade  or  commerce. 

(B)  Monopolizing,  or  attempting,  combining  or  conspiring 
to  monopolize,  interstate  or  foreign  trade  or  commerce. 

2.  Such  "  restraints  and  monopolies  "  are  illegal. 

§  378.  Object  of  Statute.  —  The  statute  is  aimed  at  all  re- 
strictions upon  interstate  commerce.  Its  purpose  is  to  per- 
mit trade  and  commerce,  between  the  States  and  with  foreign 
nations,  to  flow  in  their  natural  channels,  "  unrestricted  by 
any  combinations,  contracts,  conspiracies,  or  monopolies 
whatsoever."  ^  In  United  States  v.  Coal  Dealers  Association,^ 
Judge  Morrow  said :  "  The  clear  and  positive  purpose  of  the 
statute  must  be  understood  to  be  that  trade  and  commerce, 
within  the  jurisdiction  of  the  federal  government,  shall  be 
absolutely  free,  and  no  contract  or  combination  will  be  tolerated 
that  impedes  or  restricts  their  natural  flow  and  volume." 

The  purpose  of  a  statute  must  be  gathered,  primarily,  from 
its  language;  and,  as  will  be  shown,  this  act  has  been  con- 
strued to  apply  to  combinations  of  competing  carriers,  as 
well  as  to  industrial  combinations.  An  examination  of  the 
"history  of  the  times,"  moreover,  —  using  a  phrase  of  the 
Supreme  Court  of  the  United  States,  —  will  show  that  while 
the  principal  object  of  Congress,  in  enacting  the  statute,  may 
have  been  the  suppression  of  combinations  of  industrial  cor- 
porations in  restraint  of  interstate  commerce,  the  prevention 
of  combinations  between  competing  railroad  companies  was 
not  outside  its  purpose.' 

'  United  States  v.  Hopkins,  82  Fed.  of  the  act  in  question ;  that  a  number 

537  (1897).  of  combinations  in  the  form  of  trusts 

'  United    States    v.    Coal     Dealers  and  conspiracies  in  restraint  of  trade 

Ass'n,  85  Fed.  261  (1898).  were    to    be    found    throughout    the 

'  United    States    v.    Trans-Missouri  country,  and   that   it  was   impossible 

Freight  Ass'n,   166  U.  S.  319  (1897),  for  the  State  governments  to  success- 

(17  Sup.  Ct.  Rep.  540):   "It  is  said  fully  cope  witli  them,  because  of  their 

that     Congress     had     very    different  commercial    character,    and    of    their 

matters    in    view,  and   very  different  business  extension    through    the   dif- 

objects  to  accomplish  in  the  pa.ssage  ferent  States  of  the  Union.     Among 

691 


§379 


INTERCORPORATE    RELATIONS 


[part  V 


§  379.  Constitutionality  of  Act  — •  (A)  Power  of  Congress 
under  Commerce  Clause  to  legislate  concerning  Private  Con- 
tracts affecting  Interstate  Commerce.  —  The  Constitution  of 
the  United  States  provides  that  Congress  shall  have  power  "  to 
regulate  commerce  with  foreign  nations,  and  among  the  several 
States  and  with  the  Indian  Tribes."  ^     Under  this  grant  of 


these  trusts  it  was  said  in  Congress, 
were  the  Beef  Trust,  the  Standard 
Oil  Trust,  the  Steel  Trust,  the  Barbed 
Wire  Fence  Trust,  the  Sugar  Trust, 
the  Cordage  Trust,  the  Cotton  Seed 
Oil  Trust,  the  Whiskey  Trust,  and 
many  others,  and  these  trusts,  it  was 
stated,  had  assumed  an  importance 
and  had  acquired  a  power  which  were 
dangerous  to  the  whole  country,  and 
that  their  existence  was  directly 
antagonistic  to  its  peace  and  pros- 
perity. To  combinations  and  con- 
spiracies of  this  kind,  it  is  contended 
that  the  act  in  cjuestion  was  directed, 
and  not  to  the  combinations  of  com- 
peting railroads  to  keep  up  their  prices 
to  a  reasonable  sum  for  the  transpor- 
tation of  persons  and  property.  It 
is  true  that  many  and  various  trusts 
were  in  existence  at  the  time  of  the 
passage  of  the  act,  and  it  was  probably 
sought  to  cover  them  by  the  provisions 
of  the  act.  Many  of  them  had 
rendered  themselves  offensive  by 
the  manner  in  which  they  exercised 
the  great  power  that  combined  capital 
gave  them.  But  a  further  investiga- 
tion of  'the  historj'  of  the  times' 
shows  also  that  those  trusts  were  not 
the  only  associations  controlling  a 
great  combination  of  capital  which 
had  caused  complaint  at  the  manner 
in  which  their  business  was  conducted. 
There  were  many  and  loud  complaints 
from  some  portions  of  the  public 
regarding  the  railroads  and  the  prices 
thej'  were  charging  for  the  ser\'ice  they 
rendered,  and  it  was  alleged  that  the 
prices  for  the  transportation  of  per- 
sons and  articles  of  commerce  were 
unduly  and  improperly  enhanced  by 
combinations     among     the     different 

692 


roads.  Whether  these  complaints 
were  well  or  ill  founded  we  do  not 
presume  at  this  time  and  under  these 
circumstances  to  determine  or  discu.ss. 
It  is  simply  for  the  purpose  of  answer- 
ing the  statement  that  it  was  only 
to  trusts  of  the  nature  above  set  forth 
that  this  legislation  was  directed,  that 
the  subject  of  the  opinions  of  the 
people  in  regard  to  the  actions  of  the 
railroad  companies  in  this  particular 
is  referred  to.  A  reference  to  this 
history  of  the  times  does  not,  as  we 
think,  furnish  us  with  any  strong 
reason  for  believing  that  it  was  only 
trusts  that  were  in  the  minds  of  the 
members  of  Congress,  and  that  rail- 
roads and  their  manner  of  doing 
business  were  whollj'  excluded  there- 
from." 

^  Constitution  of  the  United  States, 
Art.  I,  §  8  :  "The  Congress  shall  have 
Power  ...  to  regulate  commerce 
with  foreign  nations,  and  among  the 
several  States  and  with  the  Indian 
Tribes." 

By  the  adoption  of  this  clause  in  its 
grant  of  legislative  powers  the  Con- 
stitutional Convention  created  the 
federal  commercial  power  and  pre- 
scribed for  commercial  regulation. 
And  yet  no  member  of  the  Convention 
appreciated  the  possibilities  of  the 
language  used.  There  is  nothing  to 
indicate  that  anything  further  was 
intended  than  the  uniform  regulation 
of  foreign  commerce  and  the  preven- 
tion of  imposts  at  State  lines.  The 
widening  scope  of  the  commerce 
clause  —  the  development  of  the 
essentially  nationalizing  power  —  has 
been  brought  about  through  its  inter- 
pretation,   in    the    light    of    history 


CHAP.  XXXVIIl]      STATUTE   AND   ITS   CONSTITUTIONALITY  §   379 

power,  Congress  may  enact  laws  declaring  illegal  and  prohibit- 
ing the  performance  of  contracts  between  individuals  or  corpo- 
rations, the  natural  and  direct  —  as  distinguished  from  the 
incidental  and  collateral  — effect  of  the  operation  of  which 
will  be  to  regulate,  to  any  extent,  interstate  or  foreign  com- 
merce.^ The  provision  in  the  Constitution  regarding  the 
liberty  of  the  citizen,'  although  including  liberty  of  contract, 
does  not  limit  the  power  of  Congress,  under  the  commerce 
clause,  to  legislate  upon  the  subject  of  contracts  affecting,  in 
any  degree,  commerce  among  the  States. 

In  Addyston  Pipe,  etc.  Co.  v.  United  States,^  Mr,  Justice 
Peckham  said:  "  It  is  insisted  by  the  appellants,  at  the  thresh- 
old of  the  inquiry,  that,  by  the  true  construction  of  the  Con- 
stitution, the  power  of  Congress  to  regulate  interstate  com- 
merce is  limited  to  its  protection  from  acts  of  interference  by 
State  legislation  or  by  means  of  regulations  made  under  the 
authority  of  the  State  by  some  political  subdivision  thereof, 
.  .  .  but  that  it  does  not  include  the  general  power  to  interfere 
with  or  prohibit  private  contracts  between  citizens,  even  though 
such  contracts  have  interstate  commerce  for  their  object,  and 
result  in  a  direct  and  substantial  obstruction  to  or  regulation 
of  that  commerce,  .  .  .  The  power  to  regulate  interstate 
commerce  is,  as  stated  by  Chief  Justice  Marshall,  full  and  com- 
plete in  Congress,  and  there  is  no  limitation  in  the  grant  of  the 
power  which  excludes  private  contracts  of  the  nature  in  question 
from  the  jurisdiction  of  that  body.  Nor  is  any  such  limitation 
contained  in  the  other  clause  of  the  Constitution,  which  pro- 
vides that  no  person  shall  be  deprived  of  life,  liberty  or  property 
without  due  process  of  law.  .  .  .     The  provision  in  the  Con- 

and  the  nation's  growth,  by  the  Su-  shall  be  .   .   .  deprived  of  life,  liberty 

preme    Court    of   the    United    States.  or   property  without   due   process  of 

The  series  of  decisions  marking  that  law ;    nor   shall   private   propertj'   be 

development     mark     also     American  taken  without  just  compensation." 

commercial  progress.  ^  Addyston  Pipe,  etc.  Co.  v.  United 

'  Addyston  Pipe,  etc.  Co.  v.  United  States,  175  U.  S.  226  (1899),  (20  Sup. 

States,  175  U.  S.  226  (1899),  (20  Sup.  Ct.  Rep.  96). 

Ct.  Rep.  96)  ;    ITnited  States  v.  Joint  See    also    opinion    of    Mr.    Justice 

Traffic   A.ss'n,   171   U.  S.  571   (1898),  Harlan  in  Northern  Securities  Co.  v. 

(19  Sup.  Ct.  Rep.  25).  United    States,    193    U.  S.     197,    342 

2  The  Fifth  Amendment  of  the  Con-  (1994),  (24  Sup.  Ct.  Rep;  4.36). 
stitution    provides    that    "no    person 

693 


§   380  INTERCORPORATE    RELATIONS  [PART    V 

stitution  does  not,  as  we  believe,  exclude  Congress  from  legis- 
lating with  regards  to  contracts  of  the  above  nature,  while  in 
the  exercise  of  its  constitutional  right  to  regulate  commerce 
among  the  States.  On  the  contrary,  we  think  the  provision 
regarding  the  liberty  of  the  citizen  is,  to  some  extent,  limited 
by  the  commerce  clause  of  the  Constitution,  and  that  the  power 
of  Congress  to  regulate  interstate  commerce  comprises  the  right 
to  enact  a  law  prohibiting  the  citizen  from  entering  into  those 
private  contracts  which  directly  and  substantially,  and  not 
merely  indirectly,  remotely,  incidentally  and  collaterally,  regu- 
late, to  a  greater  or  less  degree,  commerce  among  the  States."  * 

§  380.  Constitutionality  of  Act  —  (B)  Power  of  Congress 
under  Commerce  Clause  to  legislate  concerning  Contracts  and 
Combinations  under  State  Laws.  —  The  power  of  Congress, 
under  the  commerce  clause  of  the  Constitution,  to  legislate 
concerning  contracts  and  combinations  affecting  commerce 
among  the  States  is  not  affected  by  the  fact  that  they  may  have 
been  entered  into  under  State  laws.  The  States  have  no  power 
to  place  restraints  upon  interstate  commerce  nor  to  authorize 
corporations  or  individuals  to  do  so.  State  legislation  can  never 
sei*ve  as  a  shield  against  the  assertion  of  federal  authority  over 
such  commerce. 

It  is  no  violation  of  the  reserved  rights  of  the  States  for  Con- 
gress to  enact  that  no  persons,  natural  or  artificial,  shall  enter 

1  Compare  this  decision  witli  that  in  the  citizens  of  the  States,  in  the  acqui- 
In  re  Greene,  52  Fed.  112  (1892),  sition,  control,  and  disposition  of 
where  the  constitutional  hmitations  property.  Neither  can  Congress  regu- 
upon  the  power  of  Congress  are  also  late  or  prescribe  the  price  or  prices 
considered.  Judge  Jackson  said  :  at  which  such  propertj',  or  the  prod- 
"  Congress  may  place  restrictions  and  ucts  thereof,  shall  be  sold  bj'  the 
limitations  upon  the  right  of  corpora-  owner  or  owners,  whether  corpora- 
tions created  and  organized  under  its  tions  or  indi\'iduals.  It  is  equally 
authority  to  acquire,  use,  and  dispose  clear  that  Congress  has  no  jurisdiction 
of  property.  It  may  also  impose  such  over,  and  cannot  make  criminal, 
restrictions  and  limitations  upon  the  the  aims,  purposes,  and  intentions 
citizen  in  respect  to  the  exercise  of  of  persons  in  the  acquisition  and  con- 
a  public  privilege  or  franchise  by  the  trol  of  property,  which  the  States 
United  States.  But  Congress,  cer-  in  their  residence  or  creation  sanction 
tainly,  has  not  the  power  or  authority  and  permit.  It  is  not  material  that 
under  the  cpmmerce  clause,  or  any  such  property,  or  the  products  thereof, 
other  provision  of  the  Constitution,  may  become  the  subject  of  trade  and 
to  limit  and  restrict  the  right  of  cor-  commerce  among  the  several  States  or 
porations   created   by  the   States,   or  with  foreign  nations." 

694 


CHAP.  XXXVIIl]      STATUTE    AND    ITS   CONSTITUTIONALITY 


§  380 


into  a  contract  or  combination  in  restraint  of  interstate  com- 
merce. The  States  have  no  power  to  charter  corporations  to 
break  such  a  law.  No  corporation  can  rely  upon  its  chartered 
powers  to  justify  breaking  such  a  law.  The  federal  anti-trust 
statute  is  not  unconstitutional  as  trenching  upon  the  powers 
of  the  States. 

Mr.  Justice  Harlan  considers  at  length  these  questions  in 
his  opinion  in  the  Northern  Securities  Case,  extracts  from  which 
are  printed  in  the  footnote.* 


'  The  Northern  Securities  Case 
(193  U.  S.  197  (1904),  (24  Sup.  Ct. 
Rep.  436)  is  examined  at  length  in 
post,  §  397a.  The  following  extracts 
from  Mr.  Justice  Harlan's  opinion 
relate  to  the  question  of  constitu- 
tionality:  "Now,  the  court  is  asked 
to  adjudge  that,  if  held  to  embrace 
the  case  before  us,  the  Anti-trust 
Act  is  repugnant  to  the  Constitution 
of  the  United  States.  In  this  view 
we  are  unable  to  concur.  The  con- 
tention of  the  defendants  could  not 
be  sustained  without,  in  effect,  over- 
ruling the  prior  decisions  of  the  court 
as  to  the  scope  and  validity  of  the 
Anti-trust  Act.  ...  If  private  parties 
may  not,  by  combination  among 
themselves,  restrain  interstate  and 
international  commerce  in  violation 
of  an  act  of  Congress,  much  less  can 
such  restraint  be  tolerated  when 
i:nposed  or  attempted  to  be  imposed 
upon  commerce  as  carried  on  over 
l>ublic  highways.  Indeed,  if  the  con- 
tentions of  the  defendants  are  sound, 
why  may  not  all  the  railway  com- 
panies in  the  United  States,  that  are 
engaged,  under  State  charters,  in 
interstate  and  international  com- 
merce, enter  into  a  combination  such 
as  the  one  here  in  question,  and  by 
the  device  of  a  holding  corporation 
obtain  the  absolute  control  through- 
out the  entire  country  of  rates  for 
passengers  and  freight,  beyond  the 
power  of  Congress  to  protect  the 
I)ublic  against  their  exactions?  .  .  . 
All,  we  take  it,  will  agree,  as  estab- 


lished firmly  by  the  decisions  of  thia 
court,  that  the  powers  of  Congress 
over  commerce  extend  to  all  the  in- 
strumentalities of  such  commerce, 
and  to  every  de\-ice  that  maj'  be 
employed  to  interfere  with  the  free- 
dom of  commerce  among  the  States 
and  with  foreign  nations.  Equally, 
we  assume,  all  will  agree  that  the  Con- 
stitution and  the  legal  enactments 
of  Congress  are,  by  express  words 
of  the  Constitution,  the  supreme  law 
of  the  land,  anything  in  the  consti- 
tution and  laws  of  any  State  to  the 
contrary  notwithstanding.  Never- 
theless, the  defendants,  strangely 
enough,  invoke  in  their  behalf  the 
Tenth  Amendment  of  the  Constitu- 
tion which  declares  that  'the  powers 
not  delegated  to  the  United  States 
by  the  Constitution,  nor  prohibited 
by  it  to  the  States,  are  reserved  to 
the  States  respectively  or  to  the 
People,'  and  we  are  confronted  with 
the  suggestion  that  any  order  or 
decree  of  the  federal  court  which 
will  prevent  the  Northern  Securities 
Company  from  exercising  the  power 
it  acquired  in  becoming  the  holder 
of  the  stocks  of  the  Great  Northern 
and  Northern  Pacific  Railway  com- 
panies will  be  an  invasion  of  the 
rights  of  the  State  under  which  the 
Securities  Company  was  chartered, 
as  well  as  the  rights  of  the  States 
creating  the  other  companies.  In 
other  wonls,  if  the  State  of  New 
Jersey  gives  a  charter  to  a  corpo- 
ration, and  even  if  the  obtaining  of 

G95 


§  381  INTKRCORPORATE   RELATIONS  [PART   V 

§  381.  Constitutionality  of  Act  —  (C)  Power  of  Congress 
under  Commerce  Clause  to  prohibit  Combinations  of  Competing 
Railroads.  —  In  the  exercise  of  the  power  conferred  in  the 
commerce  clause  of  the  Constitution,  Congress  may  enact 
legislation,  applicable  to  railroad  companies,  declaring  illegal 
all  contracts  and  combinations  which,  in  its  opinion,  restrain 
or  impede  interstate  or  foreign  commerce  by  restricting  or 
extinguishing  competition.^  It  is  for  Congress  to  determine 
what  contracts  and  combinations  are  prejudicial  to  the  pubHc 
welfare,  and  the  courts  may  not  declare  an  act  of  Congress 
unconstitutional  on  account  of  such  determination,  except, 
possibly,  in  a  case  of  gross  abuse  of  power. 

In  United  States  v.  Joint  Traffic  Association,'^  the  Supreme 
Court  of  the  United  States  said:  "  Has  not  Congress,  with  re- 
gard to  interstate  commerce  and  in  the  course  of  regulating 
it,  in  the  case  of  railroad  corporations,  the  power  to  say  that 
no  contract  or  combination  shall  be  legal  which  shall  restrain 
trade  and  commerce  by  shutting  out  the  operation  of  the 
general  laws  of  competition  ?  We  think  it  has.  .  .  .  The  busi- 
ness of  a  railroad  carrier  is  of  a  public  nature,  and,  in  perform- 

such  charter  is  in  fact  pursuant  to  this  court  as  to  the  powers  of  the 
a  combination  under  which  it  becomes  National  Government  over  matters 
the  holder  of  the  stocks  of  shareholders  committed  to  it.  No  State  can,  by 
in  two  competing  parallel  railroad  merely  creating  a  corporation,  or  in 
companies  engaged  in  interstate  com-  any  other  mode,  project  its  authority 
merce  in  other  States,  whereby  com-  into  other  States,  and  across  the 
petition  between  the  respective  roads  continent,  so  as  to  prevent  Congress 
of  those  companies  is  to  be  destroyed  from  exerting  the  power  it  possesses 
and  the  enormous  commerce  carried  under  the  Constitution  over  inter- 
on  over  them  restrained  by  suppress-  state  and  international  commerce, 
ing  competition,  Congress  must  stay  or  so  as  to  exempt  its  corporation 
its  hand  and  allow  such  restraint  to  engaged  in  interstate  commerce  from 
continue  to  the  detriment  of  the  obedience  to  any  rule  lawfully  estab- 
public  because,  forsooth,  the  cor-  lished  by  Congress  for  such  com- 
porations  concerned,  or  some  of  them,  merce." 

are  State  corporations.  .  .  .  We  re-  '  United  States  v.  Joint  Traffic 
ject  any  such  view  of  the  relations  of  Ass'n,  171  U.  S.  505  (1898),  (19  Sup. 
the  National  Government  and  the  Ct.  Rep.  25)  :  United  States  v.  Trans- 
States  composing  the  Union,  as  that  Missouri  Freight  Ass'n,  166  U.  S. 
for  which  the  defendants  contend.  290  (1897),  (17  Sup.  Ct.  Rep.  540). 
Such  a  view  cannot  be  maintained  ^  United  States  v.  Joint  Traffic 
without  destroying  the  just  author-  Ass'n,  171  U.  S.  566  (1898),  (19  Sup. 
ity  of  the  United  States.  It  is  in-  Ct.  Rep.  25). 
consistent    with   all    the    decisions  of 

696 


CHAP.  XXXVIIl]      STATUTE   AND   ITS   CONSTITUTIONALITY  §   382 

ing  it,  the  carrier  is  also  performing,  to  a  certain  extent,  a  func- 
tion of  government  which,  a§  counsel  observed,  requires  them 
to  perform  the  service  upon  equal  terms  to  all.  This  public 
service,  that  of  transportation  of  passengers  and  freight,  is  a 
part  of  trade  and  commerce,  and  when  transported  between 
States  such  commerce  becomes  what  is  described  as  interstate, 
and  comes,  to  a  certain  extent,  under  the  jurisdiction  of  Congress, 
by  virtue  of  its  power  to  regulate  commerce  among  the  several 
States.  Where  the  grantees  of  this  public  franchise  are  com- 
peting railroad  companies  for  interstate  commerce,  we  think 
Congress  is  competent  to  forbid  any  agreement  or  combination 
among  them  by  means  of  which  competition  is  to  be  smoth- 
ered. Although  the  franchise,  when  granted  by  the  State, 
becomes  by  the  grant  the  property  of  the  grantee,  yet  there 
are  some  regulations  respecting  the  exercise  of  such  grants 
which  Congress  may  make  under  its  power  to  regulate  commerce 
among  the  several  States.  This  will  be  conceded  by  all,  the 
only  question  being  as  to  the  extent  of  the  power.  We  think 
it  extends,  at  least,  to  the  prohibition  of  contracts  relating  to 
interstate  commerce,  which  would  extinguish  all  competition 
between  otherwise  competing  railroad  corporations,  and  which 
would,  in  that  way,  restrain  interstate  trade  or  commerce.  .  .  . 
The  prohibition  of  such  contracts  may,  in  the  judgment  of 
Congress,  be  one  of  the  reasonable  necessities  for  the  proper 
regulation  of  commerce,  and  Congress  is  the  judge  of  such  neces- 
sity and  propriety,  unless,  in  case  of  a  possible  gross  perversion 
of  the  principle,  the  courts  might  be  applied  to  for  relief." 

§  382.  Constitutionality  of  Act  —  (D)  Act  is  Constitutional. 
—  It  follows,  as  a  corollary  to  the  conclusions  reached 
in  the  preceding  sections,  that  the  federal  anti-trust  statute, 
having  been  enacted  by  Congress  in  the  exercise  of  the  power 
conferred  upon  it  by  the  commerce  clause  of  the  Constitution, 
and  having  for  its  object  the  elimination  of  all  contracts,  com- 
binations and  conspiracies  for  restraining  or  monopolizing 
interstate  or  foreign  commerce,  is  constitutional;  and  it  has 
been  so  held  by  the  Supreme  Court  of  the  United  States.* 

'  Addyston  Pipe,  etc.  Co.  v.  United       Traffic   Ass'n,   171   U.  S.  50f)  (1898), 
States,  175  U.  S.  211  (1899),  (20  Sup.        (19  Sup.  Ct.  Rep.  25). 
Ct.  Rep.  96) ;    United  States  v.  Joint  See   also   United   States   v.   Trans- 

697 


§384 


INTERCORPORATE    RELATIONS 


[part  V 


§383.  Legislation  supplementing  the  Statute  —  (i)  Anti- 
trust Provisions  of  Wilson  Tariff  Act.  — The  anti-trust  pro- 
visions of  the  Wilson  Tariff  Act  of  August  27,  1894 — relating 
to  combinations  to  which  an  importer  is  a  party  —  are  printed 
in  the  subjoined  note.^ 

These  provisions,  in  respect  of  their  subject-matter,  follow 
the  lines  of  the  federal  anti-trust  statute  and  are  even  broader 
in  their  terms.  They  declare  illegal  every  combination,  trust, 
agreement  or  contract  entered  into  by  two  or  more  persons  or 
corporations,  either  of  whom  is  an  importer,  when  intended  to 
operate  in  restraint  of  trade  or  free  competition,  or  to  increase 
the  market  price  in  the  United  States  of  any  imported  article 
or  manufacture  into  which  such  article  enters.^ 

The  jurisdictional  provisions  and  those  relating  to  procedure 
and  penalties  are  substantially  identical  with  those  of  the 
federal  anti-trust  statute. 

§  384.  Legislation  supplementing  the  Statute  —  (2)  The 
Expedition  Act.  — The  federal  anti-trust  statute  provides  that 
the  circuit  courts  shall  proceed  "  as  soon  as  may  be  "  to  the 


Missouri  Freight  Ass'n,  166  U.  S.  290 
(1897),  (17  Sup.  Ct.  Rep.  540)  ;  United 
States  V.  Jellico  Mountain  Coal,  etc. 
Co.,  46  Fed.  432  (1891). 

*  "§  73.  That  every  combination, 
conspiracy,  trust,  agreement,  or  con- 
tract is  hereby  declared  to  be  con- 
trary to  public  policy,  illegal,  and 
void,  when  the  same  is  made  by  or 
between  two  or  more  persons  or  cor- 
porations either  of  whom  is  engaged 
in  importing  an  article  from  any 
foreign  country  into  the  United  States, 
and  when  such  combination,  con- 
spiracy, trust,  agreement,  or  contract 
is  intended  to  operate  in  restraint 
of  lawful  trade,  or  free  competition 
in  lawful  trade  or  commerce,  or  to 
increase  the  market  price  in  any  part 
of  the  United  States  of  any  article 
or  articles  imported  or  intended  to 
be  imported  into  the  United  States, 
or  of  any  manufacture  into  which 
such  imported  article  enters  or  is 
intended     to     enter.     Every     person 

698 


who  is  or  shall  hereafter  be  engaged 
in  the  importation  of  goods  or  any 
commodity  from  any  foreign  country 
in  violation  of  this  section  of  this 
act,  or  who  shall  combine  or  conspire 
with  another  to  violate  the  same,  is 
guilty  of  a  misdemeanor,  and,  on 
conviction  thereof  in  any  court  of  the 
United  States,  such  person  shall  be 
fined  in  a  sum  not  less  than  one  hun- 
dred dollars  and  not  exceeding  five 
thousand  dollars,  and  shall  be  further 
punished  by  imprisonment,  in  the 
discretion  of  the  court,  for  a  term 
not  less  than  three  months  nor  ex- 
ceeding twelve  months." 

§§  74,  75,  76  and  77  of  the  Wilson 
Act  are  practically  the  same  as  §§  4, 
5,  6  and  7  respectively  of  the  Sherman 
Act. 

2  These  pro\'isions  were  continued 
in  force  by  the  Dingley  Tariff  Act 
of  1897.  They  have  never  been 
construed  by  the  Supreme  Court  of 
the  United  States. 


CHAP.  XXXVlIl]      STATUTE  AND   ITS   CONSTITUTIONALITY 


§  385 


hearing  and  determination  of  causes  brought  under  it.  Such 
causes  for  some  thirteen  years  after  the  enactment  of  the  statute 
were  appealable  to  the  circuit  courts  of  appeals  and  thence 
as  other  causes  to  the  Supreme  Court. 

In  1903,  however,  a  statute  was  passed  making  further  pro- 
vision for  expediting  the  hearing  of  causes  brought  under  the 
anti-trust  statute,  as  well  as  under  the  Interstate  Commerce 
Act,  and  giving  the  sole  right  of  appeal  directly  from  the  circuit 
court  to  the  Supreme  Court.  This  expedition  statute  is  printed 
in  the  footnote.^ 

§  385.  Legislation  supplementing  the  Statute  —  (3)  The 
Immunity  Proviso.  —  The  appropriation  act  of  February  25, 
1903,-  made  an  appropriation  for  the  enforcement  of  the 
provisions  of  the  federal  anti-trust  statute  and  contained  the 
following   provisions:    "  Provided,   That   no   person   shall    be 


'  "  §  1.  In  any  suit  in  equity  pend- 
ing or  hereafter  brought  in  any  cir- 
cuit court  of  the  United  States  under 
the  Act  entitled  'An  Act  to  protect 
trade  and  commerce  against  unlawful 
restraints  and  monopolies,'  approved 
Jul}-  second,  eighteen  hundred  and 
ninety,  'An  Act  to  regulate  com- 
merce,' approved  February  fourth, 
eighteen  hundred  and  eighty-seven, 
or  any  of  the  Acts  ha\nng  a  like  pur- 
pose that  hereafter  may  be  enacted, 
wherein  the  United  States  is  com- 
plainant, the  Attorney-General  may 
file  with  the  clerk  of  such  court  a 
certificate  that,  in  his  opinion  the 
case  is  of  general  public  importance, 
a  copy  of  which  shall  be  immediately 
furnished  by  such  clerk  to  each  of 
the  circuit  judges  of  the  circuit  in 
which  the  case  is  pending.  There- 
upon such  case  shall  be  given  pre- 
cedence over  others  and  in  every 
way  expedited,  and  be  assigned  for 
hearing  at  the  earliest  practicable 
day,  before  not  less  than  three  of 
the  circuit  judges  of  said  circuit,  if 
there  be  three  or  more ;  and  if  there 
be  not  more  than  two  circuit  judges, 
then  before  them  and  such  district 
judge   as   they   may   select.     In   the 


event  that  the  judges  sitting  in  such 
case  shall  be  di\Tded  in  opinion,  the 
case  shall  be  certified  to  the  Supreme 
Court  for  re%new  in  like  manner  as  if 
taken  there  by  appeal  as  hereinafter 
provided. 

"§  2.  That  in  every  suit  inequity 
pending  or  hereafter  brought  in  any 
circuit  court  of  the  United  States 
under  any  of  said  Acts,  wherein  the 
United  States  is  complainant,  in- 
cluding cases  submitted  but  not  yet 
decided,  an  appeal  from  the  final 
decree  of  the  circuit  court  will  lie 
only  to  the  Supreme  Court  and  must 
be  taken  within  sixty  days  from  the 
entry  thereof :  Provided,  That  in 
any  case  where  an  appeal  may  have 
been  taken  from  the  final  decree  of 
a  circuit  court  to  the  circuit  court 
of  appeals  before  this  Act  takes 
effect,  the  case  shall  proceed  to  a 
final  decree  therein,  and  an  appeal 
may  be  taken  from  such  decree  to 
the  Supreme  Court  in  the  manner 
now  provided  by  law." 

2  32  Stat,  at  Large,  Part  1,  p.  903. 
For  construction  of  this  pro\-iso  see 
■post,  §  413,  "Interpretation  of  Immu- 
nity Proviso." 

699 


§    386  INTERCORPORATE    RELATIONS  [PART   V 

prosecuted  or  be  subjected  to  any  penalty  or  forfeiture  for  or 
on  account  of  any  transaction,  matter,  or  thing  concerning 
which  he  may  testify  or  produce  evidence,  documentary  or 
otherwise,  in  any  proceeding,  suit,  or  prosecution  under  said 
acts:  Provided  further,  that  no  person  so  testifying  shall  be 
exempt  from  prosecution  or  punishment  for  perjury  committed 
in  so  testifying." 


CHAPTER    XXXIX 

CONSTRUCTION   AND   APPLICATION    OF   FEDERAL   STATUTE 

§  386.    Title  of  Statute. 

§  387.  Use  of  Phrase  "  Contract  in  Restraint  of  Trade."  Application  of 
Statute  to  Ancillary  Contracts. 

§  388.    Statute  not  limited  to  Unreasonable  Restraint  of  Trade. 

§  389.    Use  of  Terms  "Monopolize"  and  "Monopolies." 

§  390.    Meaning  of  Phrase   "Trade  or  Commerce  among   the   Several   States." 

§  391.  Statute  applies  only  to  Restraints  upon  Interstate  or  International 
Commerce. 

§  392.  Restraint  upon  Interstate  Commerce  must  be  Direct  —  (A)  In  Gen- 
eral. 

§  393.  Restraint  upon  Interstate  Commerce  must  be  Direct  —  (B)  Com- 
binations relating  to  Manufacture  and  of  Manufacturers  and  Pro- 
ducers. 

§  394.  Restraint  upon  Interstate  Commerce  must  be  Direct  —  (C)  Restraints 
upon  Facilities  for  Commerce. 

§  395.  Restraint  upon  Interstate  Commerce  must  be  Direct  —  (D)  Exchanges 
and  Similar  Associations. 

§  396.  Restraint  may  be  imposed  upon  those  engaged  in  Interstate  Commerce 
by  those  not  engaged  therein. 

§  397.    Form  of  Combination  Immaterial.      Illegality  of  Corporate  Device. 

§  397a.  The  Northern  Securities  Case. 

§  398.  Application  of  Statute  to  Combinations  of  Railroads  and  Other  Car- 
riers.     Combinations  of  Railroad  Employees. 

§  399.    Application  of  Statute  to  Combinations  under  Patents. 

§  400.    Application  of  Statute  to  Combinations  under  Copyrights. 

§  401.    Application  of  Statute  to  Combinations  under  Secret  Processes. 

§  402.    Application  of  Statute  to  Contracts  concerning  Market  Quotations. 

§  403.    Application  of  Statute  to  State's  Monopoly  and  State  Regulations. 

§  404.    Statute  not  Retroactive  but  applies  to  Continuing  Combinations. 

§  386.   Title  of  Statute.  —  The  title  of  the  federal  anti-trust 
statute  is  "An  Act  to  protect  trade  and  commerce  from  un- 
lawful restraints  and  monopoUes." 
700 


CHAP.    XXXIX]  CONSTRUCTION    AND   APPLICATION  §   387 

The  body  of  the  act  declares  illegal  "  every  contract  ...  in 
restraint  of  trade  or  commerce/'  etc.,  but  does  not  use  the 
word  "  unlawful." 

It  seems  manifest  that  the  word  "  unlawful  "  in  the  title 
applies  to  the  acts  declared  illegal  in  the  body  of  the  act,  with- 
out regard  to  their  previous  illegality  at  common  law  or  under 
State  statutes.  In  the  Trans-Missouri  Freight  Association 
Case,  however,  it  was  contended  that  the  title  indicated  an 
intention  to  include  only  those  contracts  which  were  unlawful 
at  common  law,  but  which  would  require  a  federal  statute  to 
be  dealt  with  in  a  federal  court.  In  answer  to  this  contention, 
Mr.  Justice  Peckham  said:  *  "  It  is  said  that  when  terms  which 
are  known  to  the  common  law  are  used  in  a  federal  statute, 
those  terms  are  to  be  given  the  same  meaning  that  they  received 
at  common  law,  and  that  when  the  language  of  the  title  is  to 
'  protect  trade  and  commerce  against  unlawful  restraints  and 
monopolies/  it  means  those  restraints  and  monopolies  which 
the  common  law  regarded  as  unlawful,  and  which  were  to  be 
prohibited  by  the  federal  statute.  We  are  of  opinion  that  the 
language  used  in  the  title  refers  to  and  includes,  and  was  in- 
tended to  include,  those  restraints  and  monopolies  which  are 
made  unlawful  in  the  body  of  the  statute.  It  is  to  the  statute 
itself  that  resort  must  be  had  to  learn  the  meaning  thereof, 
though  a  resort  to  the  title  here  creates  no  doubt  about  the 
meaning  of,  and  does  not  alter,  the  plain  language  contained 
in  its  text."  ' 

§  387.  Use  of  Phrase  "  Contract  in  Restraint  of  Trade." 
Application  of  Statute  to  Ancillary  Contracts.  —  If  competition 
develops  trade,  that  which  limits  competition  restrains  trade. 
So  the  phrase  "  contract  in  restraint  of  trade,"  without  any 
judicial  history,  would  naturally  be  given  a  broad  meaning 
corresponding  to  the  signification  of  the  words  composing  it. 
But,  as  we  have  seen,  the  phrase  many  years  ago  acquired  a  well- 
defined  meaning  as  describing  contracts,  ancillary  to  a  principal 

'  United   States  v.   Trans-Missouri  ^  Compare,  however,  the  language 

Freight  Ass'n,   166  U.  S.  327  (1897),  of  Mr.  Justice  Brewer  in  his  concurring 

(17  Sup.  Ct.  Rep.  .')40).  opinion    in    the    Northern    Securities 

See  also  United  States  i;.  Coal  Deal-  Case,  193  U.  S.   197,  361   (1904),   (24 

era  Ass'n,  85  Fed.  261  (1898).  Sup.  Ct.  Rep.  436). 

701 


§   387  INTERCORPORATE   RELATIONS  [PART   \* 

contract,  —  generally  of  sale,  —  whereby  a  person  agrees  to 
refrain  from  engaging  in  some  trade,  business  or  occupation. 
And  still,  as  we  have  also  seen,  notwithstanding  this  early  usage 
and  the  development  of  legal  rules  governing  such  ancillary 
contracts,  the  meaning  of  the  phrase  in  more  recent  years  has 
broadened,  and  it  was  used  in  a  comprehensive  sense  at  the 
time  of  the  enactment  of  the  federal  anti-trust  statute.^ 

It  is  clear  that  the  phrase  ''  contract  in  restraint  of  trade  " 
is  used  in  its  broad  sense  in  the  federal  statute.  It  in- 
cludes "  all  kinds  of  those  contracts  which  in  fact  restrain  or 
may  restrain  trade."  ^  "  The  natural  effect  of  competition  is 
to  increase  commerce,  and  an  agreement  whose  direct  effect 
is  to  prevent  this  play  of  competition  restrains  instead  of  pro- 
motes trade  and  commerce."  ^  Broadly  speaking,  therefore, 
the  phrase  embraces  all  agreements  which  restrain  or  tend  to 
restrain  competition  in  any  degree.  Total  suppression  of  trade 
in  a  commodity  as  a  result  of  an  agreement  is  not  necessary  to 
make  it  a  contract  in  restraint  of  trade.* 

This  broad  use  of  the  phrase  "  contract  in  restraint  of  trade  " 
is,  manifestly,  necessary  to  give  any  practical  effect  to  the 
statute.  Its  purpose  is  to  protect  interstate  trade  and  com- 
merce and  its  application  could  hardly  be  confined  to  a  class 
of  contracts  which,  except  in  the  instance  of  a  collateral  agree- 
ment to  refrain  from  engaging  in  the  transportation  business, 

»  See   ante,    §    336,    "Modern    Use  (20  Sup.  Ct.  Rep.  96),  the  Supreme 

of  Phrase    'Contract    in   Restraint  of  Coiirt  said  :    "We  have  no  doubt  but 

Trade.'"  that  where  the  direct  and  immediate 

The  objection   to  such  broad  use  effect   of  a  contract   or  combination 

of  the  phrase  is  that  pointed  out  in  among  particular   dealers  in  a   com- 

the  section  referred  to  —  testing  the  modity    is    to    destroy    competition 

validity  of  contracts  of  an  essentially  between  them  and  others  so  that  the 

different  nature  from  those  ancillary  parties  to  the  contract  or  combination 

agreements     to     which     the     phrase  may  obtain  increased  prices  for  them- 

originally  applied  by  the  legal  prin-  selves,  such  contract  or  combination 

clples  governing  those  agreements.  amounts  to  a  restraint  of  trade  in  the 

2  United   States   v.   Trans-Missouri  commodity,    even    though    contracts 

Freight  Ass'n,   166  U.  S.  329  (1897),  to   buy  such  commodity   at   the   en- 

(17  Sup.  Ct.  Rep.  540).  hanced    price    are    continually    being 

*  Northern  Securities  Co.  v.  United  made.  Total  suppression  of  the 
States,  193  U.  S.  197  (1904),  (24  Sup.  trade  in  a  commodity  is  not  necessary 
Ct.  Rep.  436).  in   order   to   render   the   combination 

*  In    Addyston    Pipe,  etc.    Co.    v.  one  in  restraint  of  trade." 
United  States,  175  U.  S.  244  (1899), 

702 


CHAP.   XXXIX]  CONSTRUCTION   AND   APPLICATION 


§  387 


could  hardly  have  any  effect  upon  interstate  commerce  at  all. 
In  fact,  the  curious  anomaly  is  presented  of  a  statute  directed 
broadly  against  contracts  in  restraint  of  trade  which  is  inap- 
plicable to  the  very  class  of  contracts  which  were  ■primarily 
in  restraint  of  trade. 

In  the  Trans-Missouri  Freight  Association  Case '  Mr.  Justice 
Peckham  said:  "A  contract  which  is  the  mere  accompaniment 
of  the  sale  of  property,  and  thus  entered  into  for  the  purpose 
of  enhancing  the  price  at  which  the  vendor  sells  it,  which,  in 
effect,  is  collateral  to  such  sale,  and  where  the  main  purpose 
of  the  whole  contract  is  accomplished  by  such  sale,  might  not 
be  included  within  the  title  or  the  spirit  of  the  statute  in  ques- 
tion." And  in  the  recent  opinion  of  Mr.  Justice  Holmes  in 
Cincinnati  Packet  Company  v.  Bay  ^  it  seems  to  be  definitely 


'  United  States  v.  Trans-Missouri 
Freight  Ass'n,  1G6  U.  S.  329  (1897), 
(17  Sup.  Ct.  Rep.  540). 

See  also  concurring  opinion  of  Mr. 
Justice  Brewer  in  the  Northern 
Securities  Case,  193  U.  S.  197,  361 
(1904),  (24  Sup.  Ct.  Rep.  436). 

^  Cincinnati  Packet  Co.  v.  Bay, 
200  U.  S.  179  (1906),  (26  Sup.  Ct. 
Rep.  208). 

In  this  case  the  vendors  in  a  con- 
tract for  the  sale  of  vessels  agreed, 
as  a  part  of  the  con.sideration,  to  with- 
draw from  the  business  of  operating 
vessels  between  certain  points  for 
a  specified  period.  In  a  suit  upon  the 
contract  it  was  set  up  that  this  cove- 
nant in  the  contract  was  in  restraint 
of  trade  in  ATolation  of  the  federal 
anti-trust  statute.  But  Mr.  Justice 
Holmes  said  (p.  184)  :  "It  is  argued, 
to  be  sure,  that  the  la.st  mentioned 
covenant  is  independent  and  not 
connected  with  the  sale  of  the  vessels. 
The  contrary  is  manifest  as  a  matter 
of  good  sense,  and  is  proved  even 
technically  by  the  words  'it  is  also 
agreed  as  a  part  of  the  consideration 
of  this  agreement.'  By  these  words 
the  covenant  not  to  do  business 
between  Cincinnati  and  Portsmouth 
for   five   years   is   imported   into   the 


sale  of  the  ships,  and  made  one  of  the 
conventional  inducements  of  the  pur- 
chase. The  price  is  paid,  not  for  the 
vessels  alone,  but  for  the  vessels  with 
the  covenant.  So,  still  more  clearlj', 
the  parallel  instalments  for  five 
years  are  paid  for  the  covenant,  at 
least  in  part.  It  is  said  that  there 
is  no  sale  of  good-will.  But  the  cove- 
nant makes  the  sale.  Presumably 
all  that  there  was  to  sell,  beside  cer- 
tain instruments  of  competition,  was 
the  competition  itself,  and  the  pur- 
chasers did  not  want  the  vendors' 
names.  This  being  our  view  of  the 
covenant  in  (juestion,  whatever  differ- 
ences of  opinion  there  may  have  been 
with  regard  to  the  scope  of  the  act 
of  July  2,  1890,  there  has  been  no 
intimation  from  any  one,  we  believe, 
that  such  a  contract,  made  as  part 
of  the  sale  of  a  business  and  not  as  a 
de^^ce  to  control  commerce,  would 
fall  within  the  act.  On  the  contrary, 
it  has  been  suggested  repeatedly 
that  such  a  contract  is  not  within 
the  letter  or  spirit  of  the  statute 
(United  States  v.  Trans-Missouri 
Freight  Association,  166  U.  S.  290 
(1897),  (17  Sup.  Ct.  Rep.  540); 
United  States  v.  Joint  Traffic  .Vssocia- 
tion,  171  U.  S.  505  (1898\  (19  Sup. 

703 


387 


INTERCORPORATE    RELATIONS 


[part  V 


decided  that  such  ancillary  contracts  "  made  as  a  part  of  the 
sale  of  a  business  and  not  as  a  device  to  control  commerce  " 
are  not  within  the  statute.*  But  if  an  agreement,  although 
in  the  form  of  an  ancillary  contract,  goes  further  than  is  neces- 
sary for  the  purposes  of  such  a  contract  and  "  presents  acts  in 
aid  of  a  scheme  of  monopoly/'  it  is  unlawful.^ 


Ct.  Rep.  25));  and  it  was  so  decided 
in  the  case  of  a  patent  (Benient  v. 
National  Harrow  Co.,  186  U.  S.  70 
(1902),  (22  Sup.  Ct.  Rep.  747).  It 
would  accomplish  no  public  purpose, 
but  simply  would  pro\'ide  a  loop- 
hole of  escape  to  persons  inclined  to 
elude  performance  of  their  under- 
takings if  the  sale  of  a  bu.siness  and 
temporary  withdrawal  of  the  seller 
necessary  in  order  to  give  the  sale 
effect,  were  to  be  declared  illegal  in 
every  case  where  a  nice  scrutiny 
could  discover  that  the  covenant 
possibly  might  reach  beyond  the 
State  line.  We  are  of  opinion  that 
the  agreement  before  us  is  not  made 
illegal  by  either  of  the  provisions  thus 
far  discussed." 

»  In  Brett  v.  Ebel,  29  App.  Div. 
(N.  Y.)  256  (1898),  (51  N.  Y. 
Supp.  573)  a  party  sold  "all  his 
interest  and  good-will  in  the  business 
of  freighting  vessels"  for  a  certain 
port  and  covenanted  for  a  specified 
period  to  refrain  from  doing  any 
business  with  such  port.  It  was  held 
that  the  covenant  was  not  in  viola- 
tion of  the  federal  statute:  "It  was 
clearly  aimed  at  the  so-called  'trusts' 
or  monopolies  now  so  familiar  in 
this  country,  whose  main  object  was 
the  restraint  of  trade.  The  intention 
was  undoubtedly  to  declare  every 
contract  illegal  which  was  in  the  line 
of  these  evnls.  But  it  certainly  was 
not  intended  to  prohibit  a  man  from 
selling  his  business  in  the  ordinary 
way  and  from  thereupon  obtaining 
the  full  value  thereof,  through  the 
instrumentalitj'  of  an  incidental  cove- 
nant not  to  compete  with  the  pur- 
chaser   within    some    limited    area." 

704 


Compare  Monongahela  River  Con. 
Coal,  etc.  Co.  v.  Jutte,  210  Pa.  St.  288 
(1904),  (59  Atl.  Rep.  1088,  105  Am. 
St.  Rep.  812). 

Where  a  corporation  in  the  fish 
business  sold  out  its  property  and 
good-will,  and  its  stockholders,  who 
dealt  in  fish  at  different  places,  agreed 
not  to  enter  into  competition  with 
the  purchaser  for  a  period  of  ten  years 
it  was  held  that  the  agreement  was 
not  in  \-iolation  of  the  federal  stat- 
ute. 

Dav-is  V.  Booth,  127  Fed.  875 
(1904),  affirmed  131  Fed.  31  (1904). 

2  Shawnee  Compress  Co.  v.  Ander- 
son, 28  Sup.  Ct.  Rep.  572  —  decided 
by  U.  S.  Supreme  Court,  April,  1908. 

In  this  case  a  corporation  sought 
to  obtain  control  of  the  business  of 
compressing  cotton  in  a  certain  terri- 
tory by  purchasing  or  leasing  local 
plants.  It  exacted  from  a  lessor  an 
agreement  not  to  engage  in  the  com- 
press business  for  a  specified  period 
within  fifty  miles  of  any  of  its  plants 
and  to  render  "every  assistance  in 
discouraging  unreasonable  and  un- 
necessary competition."  The  Su- 
preme Court  of  Oklahoma  (17  Okl. 
231  (1906),  (87  Pac.  Rep.  315))  held 
the  contract  void  and  the  U.  S. 
Supreme  Court  affirmed  its  de- 
cision. 

Where  a  contract  for  the  sale  of 
a  business  contained  an  agreement 
that  the  vendor  for  a  specified  period 
should  not  engage  in  a  competing 
business,  and  it  appeared  that  the 
agreement  was  obtained  as  a  part  of 
a  scheme  to  form  an  illegal  combina- 
tion by  which  a  monopoly  of  a  par- 
ticular business  was  obtained,  it  was 


CHAP.    XXXIX]  CONSTRUCTION    AND    APPLICATION  §   388 

§  388.  Statute  not  limited  to  Unreasonable  Restraint  of  Trade. 
—  The  meaning  of  the  phrase  "contract  in  restraint  of  trade  " 
has  never  been  confined  to  contracts  in  unreasonable  restraint 
of  trade.  As  already  shown,  contracts  to  which  the  phrase  in 
its  primary  sense  was  appHcable  were  valid  at  common  law  if 
reasonable;  invalid,  if  unreasonable.^  But  in  each  case  they 
were  called  "  contracts  in  restraint  of  trade."  So,  using  the 
phrase  in  its  more  modern  sense  as  equivalent  to  "  agreement 
restraining  competition,"  its  appUcation  has  never  been  de- 
pendent upon  the  invalidity  of  the  contract.  And,  equally 
true,  the  test  of  the  legality  of  the  contract  has  not  been  whether 
it  was  in  restraint  of  trade,  but  whether  the  restraint  had  been 
carried  so  far  as  to  be  injurious. 

After  the  enactment  of  the  federal  anti-trust  statute  it  was 
contended  that  it  appUed  only  to  contracts  in  unreasonable 
restraint  of  trade,  and  this  contention  was  sustained  in  several 
decisions  of  the  lower  federal  courts.^  But  when  the  question 
came  before  the  Supreme  Court  of  the  United  States  that  Court 
pointed  out  that  the  phrase  "  contract  in  restraint  of  trade  " 
applied  equally  well  to  contracts  lawful  and  unlawful  at  com- 
mon law  and  was  used  in  the  statute  without  qualification. 
Thus  the  Court  said  in  the  Trans-Missouri  Freight  Association 
Case:^   "  By  the  simple  use  of  the  term  '  contract  in  restraint 

hold  that  the  agreement  was  in  vio-  argument    urged    that    the    statute, 

lation  of  the  federal  statute.  in  declaring  illegal  every  combination 

McConnell  v.  Camors-McConnell  Co.,  in  the  form  of  trust  or  otherwise,  or 

152  Fed.  321  (1907).  conspiracy    in    restraint    of    trade    or 

^  See  ante,  Ch.  XXXlll:"  A pplica-  commerce,  does   not   mean  what   the 

tion  of  Law  of  Contracts  in  Restraint  language    used    plainly  imports,    but 

of  Trade."  that  it  only  means  to  declare  illegal 

2  Prescott,  etc.  R.  Co.  v.  Atchison,  any   such   contract    which    is   in   un- 

etc.    R.    Co.,    73    Fed.    438    (1896)  ;  reasonable    restraint    of    trade,    while 

Dueber    Watch    Case     Mfg.     Co.     v.  lea\'ing  all  others   unaffected  by  the 

Howard  Watch,  etc.  Co.,  66  Fed.  637  provisions  of  the  act ;    that  the  coni- 

(189.5);     In  re  Greene,   52   Fed.    104  mon  law  meaning  of    the  term  'con- 

(1892);     In  re   Nelson,    52    Fed.    647  tract  in  restraint  of    trade'  includes 

(1892).  only  such  contracts  as  are  in  unrea- 

^  United   States   v.   Trans-Missouri  sonable  restraint  of  trade,  and  when 

Freight  Ass'n,  166  U.  S.  328  (1897),  that    term    is    used    in    the    federal 

(17  Sup.  Ct.  Rep.  540).     In  reaching  statute,  it  is  not  intended  to  include 

the    conclusion    stated    in    the    text  all    contracts    in    restraint    of    trade, 

Mr.    Justice    Peckham    said:     "It    is  but   onlj'  those  which   are   in   unrea- 

now     with     much     amplification     of  sonable  restraint   thereof.     The  term 

70.") 


§  388 


INTERCORPORATE    RELATIONS 


[part  V 


of  trade  '  all  contracts  of  that  nature,  whether  valid  or  other- 
wise, would  be  included,  and  not  alone  that  kind  of  contract 
which  was  invalid  and  unenforceable  as  being  in  unreasonable 
restraint  of  trade.  When,  therefore,  the  body  of  an  act  pro- 
nounces as  illegal  every  contract  or  combination  in  restraint  of 
trade  or  commerce  among  the  several  States,  etc.,  the  plain  and 
ordinary  meaning  of  such  language  is  not  limited  to  that  kind 
of  contract  alone  which  is  in  unreasonable  restraint  of  trade, 
but  all  contracts  are  included  in  such  language,  and  no  excep- 
tion or  limitation  can  be  added  without  placing  in  the  act  that 
which  has  been  omitted  by  Congress." 

The  statute,  therefore,  makes  every  contract  or  combination 
in  restraint  of  interstate  trade  or  commerce,  without  limitation 
or  qualification,  illegal.  The  extent  of  the  restraint  imposed 
is  immaterial.  The  essential  question  in  every  case  is  whether 
the  contract  under  consideration  directly  imposes  any  restraint 
whatsoever.  If  it  does,  no  matter  how  slight,  it  comes  within 
the  prohibition  of  the  statute.^ 


is  not  of  such  limited  signification. 
Contracts  in  restraint  of  trade  have 
been  known  and  spoken  of  for 
hundreds  of  years,  both  in  England 
and  this  country,  and  the  term  in- 
cludes all  kinds  of  those  contracts 
which  in  fact  restrain  or  may  restrain 
trade.  Some  of  such  contracts  have 
been  held  void  and  unenforceable  in 
the  courts  by  reason  of  their  restraint 
being  unreasonable,  while  others  have 
been  held  valid  because  they  were 
not  of  that  nature.  A  contract  may 
be  in  restraint  of  trade  and  still  be 
valid  at  common  law.  Although 
valid,  it  is  nevertheless  a  contract  in 
restraint  of  trade  and  would  be  so 
described  either  at  common  law  or 
elsewhere." 

Mr.  Justice  White  delivered  an 
elaborate  dissenting  opinion  in  this 
case,  concurred  in  by  Justices  Field, 
Gray  and  Shiras,  in  which  he  reached 
the  conclusion  that  the  act  applied 
only  to  contracts  in  unreasonable 
restraint  of  trade. 

'  In     Shawnee     Compress     Co.     v. 

706 


Anderson,  28  Sup.  Ct.  Rep.  572, 
decided  by  the  Supreme  Court  April, 
1908,  the  Court  said  :  "The  Sherman 
law  provides  that,  'Every  contract, 
combination  in  the  form  of  trust  or 
otherwise,  or  conspiracy,  in  restraint 
of  trade  or  commerce  in  any  terri- 
tory of  the  United  States  or  of  the 
District  of  Columbia  ...  is  hereby 
declared  illegal.'  And  it  has  been 
decided  that  not  only  unreasonable, 
but  all  direct,  restraints  of  trade  are 
prohibited,  the  law  being  thereby 
distinguished  from  the  common  law." 

Northern  Securities  Co.  v.  United 
States,  193  U.  S.  331  (1904),  (24  Sup. 
Ct.  Rep.  436)  :  "The  act  is  not 
limited  to  restraints  of  interstate  and 
international  trade  or  commerce  that 
are  unreasonable  in  their  nature, 
but  embraces  all  direct  restraints 
imposed  by  any  combination,  con- 
spiracy or  monopoly  upon  such  trade 
or  commerce." 

In  Pocahontas  Coke  Co.  v.  Pow- 
hatan Coal,  etc.  Co.,  60  W.  Va.  508 
(1907),  (56  S.  E.  Rep.  270,  116  Am. 


CHAP.    XXXIX]  CONSTRUCTION    AND    APPLICATION 


§  388 


This  construction  of  the  statute  gives  it  the  broadest  possible 
application.     It  includes  contracts  and  combinations  perfectly 


St.  Rep.  901,  10  L.  R.  A.  (n.  s.)  268), 
the  Court  said:  "It  may  be  saiil  in 
this  connection  that  the  determination 
of  the  question  whether  or  not  a  con- 
tract in  restraint  of  trade  is  to  be  ar- 
rived at  in  exactly  the  same  way  and 
under  exactly  the  same  rules  whether 
the  case  falls  under  the  act  of  Congress 
or  under  the  rules  of  the  common 
law.  The  difference  between  the 
act  and  the  common  law  does  not  lie 
in  the  manner  of  ascertaining  whether 
or  not  restraint  exists  but  in  the 
degree  of  restraint  required  to  make 
the  contract  illegal.  Under  the  act 
of  Congress  any  restraint  is  illegal 
while  under  the  common  law  only 
unreasonable  restraint  is  illegal." 

Prior  to  the  decision  in  the  Trans- 
Missouri  ca.se  agreements  by  dealers 
to  purchase  all  of  a  certain  product 
used  by  them  from  a  producer  con- 
trolling the  greater  part  of  such 
product,  in  consideration  of  rebates, 
had  been  held  not  to  be  contracts  in 
restraint  of  trade  within  the  meaning 
of  the  federal  statute.  United  States 
V.  Greenhut,  51  Fed.  213  (1892). 
In  re  Corning,  51  Fed.  205  (1892); 
In  re  Terrill,  51  Fed.  213  (1892); 
In  re  Greene,  52  Fed.  104  (1892). 

But  such  agreements  would  now 
undoubtedly  be  held  to  violate  the 
statute.  Agreements  of  somewhat 
similar  nature  have  repeatedly  been 
held  to  be  contracts  in  restraint  of 
trade  in  \'iolation  of  the  statute. 
Thus  in  Montague  v.  Lowry,  193 
U.  S.  38  (1904),  (24  Sup.  Ct.  Rep. 
307),  affirming  115  Fed.  27  (1902), 
the  Supreme  Court  held  an  agreement 
creating  an  association  between  manu- 
facturers and  dealers  in  tiles,  whereby 
the  latter  agreed  not  to  purchase 
materials  from  manufacturers  not 
members,  and  not  to  sell  unset  tiles 
to  any  one  other  than  members  ex- 
cept at  much  higher  prices  than  to 


members,  and  whereby  the  manu- 
facturers agreed  to  sell  only  to  dealers 
wiio  were  members,  to  be  a  contract 
in  restraint  of  trade  in  contravention 
of  the  statute.  So  an  agreement 
between  a  corporation  and  a  number 
of  producers  of  coal  and  coke  consti- 
tuting an  association,  whereby  the 
former  agrees  to  take  the  entire  out- 
put of  such  producers  intended  for 
"Western  shipment";  to  sell  the 
same  at  prices  fixed  by  the  executive 
committee  of  the  association ;  to 
account  for  the  proceeds  above  a 
fixed  compensation  and  to  refrain 
from  selling  the  product  of  any  com- 
peting producer,  and  whereby  the 
amount  to  be  furni.shed  by  such 
producer  is  also  fixed  by  such  execu- 
tive committee — each  producer  re- 
ceiving payment  at  the  .same  rate  — 
has  been  held  to  be  a  contract  in 
restraint  of  trade  contrary  to  the 
federal  statute.  Chesapeake,  etc. 
Fuel  Co.  V.  United  States,  115  Fed. 
610  (1902),  affirming  105  Fed.  93 
(1900).  It  was  also  held  in  this  case 
that  it  was  no  defence  to  an  action 
upon  the  statute  that  the  combina- 
tion had  not  operated  injuriously 
to  the  public,  or  even  that,  by  opening 
up  a  wider  field  for  competition,  its 
operation  had  actually  been  beneficial 
to  the  pviblic. 

An  agreement  between  the  whole- 
sale dealers  in  window  glass  controlling 
a  large  part  of  the  business  in  that 
article  in  the  United  States  and  a 
manufacturer  producing  the  greater 
part  of  such  article  soKl  in  this  country 
whereby  the  dealers  agree  to  buy 
wholly  from  the  manufacturer  — 
except  at  materially  reduced  prices 
—  and  the  manufacturer  agrees  to 
sell  only  to  the  dealers  —  except  at 
materially  enhanced  prices  —  and 
which  fixes  the  amount  to  be  received 
by  each  dealer  and  the  prices  at  which 

707 


§  388 


INTERCORPORATE   RELATIONS 


[part  V 


valid  according  to  rules  of  public  policy.  It  undoubtedly 
renders  unlawful  agreements  which  would  actually  be  beneficial 
to  the  public.  An  amendment  to  the  statute  relaxing  its  pro- 
visions and  making  it  applicable  only  to  contracts  and  com- 
binations in  unreasonable  restraint  of  trade  has  been  urged 
by  the  highest  authority.  It  cannot  be  denied,  however,  that 
such  an  amendment  would  necessarily  deprive  the  statute  of 


the  glass  is  to  be  sold,  is  a  contract  in 
restraint  of  trade  in  conflict  with 
the  federal  statute. 

Wheeler-Stenzel  Co.  v.  National 
Glass  Jobbers'  Ass'n,  152  Fed.  864 
(1907). 

See  also  United  States  v.  Joint 
Traffic  Ass'n,  171  U.  S.  505  (1898), 
(19  Sup.  Ct.  Rep.  25) ;  United  States 
V.  Swift,  122  Fed.  529  (1903),  modified 
and  affirmed  196  U.  S.  375  (1905), 
(25  Sup.  Ct.  Rep.  276) ;  United  States 
V.  Coal  Dealers  Ass'n,  85  Fed.  261 
(1898) ;  Getz  v.  Federal  Salt  Co.,  147 
Cal.  115  (1905),  (81  Pac.  Rep.  416, 
109  Am.  St.  Rep.  114).  Compare  the 
agreements  in  these  cases  with  the 
contract  in  Ceballos  v.  Munson  Steam- 
ship Line,  93  App.  Div.  (N.  Y.)  593 
(1904),  (87  N.  Y.  Supp.  811). 

A  contract  by  which  a  corporation 
agreed  to  buy  all  its  materials  from, 
and  sell  all  its  manufactured  products 
to,  another  corporation,  however, 
has  been  held  not  to  violate  the  fed- 
eral statute. 

Heimbucher  v.  Goff,  119  111.  App. 
373  (1905). 

And  a  contract  by  which  a  manu- 
facturer agreed  to  sell  his  entire  out- 
put to  a  party  who  agreed  to  take 
it  at  a  specified  price  and  to  purchase 
such  product  from  no  other  person 
in  the  State  has  been  held,  under  the 
circumstances,  to  foster  legitimate 
business  and  not  to  \'iolate  the  fed- 
eral statute.  Lanyon  v.  Garden  City 
Sand  Co.,  223  111.  616  (1906),  (79 
N.  E.  Rep.  313). 

In  its  opinion  in  this  case  (p.  621) 
the  Court  said  of  the  federal  and  the 
Illinois     anti-trust     statutes:      "The 

708 


object  of  these  statutes,  is  to  pro- 
hibit the  formation  of  trusts  and 
combinations  and  remove  all  ob- 
structions in  restraint  of  trade  and 
free  competition.  It  is  not  the  pur- 
pose of  either  law  to  hinder  or  pro- 
hibit contracts  on  the  part  of  corpora- 
tions or  indi\'iduals  made  to  foster 
or  increase  trade  or  business.  But 
a  contract  may  incidentally  restrain 
competition  or  trade  without  \'iolating 
the  statutes  if  its  chief  purpose  is  to 
promote  and  increase  the  business 
of  those  who  enter  into  it." 

This  decision  is,  of  cour.se,  decisive 
as  to  the  purposes  of  the  Illinois 
statute,  but  it  seems  quite  at  variance 
with  the  decisions  of  the  Supreme 
Court  interpreting  the  federal  statute 
as  applying  to  all  contracts  restraining 
competition  whether  reasonable  or 
unreasonable. 

When  it  is  claimed  that  a  combi- 
nation \s  in  violation  of  the  federal 
anti-trust  statute  it  is  immaterial 
that  the  agreement  in  cjuestion  might 
have  been  valid  at  common  law. 

Continental  Wall  Paper  Co.  v. 
Voight,  148  Fed.  939  (1906). 

The  combination  in  this  case,  how- 
ever, which  was  by  means  of  a  cor- 
poration selling  agent,  would  seem  to 
have  been  illegal  at  common  law. 

In  determining  whether  a  contract 
or  combination  is  in  restraint  of  trade 
within  the  meaning  of  the  statute 
the  test  is  whether  it  directly  re- 
strains trade  to  an  appreciable  ex- 
tent, and  it  is  immaterial  what  other 
results  may  flow  from  it. 

Ellis  V.  Inman,  131  Fed.  182 
(1904). 


CHAP.   XXXIX]  CONSTRUCTION   AND   APPLICATION  §   389 

much  of  its  effectiveness.  Contracts  and  combinations  in 
unreasonable  restraint  of  trade  were  unlawful  at  common  law. 
If  the  act  be  amended  to  apply  only  to  combinations  of  this 
character  it  will  merely  have  the  effect  of  imposing  additional 
penalties  for  existing  offences,  besides  bringing  for  determination 
into  every  case  that  most  uncertain  of  questions  —  what  is  an 
unreasonable  restraint  of  trade  or  commerce? 

While  the  discussion  of  economic  questions  is  outside  the 
scope  of  this  treatise,  it  is  suggested  that  a  solution  of  the  diffi- 
culty might  be  found  in  an  amendment  which,  while  preserving 
the  presumptive  application  of  the  statute,  would  permit  a 
defendant  combination  to  avoid  the  operation  of  the  act  by 
showing  affirmatively  that  its  objects  and  methods  are  not  of 
a  nature  injurious  to  the  public* 

§  389.  Use  of  Terms  "  Monopolize"  and  "  Monopolies."  — 
The  second  section  of  the  federal  anti-trust  statute  provides 
that  "  every  person  who  shall  monopolize,  or  attempt  to  monop- 
olize, or  combine  or  conspire  with  any  other  person  or  persons 
to  monopolize  "  any  part  of  interstate  commerce  shall  be  guilty 
of  a  misdemeanor.  The  statute  is  entitled  "  An  act  to  pro- 
tect trade  and  commerce  from  unlawful  restraints  and  mo- 
nopolies." 

These  words  — the  verb  "  monopoUze  "  in  the  body  of  the 
act  and  the  noun  "  monopolies  "  in  the  title  —  manifestly 
have  no  reference  to  governmental  grants  of  privileges,  and  are 

'  Mr.  Justice  Brewer,  although  destroy  those  minor  contracts  in 
concurring  in  the  decision  of  the  partial  restraint  of  trade  which  the 
Trans-Missouri  case,  said  in  his  long  course  of  decisions  at  common 
opinion  in  the  Northern  Securities  law  had  affirmed  were  reasonable 
case  (193  U.  S.  361  (1904),  (24  Sup.  and  ought  to  be  upheld.  The  pur- 
Ct.  Rep.  436))  :  "  Instead  of  holding  pose  rather  was  to  place  a  statutory 
that  the  anti-trust  act  included  all  prohibition  with  prescribed  penalties 
contracts,  reasonable  or  unreasonable,  and  remedies  upon  those  contracts 
in  restraint  of  interstate  trade,  the  wliich  were  in  direct  restraint  of 
ruling  should  have  been  that  the  con-  trade,  unreasonable  and  against  pub- 
tracts  there  presented  were  unrea-  lie  policy.  Whenever  a  departure 
sonable  restraints  of  interstate  trade,  from  common  law  rules  and  definitions 
and  as  such  within  the  scope  of  the  is  claimed,  the  purpose  to  make  the 
act.  That  act,  as  appears  from  dejiarture  should  be  closely  shown, 
its  title,  was  levelled  at  only 'unlawful  Such  a  purpose  does  not  appear  and 
restraints  and  monopolies.'  Con-  such  a  departure  was  not  in- 
gress  did   not   intend   to   reach   and  tended." 

709 


§   389  INTERCORPORATE    RELATIONS  [PART    V 

used  in  the  broad  sense  which  we  have  seen  now  attaches  to 
the  word  "  monopoly."  ^ 

In  formulating  the  rules  of  public  policy  it  was  unnecessary 
to  do  more  than  describe  a  monopoly  as  "  the  concentration  of 
business  in  the  hands  of  a  few."  But  this  description  while 
giving  a  broad  idea  of  the  meaning  of  the  term  is  not  sufficiently 
definite  for  use  in  construing  a  statute  of  this  nature.  A  pre- 
cise definition,  however,  is  difficult  to  frame.  The  exact  bound- 
aries of  monopoly  are  not  readily  located.  An  attempt,  there- 
fore, will  only  be  made  to  describe  that  which  certainly  comes 
within  the  meaning  of  the  term  as  used  in  the  federal  statute. 

The  followdng  language  of  Mr.  Justice  McKenna  in  the  recent 
Case  of  the  National  Cotton  Oil  Company  ^  furnishes  the  most 
authoritative  basis  for  such  a  description:  ''It  is  certainly  the 
conception  of  a  large  body  of  pubUc  opinion  that  the  control 
of  prices  through  a  combination  tends  to  restraint  of  trade  and 
to  monopoly,  and  is  evil.  The  foundations  of  the  belief  we  are 
not  called  upon  to  discuss,  nor  does  our  purpose  require  us  to 
distinguish  between  the  kinds  of  combinations  or  the  degrees  of 
monopoly.  It  is  enough  to  say  that  the  idea  of  monopoly  is 
not  now  confined  to  a  grant  of  privileges.  It  is  understood 
to  include  a  condition  produced  by  the  acts  of  mere  indi- 
viduals. Its  dominant  thought  now  is,  to  quote  another, 
'  the  notion  of  exclusiveness  or  unity,'  in  other  words,  the 
suppression  of  competition  by  the  unification  of  interest  or 
management,  or,  it  may  be,  through  agreement  and  concert 
of  action.  And  the  purpose  is  so  definitely  the  control  of  prices 
that  monopoly  has  been  defined  to  be  '  unified  tactics  with 
regard  to  prices.'  It  is  the  power  to  control  prices  which  makes 
the  inducement  of  combinations  and  their  profit.  It  is  such 
power  that  makes  it  the  concern  of  the  law  to  prohibit  or  limit 
them.  And  this  concern  and  the  policy  based  upon  it  has  not 
only  expression  in  the  Texas  statutes;  it  has  expression  in  the 
statutes  of  other  States  and  in  a  well-known  national  enactment. 
According  to  them,  competition,  not  combination,  should  be 
the  law  of  trade.     If  there  is  evil  in  this  it  is  accepted  as  less 

»  See  ante,  §332:  "Modern  Use  of  197  U.  S.  129  (1905),  (25  Sup.  Ct. 
Term  'Monopoly.'  "  Rep.  379). 

*  National  Cotton  Oil  Co.  v.  Texas, 

710 


CHAP.    XXXIX]  CONSTRUCTION   AND    APPLICATION 


§  389 


than  that  which  may  result  from  the  unification  of  interest, 
and  the  power  such  unification  gives." 

From  this  opinion  and  the  definitions  found  in  other  cases, 
as  stated  in  the  footnote,^  it  may  conservatively  be  said  that 


'  In  American  Biscuit,  etc.  Co.  v. 
Klotz,  44  Fed.  724  (1891),  the  Court 
thus  discussed  the  meaning  of  the 
word  "monopolize,"  as  used  in  the 
federal  anti-trust  law  and  in  the 
Louisiana  statute:  "In  construing 
the  federal  and  State  statutes,  we 
exclude  from  consideration  all  monop- 
olies which  exist  by  legislative  grant; 
for  we  think  the  word  'monopolize' 
cannot  be  intended  to  be  used  with 
reference  to  the  acquisition  of  ex- 
clusive rights  under  government 
concession,  but  that  the  law-maker 
has  used  the  word  to  mean  'to  aggre- 
gate' or  'concentrate  '  in  the  hands  of 
a  few,  practically,  and,  as  a  matter 
of  fact,  and  according  to  the  known 
results  of  human  action,  to  the  ex- 
clusion of  others ;  to  accomplish  this 
end  by  what,  in  popular  language 
is  expressed  in  the  word  'pooling,' 
which  may  be  defined  to  be  an  aggre- 
gation of  property  or  capital  belong- 
ing to  different  persons,  with  a  \aew 
to  common  liabilities  and  profits. 
.  .  .  One  just  and  decisive  test  of 
the  meaning  of  the  expression  'to 
monopolize,'  is  obtained  by  getting 
at  the  exil  which  the  law-maker  has 
endeavored  to  abolish  and  restrict. 
The  statutes  show  that  the  evil  was 
the  hindrance  and  oppression  in  trade 
and  commerce  wrought  by  its  absorp- 
tion in  the  hands  of  the  few,  so  that 
the  prices  would  be  in  danger  of  being 
arbitrarily  and  exorbitantly  fixed, 
because  all  competition  would  be 
swallowed  up,  so  that  the  man  of 
small  means  would  find  himself  ex- 
cluded from  the  restrainetl  or  monop- 
olized trade  or  commerce  as  ab- 
solutely as  if  kept  out  by  law  or 
force. " 

In  re  Greene,  52  Fed.  115  (1892)  : 
"A    'monopoly,'    in    the    prohibited 


sense,  involves  the  element  of  an 
exclusive  privilege  or  grant  wliich 
restrained  others  from  the  exercise  of 
a  right  or  liberty  which  they  had 
before  the  monopoly  was  secured. 
In  commercial  law,  it  is  the  abuse 
of  free  commerce,  by  which  one  or 
more  indi\-iduals  have  procured  the 
advantage  of  selling  alone  or  exclu- 
sively all  of  a  particular  kind  of  mer- 
chandise or  commodity  to  the  detri- 
ment of  the  public.  As  defined  by 
Blackstone  (4  Bl.  Com.  159),  and  by 
Lord  Coke  (3  Co.  Inst.  181),  it  is  a 
grant  from  the  sovereign  power  of  the 
State  by  commis.sion,  letters  patent, 
or  otherwise,  to  any  person  or  corpora- 
tion, by  which  the  exclusive  right  of 
buying,  selling,  making,  working,  or 
using  anything  is  given.  AVhen  this 
section  of  the  act  was  under  con- 
sideration in  the  Senate,  distinguished 
members  of  its  judicial  committee 
and  lawyers  of  great  ability  explained 
what  they  understood  the  term  'mo- 
nopoly' to  mean  ;  one  of  them  saying  : 
'It  is  the  sole  engrossing  to  a  man's 
self  by  means  which  prevent  other 
men  from  engaging  in  fair  competition 
with  him.'  .\nother  senator  defined 
the  term  in  the  language  of  Webster's 
Dictionary :  '  To  engross  or  obtain, 
by  any  means,  the  exclusive  right, 
especially  of  the  right  of  trading, 
to  any  place  or  with  any  country  or 
district;  as  to  monopolize  the  India 
or  Levant  trade.'  It  will  be  noticed 
that,  in  the  foregoing  definitions  of 
'monopoly,'  there  is  embraced  two 
leading  elements,  ^•iz.,  an  exclusive 
right  or  pri\-ilegc,  on  the  one  side,  and 
a  restriction  or  restraint  on  the  other, 
which  will  operate  to  prevent  the 
exercise  of  a  right  or  liberty  open  to 
the  public  before  the  monopoly  was 
secured.     This    being,    as    we    think, 

711 


389 


INTERCORPORATE   RELATIONS 


[part  V 


trade  and  commerce  are  "  monopolized  "  within  the  meaning 
of  the  second  section  of  the  federal  statute  when,  as  a  result  of 
efforts  to  that  end,  previously  competing  businesses  are  so  con- 
centrated in  the  hands  of  a  single  person  or  corporation,  or  a 
few  persons  or  corporations  acting  together,  that  they  have 
power  to  practically  control  the  prices  of  a  commodity  and  thus 
to  practically  suppress  competition. 

It  is  not  necessary,  however,  to  constitute  a  violation  of  the 
act  that  the  result  of  the  concentration  of  business  should  be 
a  complete  monopoly,  nor  that  it  should  have  resulted  in  actual 
injury  to  the  public.     The  essential  question  is  one  of  power. ^ 

The  second  section  of  the  act,  so  far  as  it  relates  to  combina- 
tions to   monopolize,   only  includes  offences  already   covered 


the  general  meaning  of  the  term,  as 
employed  in  the  second  section  of  the 
statute,  an  'attempt  to  monopo- 
lize '  any  part  of  the  trade  or  com- 
merce among  the  States  must  be  an 
attempt  to  secure  or  acquire  an  ex- 
clusive right  in  such  trade  or  com- 
merce by  means  which  prevent  or 
restrain  others  from  engaging  there- 
in." 

United  States  v.  Trans-Missouri 
Association,  58  Fed.  Rep.  82  (1892)  : 
"A  monopoly  of  trade  embraces  two 
essential  elements  :  (1)  The  acquisi- 
tion and  exclusive  right  to,  or  ex- 
clusive control  of,  a  trade ;  and  (2) 
the  exclusion  of  all  others  from  that 
right  and  control." 

United  States  v.  Patterson,  55  Fed. 
Rep.  640  (1893)  :  "  The  second  section 
is  limited  by  its  terms  to  monopolies, 
and  evidently  has  as  its  basis  the 
engrossing  or  controlling  of  the 
market.  The  first  section  is  undoubt- 
edly in  pari  materia,  and  so  has  as  its 
basis  the  engrossing  or  controlling 
of  the  market,  or  of  lines  of  trade. " 

1  United  States  v.  E.  C.  Knight 
Co.,  156  U.  S.  16  (1895),  (15  Sup.  Ct. 
Rep.  249)  :  "Again,  all  authorities 
agree  that  in  order  to  \itiate  a  con- 
tract or  combination  it  is  not  essential 
that  its  result  should  be  a  complete 

712 


monopoly ;  it  is  sufficient  if  it  really 
tends  to  that  end  and  to  deprive 
the  public  of  the  advantages  which 
flow  from  free  competition." 

United  States  v.  Chesapeake,  etc. 
Fuel  Co.,  105  Fed.  104  (1900),  affirmed 
115  Fed.  610  (1902):  "All  competi- 
tion among  the  members  of  the  asso- 
ciation in  the  production,  shipment, 
and  sale  of  their  product  is  eliminated, 
and  the  combination  enters  the 
Western  markets  clothed  with  powers 
which  enable  it  to  exercise  a  large 
influence  in  those  markets  in  regu- 
lating the  supply  and  the  prices 
of  coal  and  coke.  These  provisions 
are  in  restraint  of  trade,  and  tend 
to  monopoly,  within  the  meaning 
of  the  act  of  Congress,  and  render 
the  contract  illegal,  in  so  far  as  it 
relates  to  interstate  commerce.  The 
important  question  is  not  whether 
the  performance  of  the  contract  so 
far  has  resulted  in  actual  injury 
to  trade,  but  whether  the  contract 
confers  power  to  regulate  and  re- 
strain trade,  upon  those  charged 
with  its  performance." 

As  indicated  by  the  language  of  the 
last  decision  the  principles  there 
stated  are  equally  applicable  to  com- 
binations in  restraint  of  trade  under 
the  first  section  of  the  act. 


CHAP.    XXXIX]  CONSTRUCTION   AND    APPLICATION 


§  389 


by  the  first  section.  A  combination  or  conspiracy  to  monopo- 
lize trade  is  a  combination  or  conspiracy  in  restraint  of  trade. 
So  actually  monopolizing  trade  by  different  persons  acting  in 
concert  is  undoubtedly  a  combination  in  restraint  of  trade. 
Practically  all  that  is  reached  by  the  second  section  of  the  act 
not  embraced  by  the  first  section  —  other  than  attempts  to 
monopoUze  — is  the  monopoUzing  of  trade  and  commerce  by 
a  si7igle  person  or  corporation.^  But  in  the  case  of  a  corporate 
combination  this  distinction  between  the  two  sections  might 
be  of  the  utmost  importance. 

To  constitute  an  attempt  to  monopolize  within  the  meaning 
of  the  second  section  an  intent  to  create  a  monopoly  must  be 
shown.^ 


'  In  his  dissenting  opinion  in 
Northern  Securities  case,  193  U.  S. 
404  (1904),  (24  Sup.  Ct.  Rep.  436) 
Mr.  Justice  Holmes  said:  "AH  that 
is  added  to  the  first  section  by  section 
2  is  that  the  penalties  are  imposed 
upon  every  single  person  wlio,  without 
combination,  monopolizes  or  attempts 
to  monopoHze  commerce  among  the 
States,  and  that  the  liability  is  ex- 
tended to  attempting  to  monopolize 
any  part  of  such  trade  or  commerce. 
It  is  more  important  as  an  aid  to  the 
construction  of  section  1  tlian  it  is  on 
its  own  account.  .  It  shows  that  what- 
ever is  criminal  when  done  by  way 
of  combination  is  equally  criminal 
if  done  by  a  single  man." 

2  Swift  V.  United  States,  196  U.  S. 
396  (1905),  (25  Sup.  Ct.  Rep.  276)  : 
"Intent  is  almost  essential  to  such 
a  combination  and  is  essential  to 
such  an  attempt.  Where  acts  are 
not  sufficient  in  themselves  to  pro- 
duce a  result  wliich  the  law  seeks  to 
prevent  —  for  instance,  the  monop- 
oly —  but  require  further  acts  in 
addition  to  the  mere  forces  of  nature 
to  bring  that  result  to  pass,  an  intent 
to  bring  it  to  pass  is  necessary  in  ortier 
to  produce  a  tlangerous  probabihty 
that  it  will  happen." 

In  Whitwell  v.  Continental  To- 
bacco Company,    125   Fed.   Rep.  462 


(1903)  the  Court  said  concerning 
"attempts"  to  monopolize:  "It  is 
admitted  that  the  practice  of  the 
defendants  was  not  only  an  attempt, 
but  a  successful  attempt,  to  mo- 
nopolize a  part  of  this  commerce. 
But  is  every  attempt  to  monopolize 
any  part  of  interstate  commerce 
made  unlawful  and  punishable  by 
section  2  of  the  Act  of  July  2,  1890? 
...  If  so,  no  interstate  commerce 
has  ever  been  lawfully  transacted  since 
that  Act  became  a  law,  because  every 
sale  and  every  transportation  of  an 
article  which  is  the  subject  of  inter- 
state commerce  is  a  succe.ssful  attempt 
to  monopolize  that  part  of  this  com- 
merce which  concerns  that  sale  or 
transaction.  An  attempt  by  each 
competitor  to  monopolize  a  part  of 
interstate  commerce  is  the  very  root 
of  all  competition  therein.  Eradi- 
cate it,  and  competition  necessarily 
ceases  —  dies.  Every  person  en- 
gaged in  interstate  commerce  neces- 
sarily attempts  to  draw  to  himself, 
and  to  exclude  others  from,  a  part  of 
that  trade;  and,  if  he  may  not  do 
this,  he  may  not  compete  with  his 
rivals  ;  all  other  persons  and  corpora- 
tions must  cease  to  secure  for  them- 
selves any  part  of  the  commerce 
among  States,  and  some  single  cor- 
poration   or    person    must    be    per- 

713 


§  390 


INTERCORPORATE    RELATIONS 


[part  V 


§  390.  Meaning  of  Phrase  "  Trade  or  Commerce  among  the 
Several  States." — The  use  of  both  the  terms  "trade"  and 
"  commerce  "  in  the  statute  —  especially  disjunctively  —  in- 
dicates a  belief  on  the  part  of  the  framers  of  the  act  that  a 
wider  commercial  field  was  thereby  covered  than  by  the  use 
of  the  term  "  commerce  "  alone.  Such  is  not  the  case.  The 
word  "  trade  "  is  used  in  the  sense  of  traffic  and,  broadly 
speaking,  all  traffic  is  commerce,  although  all  commerce  is 
not  traffic.^     In  the  often  quoted  words  of  Chief  Justice  Mar- 


mitted  to  receive  and  control  it  all 
in  one  large  monopoly." 

It  by  no  means  follows,  however, 
because  a  single  purchase  has  so 
slight  an  effect  upon  commerce  that 
it  could  not  be  described  as  an  at- 
tempt to  monopolize  commerce,  that 
a  large  number  of  purchases  directed 
toward  a  common  end  might  not,  in 
the  aggregate,  be  properlj^  so  desig- 
nated. 

1  In  United  States  v.  Debs,  64  Fed. 
751  (1894),  Judge  Woods  said  in  ref- 
erence to  the  federal  statute:  "I  am 
unable  to  regard  the  word  '  commerce, ' 
in  this  statute,  as  synonj^mous  with 
'trade,'  as  used  in  the  common  law 
phrase  'restraint  of  trade.'  In  its 
general  sense,  trade  comprehends 
every  species  of  exchange  or  dealing, 
but  its  chief  use  is  'to  denote  the 
barter  or  purchase  and  sale  of  goods, 
wares,  and  merchandise,  either  by 
wholesale  or  retail,'  and  so  it  is  used 
in  the  phrase  mentioned.  But  'com- 
merce' is  a  broader  term.  It  is  the 
word  in  that  clause  of  the  constitution 
by  which  power  is  conferred  on 
Congress  'to  regulate  commerce  with 
foreign  nations,  and  among  the  sev- 
eral States,  and  with  the  Indian 
Tribes.'  Const.  U.  S.,  Art.  I,  §  8.  In 
a  broader  and  more  distinct  exercise 
of  that  power  than  ever  before  asserted 
Congress  passed  the  enactments  of 
1887  and  1888  known  as  the  '  Inter- 
state Commerce  Law.'  The  present 
statute  is  another  exercise  of  that 
constitutional   power,    and   the   word 

714 


'commerce,'  as  used  in  that  statute, 
as  it  seems  to  me,  need  not  and 
should  not  be  given  a  meaning  more 
restricted  than  it  has  in  the  Consti- 
tution. .  .  .  These  definitions  and 
expositions  of  the  scope  and  law  of 
interstate  commerce,  except  the  last, 
preceded  the  enactment  by  Congress 
on  the  subject.  It  was  therefore  of 
commerce  so  defined,  embracing  all 
instrumentalities  and  subjects  of 
transportation  among  the  States, 
that  Congress,  by  that  legislation, 
assumed  the  control ;  and  I  see  no 
reason  for  thinking  that,  as  employed 
in  the  act  of  1890,  which  is  essentially 
supplemental  to  the  other  acts,  the 
word  was  intended  to  be  less  com- 
prehensive." 

In  In  re  Debs,  158  U.  S.  564  (1895), 
(15  Sup.  Ct.  Rep.  900),  the  Supreme 
Court  of  the  United  States  did  not 
pass  upon  the  question  considered 
by  Judge  Woods  in  reference  to  the 
anti -trust  act. 

With  reference  to  the  pro\'ision  in 
the  Texas  anti-trust  statute  making 
unlawful  combinations  to  "create 
or  carry  out  restrictions  in  trade," 
the  Court  in  Queen  Ins.  Co.  r.  State 
(Tex.  1893),  22  S.  W.  Rep.  1048, 
said:  "In  ordinary  language  the 
word  'trade,'  is  employed  in  three 
different  senses :  First,  in  that  of  the 
business  of  buying  and  selling ;  sec- 
ond, in  that  of  an  occupation  gen- 
erally ;  and,  third,  in  that  of  a  me- 
chanical employment  in  contra-dis- 
tinction  to  agriculture  and  the  liberal 


CHAP.    XXXIX]  CONSTRUCTION    AND    APPLICATION  §   390 

• 

shall  in  the  first  interstate  commerce  case : '  "  Commerce, 
undoubtedly,  is  traffic,  but  it  is  something  more:  it  is  inter- 
course. It  describes  the  commercial  intercourse  between 
nations,  and  parts  of  nations,  in  all  its  branches,  and  is  regulated 
by  prescribing  rules  for  carrying  on  that  intercourse." 

The  use  of  the  word  "  trade  "  brings  in  the  phrase  "  con- 
tract in  restraint  of  trade  "  and  makes  available  in  the  inter- 
pretation of  the  statute  the  established  law  regarding  such 
contracts.  But  still,  the  phrase  is  used  as  an  equivalent  —  so 
far  as  it  goes  — for  "  contract  in  restraint  of  commerce."  The 
word  "  trade,"  in  legal  effect,  adds  nothing  to  the  act.  It 
covers  nothing  not  embraced  by  the  word  "  commerce  ";  and 
if  it  did,  the  act  would  be  unconstitutional.  Congress  has 
power  to  regulate  commerce.  It  may  regulate  trade  only  if 
trade  is  commerce.  The  phrase  "  trade  or  commerce  among 
the  several  States  "  means  interstate  commerce  — nothing  more 
nor  less. 

Interstate  commerce  consists  of  intercourse  and  traffic 
between  citizens  or  inhabitants  of  different  States,  and  includes 
the  purchase,  sale  and  exchange  of  commodities,  and  the  trans- 
portation of  persons  and  property.* 

arts.     Ordinarily,     when     we     speak  nitions  as  to  what  constitutes  inter- 

of    'trade,'   we    mean    commerce,    or  state  commerce  are  not  easih'  given 

something  of  that  nature;    when  we  so  that  they  shall  clearly  define  the 

speak  of  'a  trade,'  we  mean  an  occu-  full  meaning  of  the  term.     We  know 

pation   in    the    more    general    or    the  from  the  cases  decided  in  this  court 

limited  sense."  that  it  is  a  term  of  very  large  signifi- 

'  Gibbons    v.     Ogden,     9     Wheat.  cance.       It    comprehends,    as    it     is 

(U.  S.)  189  (1824).  said,    intercourse    for    the    purposes 

2  Addyston  Pipe,  etc.  Co.  v.  United  of  trade  in  any  and  all  its  form^  in- 
states, 175  U.  S.  241  (1899),  (20  Sup.  eluding  transportation,  purchase,  sale 
Ct.  Rep.  9G)  (per  Peckham,  J.)  :  ".\s  and  exchange  of  commodities  between 
has  frequently  been  said,  interstate  the  citizens  of  different  States,  and 
commerce  consists  of  intercourse  and  the  power  to  regulate  it  embraces  all 
traffic  between  the  citizens  or  inhabit-  the  instruments  by  which  such  com- 
ants  of  different  States,  and  includes  merce  may  be  conducted." 
not  only  the  transportation  of  persons  See  also  United  States  v.  E.  C. 
and  property  and  the  navigation  of  Knight  Co.,  156  U.  S.  1  (1895),  (15 
public  waters  for  that  purpose,  but  Sup.  Ct.  Rep.  249) ;  Hooper  v.  Cali- 
also  the  purchase,  sale  and  exchange  fornia,  155  U.  S.  653  (1895),  (15  Sup. 
of  commoilities."  Ct.  Rep.  207)  ;    Gloucester  Ferry  Co. 

Hopkins    V.    United    States,     171  f.  Pennsylvania,  114  U.  S.  196  (1885), 

U.  S.  597  (1898),  (19  Sup.  Ct.  Rep.  (5   Sup.    Ct.    Rep.    826)  ;     County   of 

40),   (also  per  Peckham,   J.):    "Defi-  Mobile  r.  Kimball,  102  U.  S.  691  (1880). 

715 


§   391  INTERCORPORATE    RELATIONS  [PART    V 

But  in  considering  the  application  of  the  statute  it  must  be 
clearly  borne  in  mind  that  "  commerce  among  the  States  is  not 
a  technical  legal  conception  but  a  practical  one  drawn  from 
the  course  of  business."  Thus  of  traffic  in  cattle  the  Supreme 
Court  of  the  United  States  has  said:  "When  cattle  are  sent 
for  sale  from  a  place  in  one  State  with  the  expectation  that 
they  will  end  their  transit,  after  purchase,  in  another,  and 
when  in  effect  they  do  so,  with  only  the  interruption  necessary 
to  find  a  purchaser  at  the  stock  yards,  and  when  this  is  a  typical, 
constantly  recurring  course,  the  current  thus  existing  is  a 
current  of  commerce  among  the  States,  and  the  purchase  of 
the  cattle  is  a  part  and  incident  of  such  commerce."  ^ 

§  391,  Statute  applies  only  to  Restraints  upon  Interstate  or 
International  Commerce.  —  The  statute  declares  all  contracts, 
combinations  and  conspiracies  "  in  restraint  of  trade  or  com- 
merce among  the  several  States,  or  with  foreign  nations," 
illegal.  It  deals  only  with  restraints  upon  those  forms  of  com- 
merce which  Congress  has  power  to  regulate  and,  in  law,  as 
upon  its  face,  is  applicable  only  to  contracts,  combinations  or 
conspiracies,  in  restraint  of,  or  for  the  purpose  of  monopolizing, 
interstate  or  international  commerce.^ 

In/nreGreene,  52Fed.  113  (1892),  U.  S.  399  (1905),  (25  Sup.  Ct.  Rep. 

Judge     Jackson     said:      "Commerce  276). 

among  the  States,  within  the  exchi-  ^  Field  v.   Barber  Asphalt   Pa^'ing 

sive    regulating    power    of    Congress,  Co.,  194  U.  S.  618  (1904),  (24  Sup.  Ct. 

consists  of  intercourse  and  traffic  be-  Rep.  784) ;    Montague  v.  Lowry,  193 

tween  their  citizens,  and  includes  the  U.   S.   38   (1904),    (24   Sup.  Ct.   Rep. 

transportation  of  persons  and  prop-  307);     Addyston    Pipe,    etc.    Co.    v. 

erty,   as  well   as  the   purchase,    sale.  United  States,  175  U.  S.  211  (1899), 

and    exchange    of   commodities.   .   .   .  (20  Sup.  Ct.  Rep.  96) ;   United  States 

In    the    application    of   this   compre-  v.  Joint  Traffic  Ass'n,  171  U.  S.  558 

hensive    definition,    it    is    settled    by  (1898),  (19  Sup.  Ct.  Rep.  25) ;    Hop- 

the  decisions  of  the   Supreme   Court  kins  v.  United  States,  171  U.  S.  558 

that    such    commerce    includes,    not  (1898),  (19  Sup.  Ct.  Rep.  40) ;  United 

only    the    actual    transportation    of  States      v.      Trans-Missouri      Freight 

commodities  and  persons  between  the  Ass'n,  166  U.  S.  290  (1897),  (17  Sup. 

States,  but  also  the  instrumentalities  Ct.  Rep.  540) ;   United  States  v.  E.  C. 

and  processes  of  such  transportation.  Knight  Co.,  156  U.  S.   1   (1895),  (15 

That  it  includes  all  the  negotiations  Sup.  Ct.   Rep.   249) ;    Dueber  Watch- 

and  contracts   which   have   for   their  Case    Mfg.    Co.    v.    Howard    Watch, 

object,    or    involve,    as    an    element  etc.  Co.,  66  Fed.  639  (1895)  ;  National 

thereof,  such  transmission  or  passage  Distilling  Co.  v.  Cream  City  Importing 

from  one  State  to  another."  Co.,  86  Wis.   352  (1893),   (56  X.  W. 

»  Swift     V.      United      States,      196  Rep.  864,  39  Am.  St.  Rep.  902). 

716 


CHAP.   XXXIX]  CONSTRUCTION   AND   APPLICATION 


392 


In  Hopkins  v.  United  States '  the  Supreme  Court  of  the 
United  States  said:  "  The  act  has  reference  only  to  that  trade 
or  commerce  which  exists,  or  may  exist,  among  the  several 
States  or  with  foreign  nations,  and  has  no  application  what- 
ever to  any  other  trade  or  commerce." 

§  392.  Restraint  upon  Interstate  Commerce  must  be  Direct 
—  (A)  In  General.  —  There  are  few  commercial  contracts  or 
combinations  which  cannot  be  said  to  have,  indirectly  or  re- 
motely, some  bearing  upon  interstate  commerce  and,  possibly, 
to  restrain  it.  Private  enterprises  may  be  carried  on  by  means 
of  interstate  shipments.  Articles  may  be  manufactured  which 
the  manufacturer  intends  to  sell  in  another  State.  Combina- 
tions may  be  formed  which  result  in  enhancing  the  cost  of  con- 
ducting an  interstate  business.  These  agreements,  and  others 
of  a  similar  nature  which  readily  suggest  themselves,  may 
affect  —  and,  perhaps,  interfere  with  —  interstate  commerce 
without  contravening  the  federal  statute,  because  the  restraint 
produced  is  not  direct.^ 


But  to  render  a  contract  unlawful 
as  restraining  interstate  commerce 
it  need  not  in  terms  refer  to  such 
commerce.  It  is  sufficient  if  its  real 
purpose  and  effect  is  to  restrain  com- 
merce. 

Gibbs  V.  McNeeley,  118  Fed.  120 
(1902),  reversing  107  Fed.  210  (1902). 

'  Hopkins  v.  United  States,  171 
U.  S.  586  (1898),  (19  Sup.  Ct.  Rep.  40). 

2  Addj'ston  Pipe,  etc.  Co.  v.  United 
States,  175  U.  S.  246  (1899),  (20  Sup. 
Ct.  Rep.  96)  :  "It  is  almost  needless 
to  add  that  we  do  not  hold  that  every 
private  enterprise  which  may  be 
carried  on,  chiefly  or  in  part,  by  means 
of  inter.state  shipments,  is,  therefore, 
to  be  regarded  as  so  related  to  inter- 
state commerce  as  to  come  within  the 
regulating  power  of  Congress.  Such 
enterprises  may  be  of  the  same  nature 
as  the  manufacturing  of  refined  sugar 
in  the  Knight  Case  (United  States  v. 
E.  C.  Knight  Co.,  1.56  U.  S.  1  (1895), 
(15  Sup.  Ct.  Rep.  249)),— that  is, 
the  parties  may  be  engaged  as  manu- 
facturers of  a  comnaoditj'  which  they 


tliereafter  intend  at  some  time  to  sell, 
and,  possibly,  to  sell  in  another  State  ; 
but  such  sale,  as  we  have  already 
held,  is  an  incident  to  and  not  the 
direct  result  of  the  manufacture, 
and  so  is  not  a  regulation  of,  or  an 
illegal  interference  with,  interstate 
commerce." 

Hopkins  i\  United  States,  171  U.  S. 
592  (1898),  (19  Sup.  Ct.  Rep.  40) : 
"The  contract  condemned  by  the 
statute  is  one  whose  direct  and  imme- 
diate effect  is  a  restraint  upon  that 
kind  of  trade  or  commerce  which  is 
interstate.  ...  To  treat  as  con- 
denuicd  by  the  act  all  agreements 
under  which,  as  a  result,  the  cost  of 
conducting  an  interstate  business  may 
be  increased  would  enlarge  the  appU- 
cation  of  the  act  far  beyond  the  fair 
meaning  of  the  language  used.  There 
must  be  some  direct  and  immediate 
effect  upon  interstate  conmicrce  to 
come  within  the  act.  .  .  .  Many 
agreements  suggest  them.selves  which 
relate  only  to  facilities  furnished  com- 
merce, or  else  touch  it  in  an  indirect 

717 


§  392 


INTERCORPORATE    RELATIONS 


[part  V 


The  statute  must  receive  a  reasonable  construction,*  and 
a  combination  or  contract  to  fall  within  its  provisions  must 


way,  while  possibly  enhancing  the 
cost  of  transacting  the  business,  and 
which,  at  the  same  time,  we  would 
not  think  of  as  agreements  in  restraint 
of  interstate  trade  or  commerce.  .  .  . 
An  agreement  may  in  a  variety  of 
ways  affect  interstate  commerce  just 
as  State  legislation  may,  and  yet, 
like  it,  be  entirely  valid,  because  the 
interference  produced  by  the  agree- 
ment, or  by  the  legislation,  is  not 
direct." 

Anderson  v.  United  States,  171 
U.  S.  .615  (1898),  (19  Sup.  Ct.  Rep. 
50)  :  "It  has  already  been  stated  in 
the  Hopkins  case,  above  mentioned, 
that,  in  order  to  come  within  the  pro- 
visions of  the  statute,  the  direct 
effect  of  an  agreement  or  combination 
must  be  in  restraint  of  that  trade 
or  commerce  which  is  among  the 
several  States  or  with  foreign  na- 
tions." 

United  States  v.  Joint  Traffic 
Ass'n,  171  U.  S.  569  (1898),  (19  Sup. 
Ct.  Rep.  25)  :  "The  effect  upon  inter- 
state commerce  must  not  be  indirect 
or  incidental  only.  An  agreement 
entered  into  for  the  purpose  of  pro- 
moting the  legitimate  business  of  an 
individual  or  corporation  with  no 
purpose  to  thereby  affect  or  restrain 
commerce  is  not,  as  we  think,  covered 
by  the  act,  although  the  agreement 
may  indirectly  and  remotely  affect 
that  commerce." 

See  also  Montague  v.  Lowry,  193 
U.  S.  38  (1904),  (24  Sup.  Ct.  Rep. 
307) ;  United  States  v.  Trans-Missouri 
Freight  Ass'n,  166  U.  S.  290  (1897), 
(17  Sup.  Ct.  Rep.  540)  ;  United 
States  V.  E.  C.  Knight  Co.,  156  U.  S. 


*  Hopkins  v.  United  States,  171 
U.  S.  600  (1898),  (19  Sup.  Ct.  Rep. 
40)  :  "The  act  of  Congress  must  have 
a  reasonable  construction  or  else 
there  would  scarcely  be  an  agreement 

718 


12  (1895),  (15  Sup.  Ct.  Rep.  249); 
Union  Sewer  Pipe  Co.  v.  Connolly, 
99  Fed.  354  (1900) ;  affirmed  184  U.  S. 
540  (1902),  (22  Sup.  Ct.  Rep.  431)  ; 
United  States  v.  Coal  Dealers  Ass'n, 
85  Fed.  252  (1898) ;  United  States  v. 
Chesapeake,  etc.  Fuel  Co.,  105  Fed. 
93  (1900) ;  affirmed  115  Fed.  610 
(1902) ;  United  States  v.  Jellico 
Mountain  Coal,  etc.  Co.,  46  Fed.  432 
(1891). 

In  the  very  recent  case  of  Cincin- 
nati Packet  Co.  v.  Bay,  200  U.  S. 
184  (1906),  (26  Sup.  Ct.  Rep.  208) 
the  Supreme  Court  said  :  "We  will 
suppose  then  that  the  contract  does 
not  leave  commerce  among  the  States 
untouched.  But  even  on  this  sup- 
position it  is  manifest  that  inter- 
ference with  such  commerce  is  insig- 
nificant and  incidental  and  not  the 
dominant  purpose  of  the  contract 
if  it  actually  was  thought  of  at  all. 
.  .  .  The  chief  and  visible  object 
of  its  provisions  has  nothing  to  do 
with  commerce  among  the  States. 
.  .  .  We  are  of  the  opinion  that  the 
agreement  before  us  is  not  made 
illegal  by  either  of  the  provisions 
thus  far  discussed." 

As  shown  in  note  to  §  387,  ante,  the 
contract  under  consideration  in  Cin- 
cinnati Packet  Co.  v.  Bay,  supra,  was 
an  ancillary  agreement  by  the  vendors 
of  certain  steamboats  to  withdraw 
from  the  business  of  operating  boats 
between  two  points  on  the  Ohio  River 
in  the  State  of  Ohio.  It  was  not 
clearly  shown  that  it  was  neces- 
sarj'  to  pass  through  any  other  State 
than  Ohio  in  going  from  one  point 
to  the  other,   but    the  Court    placed 


or  contract  among  business  men  that 
could  not  be  said  to  have,  indirectly 
or  remotely,  some  bearing  upon  inter- 
state commerce  and  possibly  to 
restrain  it." 


CHAP.    XXXIX]  CONSTRUCTION   AND   APPLICATION 


393 


have  some  direct  and  immediate  effect  in  restraint  of  com- 
merce among  the  States.  It  is  inappUcable  to  combinations 
whose  effect  upon  interstate  commerce  is  indirect  or  incidental 
only. 

§  393.  Restraint  upon  Interstate  Commerce  must  be  Direct 
—  (B)  Combinations  relating  to  Manufacture  and  of  Manu- 
facturers and  Producers.  —  Manufacture  is  transformation. 
Commerce  is  intercourse.^  "  Commerce  succeeds  to  manu- 
facture and  is  not  a  part  of  it."  ^  Reducing  raw  materials  into 
finished  products  directly  involves  neither  transportation  nor 
traffic.  Commerce  —  State  and  interstate  —  begins  only  when 
the  process  of  manufacture  is  completed.     The  article  produced, 


its  decision  upon  the  broader  ground 
that  if  interference  with  interstate 
commerce  existed  it  was  mere)}'  in- 
cidental and  held  that  the  federal 
anti-trust  statute  was  inapplicable. 

A  specification  in  an  ordinance,  not 
invalid  under  the  laws  of  a  State,  of 
a  particular  kind  of  asphalt  produced 
only  in  a  foreign  country  violates 
no  federal  right  and  contracts  en- 
tered into  thereunder  are  not  within 
the  federal  anti-trust  statute.  The 
statute  "is  not  intended  to  affect 
contracts  which  have  a  remote  and 
indirect  bearing  upon  commerce 
between  the  States." 

Field  V.  Barber  Asphalt  Paving 
Co.,  194  U.  S.  618  (1904),  (24  Sup.  Ct. 
Rep.  784). 

>  In  Kidd  v.  Pearson,  128  U,  S.  20 
(1888),  (9  Sup.  Ct.  Rep.  G),  Mr.  Jus- 
tice Lamar  saitl  :  "Xo  distinction  is 
more  popular  to  the  conunon  mind,  or 
more  clearly  expressed  in  economic 
and  political  literature,  than  that 
between  manufacture  and  commerce. 
Manufacture  is  transformation  —  the 
fashioning  of  raw  materials  into  a 
change  of  form  for  use.  The  functions 
of  commerce  are  different.  The  buy- 
ing and  selling  and  the  transportation 
incidental  thereto  constitute  com- 
merce; and  the  regulation  of  com- 
merce in  the  constitutional  sense 
embraces   the   regulation   at   least   of 


such  transportation.  ...  If  it  be 
held  that  the  term  includes  the  regu- 
lation of  all  such  manufactures  as 
are  intended  to  be  the  subject  of  com- 
mercial transactions  in  the  future,  it 
is  impossible  to  deny  that  it  would 
also  include  all  the  productive  in- 
dustries that  contemplate  the  same 
thing.  The  result  would  be  that 
Congress  would  be  invested,  to  the 
exclusion  of  the  States,  with  the  power 
to  regulate,  not  only  manufactures, 
but  also  agriculture,  horticulture, 
stock  raising,  domestic  fisheries,  min- 
ing —  in  short,  every  branch  of  human 
industry.  For  is  there  one  of  them 
that  docs  not  contemplate,  more  or 
less  clearly,  an  interstate  or  foreign 
market?  Does  not  the  wheat  grower 
of  the  Northwest,  and  the  cotton 
planter  of  the  South,  plant,  cultivate 
and  harvest  his  crop  with  an  eye  on 
the  prices  at  Liverpool,  New  York 
and  Chicago?  The  power  being 
vested  in  Congress  and  denied  to  the 
States,  it  would  follow  as  an  inc\-itable 
result  that  the  duty  would  devolve 
on  Congress  to  regulate  all  of  the.se 
delicate,  multiform,  and  vital  inter- 
ests —  interests  which  in  their  nature 
are,  and  must  be,  local  in  all  the  details 
of  their  successful  nianagpinent." 

2  United  States  v.  E.  C.  Knight  Co., 
156  U.  S.  12  (1895),  (15  Sup.  Ct.  Rep. 
249). 

719 


§  393 


INTERCORPORATE   RELATIONS 


[part  V 


itself,  becomes  the  subject  of  interstate  commerce  only  when 
its  transportation  from  one  State  to  another  commences.^ 
The  purpose  and  intent  of  the  manufacturer  in  producing  it 
do  not  determine  when  or  whether  it  belongs  to  interstate 
commerce.^ 

Contracts  for  the  sale  and  transportation  across  State  hnes 
of  manufactured  articles  are  proper  subjects  of  regulation  by- 
Congress  because  they  form  part  of  interstate  commerce. 
A  combination,  however,  solely  for  the  purpose  of  controlling 
manufacture,  is  not  in  violation  of  the  federal  statute  because, 
upon  principles  already  indicated,  such  a  combination  does 
not  directly  affect  or  restrain  interstate  commerce.^  Even 
if  such  a  combination  directly  affected  commerce  within  a  State 
it  would  not  come  within  the  provisions  of  the  statute,  for  State 
commerce  is  a  matter  of  State  control.  These  principles  are 
clearly  stated  in  the  opinion  of  Mr.  Chief  Justice  Fuller  in 
United  States  v.   E.   C.    Knight  Company:  *    "  Doubtless  the 


>  In  re  Greene,  52  Fed.  113  (1892), 
(Jackson,  J.)  :  "When  commerce  be- 
gins is  determined  not  by  the  char- 
acter of  the  commodity,  nor  by  the 
intention  of  the  owner  to  transfer  it  to 
another  State  for  sale,  nor  by  his  prep- 
aration of  it  for  transportation,  but 
by  its  actual  delivery  to  a  common 
carrier  for  transportation,  or  the 
actual  commencement  of  its  transfer 
to  another  State.  At  that  time  the 
power  and  regulating  authority  of 
the  States  ceases,  and  that  of  Congress 
attaches  and  continues  until  it  has 
reached  another  State,  and  becomes 
mingled  with  the  general  mass  of 
property  in  the  latter  State.  Neither 
the  production  nor  manufacture  of 
articles  or  commodities  which  consti- 
tutes subjects  of  commerce,  and 
which  are  intended  for  trade  and 
traffic  with  citizens  of  other  States, 
nor  the  preparation  for  their  trans- 
portation from  the  State  where  pro- 
duced or  manufactured  prior  to  the 
commencement  of  the  actual  transfer 
or  transmission  thereof  to  another 
State,     constitutes     that     interstate 

720 


commerce  which  comes  within  the 
regulating  power  of  Congress ;  and, 
further,  after  the  termination  of  the 
transportation  of  commodities  or 
articles  of  traffic  from  one  State  to 
another,  and  the  mingling  or  merging 
thereof  in  the  general  mass  of  property 
in  the  State  of  destination,  the  sale, 
distribution,  and  consumption  thereof 
in  the  latter  State  forms  no  part  of 
interstate  commerce." 

2  Addyston  Pipe,  etc.  Co.  v.  United 
States,  175  U.  S.  239  (1899),  (20  Sup. 
Ct.  Rep.  96) ;  United  States  v.  E.  C. 
Knight  Co.,  156  U.  S.  1  (1895),  (15 
Sup.  Ct.  Rep.  249). 

^  Addyston  Pipe,  etc.  Co.  v.  United 
States,  175  U.  S.  239  (1899),  (20  Sup. 
Ct.  Rep.  96) ;  United  States  v.  E.  C. 
Knight  Co.,  156  U.  S.  1  (1895),  (15 
Sup.  Ct.  Rep.  249) ;  Dueber  Watch 
Case  Mfg.  Co.  v.  Howard  Watch,  etc. 
Co.,  66  Fed.  642  (1895);  Gibbs  v. 
McNeeley,  107  Fed.  211  (1901),  re- 
versed 118  Fed.  120  (1902) ;  Robinson 
V.  Suburban  Brick  Co.,  127  Fed.  804 
(1904). 

*  United   States   v.   E.   C.    Knight 


CHAP.  XXXIX]  CONSTRUCTION   AND   APPLICATION 


393 


power  to  control  the  manufacture  of  a  given  thing  involves, 
in  a  certain  sense,  the  control  of  its  disposition,  Ijut  this  is  the 
secondary  and  not  the  primary  sense;  and  although  the  exercise 
of  that  power  may  result  in  bringing  the  operation  of  commerce 
into  play,  it  does  not  control  it,  and  affects  it  only  incidentally 
and  indirectly.  .  .  .  Contracts  to  buy,  sell,  or  exchange  goods 
to  be  transported  among  the  several  States,  the  transportation 
and  its  instrumentalities,  and  articles  bought,  sold,  or  exchanged 
for  the  purposes  of  such  transit  among  the  States,  or  put  in 
the  way  of  transit,  may  be  regulated,  but  this  is  because  they 
form  part  of  interstate  trade  or  commerce.  The  fact  that  an 
article  is  manufactured  for  export  to  another  State  does  not  of 
itself  make  it  an  article  of  interstate  commerce,  and  the  intent  of 
the  manufacturer  does  not  determine  the  time  when  the  article 
or  product  passes  from  the  control  of  the  State,  and  belongs 
to  commerce." 

When,  however,  the  combination,  although  relating  to  manu- 
facture—  to  production — goes  further  and  restrains  the  dis- 
position of  the  manufactured  article  and  its  distribution  among 
several  States,  its  direct  and  immediate  effect  is  to  restrain 
interstate  commerce,  and  it  comes  within  the  prohibition  of 
the  statute.  The  distinction  between  combinations  simply 
to  control  manufacture  and  production,  and  those  embracing 


Co.,  156  U.  S.  12  (189.5),  (15  Sup.  Ct. 
Rep.  249).  In  this  case  it  appeared 
that  the  American  Sugar  Refining 
Company,  a  New  .Jersey  corporation, 
with  authority  to  purchase,  refine 
and  sell  sugar,  had,  prior  to  March, 
1892,  obtained  control  of  all  the  sugar 
refineries  in  the  United  States  ex- 
cepting four  in  Philadelphia,  in- 
cluding the  E.  C  Knight  Company, 
and  one,  of  small  capacity,  in  Bo.9ton, 
with  all  of  which  it  was  in  active  com- 
petition ;  that,  in  March,  1892,  the 
American  Sugar  Refining  Company 
entered  into  contracts  with  the  stock- 
holders of  each  of  the  Philadelphia 
corporations  whereby  it  purchased 
their  stock  with  its  own  stock ;  and 
thereby  acciuired  ])osscssion  of  the 
Philadelphia  refineries  and  basiness ; 


that  there  was  no  concerted  action 
between  the  stockholders  of  the  com- 
panies, but  each  company  acted  in- 
dependently of  each  other ;  that 
the  contracts  of  sale  left  the  vendors 
free  to  engage  in  the  same  bu.sine.ss ; 
that  the  object  in  purchasing  the 
Philadelphia  refineries  was  to  obtain 
more  perfect  control  over  the  business 
of  refining  and  selling  sugar  in  the 
Unitetl  States. 

Bill  filed  by  the  United  States, 
against  E.  C.  Knight  Comp.any  charg- 
ing \-iolation  of  federal  anti-trust 
act  was  dismissed  by  Circuit  Court 
(60  Fed.  306  (1894))  ;  decree  afliirmed 
by  Circuit  Court  of  Appeals  for  Third 
Circuit  (60  Fed.  934  (1894)),  and  by 
Supreme  Court  of  the  United  States 
in  the  decision  above  cited. 

721 


§   393  INTERCORPORATE    RELATIONS  [PART    V 

the  additional  purpose  of  controlling  disposition  and  distribu- 
tion, is  pointed  out  by  the  Supreme  Court  of  the  United  States 
in  Addyston  Pipe,  etc.  Company  v.  United  States,^  where  the 
combination  under  consideration  is  distinguished  from  that 
involved  in  the  Knight  case.  Mr.  Justice  Peckham  said:  "  The 
direct  purpose  of  the  combination  in  the  Knight  case  was  the 
control  of  the  manufacture  of  sugar.  There  was  no  combina- 
tion or  agreement,  in  terms,  regarding  the  future  disposition 
of  the  manufactured  article;  nothing  looking  to  a  transaction 
in  the  nature  of  interstate  commerce.  The  probable  intention 
on  the  part  of  the  manufacturer  of  the  .sugar  to  thereafter  dis- 
pose of  it  by  sending  it  to  some  market  in  another  State,  was 
held  to  be  immaterial  and  not  to  alter  the  character  of  the  com- 
bination. .  .  .  The  case  was  decided  upon  the  principle  that  a 
combination  simply  to  control  manufacture  was  not  in  violation 
of  the  act  of  Congress,  because  such  contract  or  combination 
did  not  directly  control  or  affect  interstate  commerce,  but  that 
contracts  for  the  sale  and  transportation  to  another  State  of 
specific  articles  were  proper  subjects  of  regulation,  because 
they  did  form  part  of  such  commerce.     We  think  the  case  now 

*  Addyston  Pipe,  etc.  Co.  v.  United  territory"  there  were  no  restrictions 

States,  175  U.  S.  240  (1899),  (20  Sup.  upon  competition. 
Ct.  Rep.  96).  Bill  by  the  United  States  against 

In  this  case,  it  appeared  that  six  the  Addyston  Pipe  and  Steel  Company 
corporations,  manufacturing  iron  pipe  and  the  other  members  of  the  associa- 
in  several  different  States,  formed  an  tion,  charging  a  \'iolation  of  the  fed- 
association  whereby  the  territory  eral  anti-trust  act,  was  dismissed  by 
in  which  they  principally  operated,  the  trial  court  (78  Fed.  712  (1897)), 
comprising  a  large  part  of  the  United  but,  upon  appeal  to  the  Circuit  Court 
States,  was  di\'ided  into  "reserved"  of  Appeals  for  the  Sixth  Circuit,  Judge 
cities  and  "pay  territory."  The  Taft  delivering  an  able  and  elaborate 
reserved  cities  were  allotted  to  certain  opinion  (United  States  v.  Addyston 
members  of  the  association,  free  from  Pipe,  etc.  Co.,  85  Fed.  271  (1898)),  • 
competition,  although  the  other  mem-  the  judgment  was  reversed,  with  in- 
bers  agreed  to  stimulate  competition  structions  to  enter  a  decree  perpetu- 
by  putting  in  higher  bids.  ally   enjoining    the    defendants    from 

In  the  pay  territory  all  offers  to  maintaining  or  doing  any  business 
purchase  pipe  were  submitted  to  a  under  said  combination.  Upon  appeal 
committee  which  fixed  the  price  and  to  the  Supreme  Court  of  the  United 
awarded  the  contract  by  an  "auction  States,  tliis  decree,  modified  and 
pool" — the  members  of  the  associa-  Umited  to  that  portion  of  the  com- 
tion  agreeing  to  pay  the  largest  bonus  bination  which  was  interstate  in  char- 
to  be  di\'ided  among  the  others  re-  acter,  was  affirmed, 
ceiving   the   contract.     In   the    "  free 

722 


CHAP.  XXXIX]  CONSTRUCTION   AND   APPLICATION  §    393 

before  us  involves  contracts  of  the  nature  last  mentioned,  not 
incidentally  or  collaterally,  but  as  a  direct  and  immediate 
result  of  the  combination  engaged  in  by  the  defendants.  .  .  , 
If,  therefore,  an  agreement  or  combination  directly  restrains, 
not  alone  the  manufacture,  but  the  purchase,  sale  or  exchange 
of  the  manufactured  commodity  among  the  several  States,  it 
is  brought  within  the  provisions  of  the  statute.  The  power  to 
regulate  such  commerce,  that  is,  the  power  to  prescribe  the 
rules  by  which  it  shall  be  governed,  is  vested  in  Congress,  and 
when  Congress  has  enacted  a  statute  such  as  the  one  in  question, 
any  agreement  or  combination  which  directly  operates,  not 
alone  upon  the  manufacture,  but  upon  the  sale,  transportation 
and  delivery  of  an  article  of  interstate  commerce,  by  preventing 
or  restricting  its  sale,  etc.,  thereby  regulates  interstate  commerce 
to  that  extent,  and  to  the  same  extent  trenches  upon  the  power 
of  the  national  legislature  and  violates  the  statute." 

It  follows,  therefore,  from  these  principles  that  there  is  a 
marked  distinction  between  a  combination  relating  to  manu- 
facture and  a  combination  of  manufacturers.  The  former  falls 
without  the  statute  because  it  can  affect  interstate  commerce 
only  indirectly.  The  latter  may  be  of  wider  scope  and  contra- 
vene the  statute  by  directly  restraining  interstate  commerce. 
In  fact,  Mr.  Justice  Harlan  in  the  Northern  Securities  Case  ^ 
states  as  settled  "  that  combinations  even  among  private  manu- 
facturers or  dealers  whereby  interstate  or  international  com- 
merce is  restrained  are  equally  embraced  by  the  act." 

Combinations  or  agreements  between  manufacturers  or  pro- 
ducers in  which  an  attempt  is  made  to  directly  control  the  dis- 
position of  the  manufactured  article  or  product  are  within  the 
statute.  Thus,  as  we  have  seen,  where  the  combination  directly 
restrains  not  only  manufacture,  but  the  sale  and  the  transpor- 
tation of  the  manufactured  product  across  State  lines  it  is  vio- 
lation of  the  act.^  So,  the  statute  apphes  to  a  combination 
between  manufacturers  in  one  State  and  dealers  in  another 
State  relating  to  the  purchase  and  sale  of  a  manufactured 

'  Northern  Securities  Co.  v.  United  ^  Addyston  Pipe,  etc.  Co.  v.  United 

States,  193  U.  S.  331  (1004),  (24  Sup.  States,  175  U.  S.  239  (1899),  (20  Sup. 

Ct.   Rep.    436).       See    post,    §   397a:  Ct.  Rep.  96),  supra. 
"  The  Northern  Securities  Case." 

723 


§  393 


INTERCORPORATE    RELATIONS 


[part  V 


article.^  Indeed,  the  recent  decisions  of  the  Supreme  Court 
of  the  United  States  seem  to  warrant  the  broad  statement  that 
any  combination  of  manufacturers,  -producers  or  dealers  the  direct 
object  of  which  is  to  place  restraints  upon,  or  to  monopolize,  inter- 
state commerce  is  in  contravention  of  the  federal  statute? 


'  In  Montague  v.  Lowry,  193  U.  S. 

38,  47  (1904),  (24  Sup.  Ct.  Rep.  307), 
the  Supreme  Court  said  :  "  The  pur- 
chase and  sale  of  tiles  between  the 
manufacturers  in  one  State  and 
dealers  therein  in  California  was  inter- 
state commerce  within  the  Addyston 
Pipe  case,  175  U.  S.  239  (1899),  (20 
Sup.  Ct.  Rep.  90).  It  was  not  a 
combination  among  manufacturers 
simply  but  one  between  them  and 
dealers  in  the  manufactured  article, 
which  was  an  article  of  commerce 
between  the  States.  United  States  v. 
E.  C.  Knight  Co.,  156  U.  S.  1  (1895), 
(15  Sup.  Ct.  Rep.  249)  did  not  there- 
fore cover  it. " 

In  Montague  v.  Lowry,  supra,  an 
association  had  been  formed  in  Cali- 
fornia by  manufacturers  of,  and 
dealers  in,  tiles  and  mantels.  The 
dealers  who  resided  in  California 
agreed  to  purchase  materials  only 
from  manufacturers  who  were  mem- 
bers and  not  to  sell  unset  tiles  to 
any  one  other  than  niembers  except 
at  materiallj^  higher  prices  than  to 
the  members.  The  manufacturers 
resided  in  other  States  than  California 
and  agreed  not  to  sell  to  any  persons 
not  members.  The  action  which 
reached  the  Supreme  Court  was 
brought  for  the  recover}^  of  damages 
under  the  federal  anti-trust  statute. 
The  Court  held  that,  although  some 
of  the  transactions  covered  by  the 
combination  agreement  were  of  a 
local  nature,  the  scheme  as  a  whole 
constituted  a  combination  in  restraint 
of  interstate  trade  and  commerce. 
The  decisions  of  the  lower  federal 
courts  in  this  case  are  reported  in  106 
Fed.  38  (1900);    115  Fed.  27  (1902). 

An   association   of    manufacturers 

724 


and  dealers  formed  for  the  purpose 
of  controlUng  the  production  of 
articles  made  only  in  a  particular 
State,  but  principally  used  in  other 
States,  and  which  has  reduced  pro- 
duction and  arbitrarily  raised  prices, 
directly  affects  interstate  commerce 
and  \dolates  the  federal  statute. 

Gibbs  V.  McNeeley,  118  Fed.  120 
(1902),  reversing  107  Fed.  210  (1901). 

A  contract  or  combination  between 
a  fuel  company  and  an  association 
composed  of  fourteen  producers  of 
coal  and  coke  in  a  certain  territory, 
by  which  the  fuel  company  was  to  take 
the  entire  output  of  such  producers 
intended  for  the  Western  market  and 
to  sell  the  same  at  not  less  than 
minimum  prices  fixed  by  the  execu- 
tive committee  of  the  a.ssociation 
and  account  for  the  proceeds  —  the 
executive  committee  also  fixing  the 
amount  of  coal  to  be  furnished  by 
each  member  —  and  under  which 
shipments  were  made  into  different 
States,  directly  affects  interstate  com- 
merce and  is  in  conflict  with  the  fed- 
eral statute. 

Chesapeake,  etc.  Fuel  Co.  v.  United 
States,  115  Fed.  610  (1902),  affirming 
105  Fed.  93  (1900). 

See  also  Wheeler-Stenzel  Co.  v. 
National  Glass  Jobbers'  Ass'n,  152 
Fed.  864  (1907) ;  ElUs  v.  Inman,  131 
Fed.  182  (1904) ;  Continental  Wall 
Paper  Co.  v.  Voight,  148  Fed.  939 
(1906).  Compare  Phillips  v.  lola 
Portland  Cement  Co.,  125  Fed.  593 
(1903). 

2  In  Swift  V.  United  States,  196 
U.  S.  375,  396  (1905),  Mr.  Justice 
Holmes  said:  "Although  the  com- 
bination alleged  enabraces  restraint 
and  monopoly  of  trade  within  a  single 


CHAP.  XXXIX]  CONSTRUCTION   AND   APPLICATION 


393 


The  distinction  is  between  a  combination  which  relates  to 
manufacture,  and  the  direct  object  of  which  is  to  monopohze 


State,  its  effect  upon  commerce 
among  the  States  is  not  accidental, 
secondary,  remote  or  merely  prob- 
able. On  the  allegations  of  the  bill 
the  latter  commerce  no  less,  perhaps 
even  more,  than  commerce  within  a 
single  State  is  an  object  of  attack. 
.  .  .  Moreover,  it  is  a  direct  object, 
it  is  that  for  the  sake  of  which  the 
several  specific  acts  and  courses  of 
conduct  are  done  and  adopted. 
Therefore  the  case  is  not  like  United 
States  V.  E.  C.  Kniqht  Co.,  156  U.  S.  1 
(1895),  (15  Sup.  Ct.  Uep.  249),  where 
the  subject-matter  of  the  combina- 
tion was  manufacture  and  the  direct 
object  monopoly  of  manufacture 
within  a  State.  However  likely 
monopoly  of  commerce  among  the 
States  in  the  article  manufactured 
was  to  follow  from  the  agreement 
it  was  not  a  neces.sary  consequence 
nor  a  primary  end.  Here  the  subject- 
matter  is  sales  and  the  very  point  of 
the  combination  is  to  restrain  and 
monopolize  commerce  among  the 
States  in  respect  of  such  sales.  The 
two  cases  are  near  to  each  other,  as 
sooner  or  later  always  must  happen 
where  lines  are  to  be  drawn,  but  the 
line  between  them  is  distinct." 

In  this  case  (Swift  v.  United  States) 
it  was  held  that  "a  combination  of  a 
dominant  proportion  of  the  dealers 
in  fresh  meat  throughout  the  United 
States  not  to  bid  against  each  other 
in  the  live  stock  markets  of  the 
different  States,  to  bid  up  prices  for 
a  few  days  in  order  to  induce  the 
cattlemen  to  send  their  stock  to  the 
stockyards,  to  fix  prices  at  which 
they  will  sell,  and  to  that  end  to 
restrain  shipments  of  meat  when 
necessary,  to  establish  a  uniform 
rule  of  conduct  to  dealers  and  to 
keep  a  black  list,  to  make  uniform 
and  improper  charges  for  cartage  and, 
finally,  to  get  less  than  lawful  rates 


from  the  railroads  to  the  exclusion 
of  competitors "  was  an  illegal  com- 
bination in  restraint  of  interstate 
commerce  in  \'iolation  of  the  federal 
anti-trust  statute. 

The  very  recent  decision  of  the 
Supreme  Court  in  Loewe  v.  Lawlor, 
208  U.  S.  274  (1908),  (28  Sup.  Ct. 
Rep.  301),  also  distinctly  supports 
the  view  that  while  the  business  of 
manufacturing  in  one  State  does  not 
in  itself  directly  affect  interstate 
commerce,  yet  that  a  combination 
whose  object  is  to  prevent  the  manu- 
facturer from  shipping  his  products 
into  other  States  tioes  directlj'  affect 
interstate  commerce  and  violate  the 
act.  In  this  case  the  Court  by  Mr. 
Chief  Justice  Fuller  said  (p.  300)  : 
"The  averments  here  are  that  there 
was  an  existing  interstate  traffic  be- 
tween plaintiffs  and  citizens  of  other 
States,  and  that  for  the  direct  purpose 
of  destroying  such  interstate  traffic 
defendants  combined  not  merely  to 
prevent  plaintiffs  from  manufacturing 
articles  then  and  there  intended  for 
transportation  beyond  the  State,  but 
also  to  prevent  the  vendees  from 
reselling  the  hats  which  they  hail 
imported  from  Connecticut  or  from 
further  negotiating  with  plaintiffs 
for  the  purchase  and  intertranspor- 
tation  of  such  hats  from  Connecticut 
to  the  various  places  of  destination. 
So  that,  although  .some  of  the  means 
whereby  the  interstate  traffic  was 
to  be  destroyed  were  acts  within  a 
State,  and  some  of  them  were  in  them- 
selves as  a  part  of  their  obN-ious  pur- 
pose and  effect  beyond  the  scope  of 
federal  authority,  still,  as  we  have 
seen,  the  acts  must  be  considered  as 
a  whole,  and  the  plan  is  open  to  con- 
demnation, notwithstantling  a  negli- 
gible amount  of  intrastate  business 
might  be  affected  in  carrying  it  out. 
If  the   purposes   of  the   combination 

725 


§   394  INTERCORPORATE    RELATIONS  [PART    V 

and  affect  manufacture  within  a  State  —  to  which  the  Knight 
decision  applies  —  and  a  combination  whose  direct  object  is 
to  restrain  and  monopolize  interstate  commerce  in  respect  of 
the  sale  of  the  manufactured  product.* 

A  combination  of  manufacturers  or  producers  which  directly 
restrains  commerce  among  the  States  is  not  relieved  from  the 
operation  of  the  federal  statute  by  the  fact  that  it  may  also, 
in  some  degree,  affect  intrastate  commerce.^ 

§  394.  Restraint  upon  Interstate  Commerce  must  be  Direct 
—  (C)  Restraints  upon  Facilities  for  Commerce.  —  As  already 
shown,  the  combination  condemned  by  the  anti-trust  act  is 
one  whose  direct  and  immediate  effect  is  a  restraint  upon  inter- 
state commerce.  In  thus  applying  the  statute,  a  distinction 
is  drawn  between  a  combination  or  contract  which  directly 
affects  and  interferes  with  interstate  commerce,  and  one  which 
relates  to  a  local  facility  provided  in  furtherance  and  aid  of  such 
commerce.  These  facilities  may  consist  of  privileges  and  con- 
veniences provided  and  made  use  of,  and  services  rendered,  in 
aid  of  commerce,  as  well  as  in  the  use  of  tangible  property. 
Such  facilities  are  not,  in  themselves,  a  part  of  interstate  com- 
merce, and  touch  it  only  in  an  indirect  way.  Charges  for  such 
facilities  are  not  a  restraint  upon  interstate  commerce,  although 
the  cost  of  conducting  an  interstate  business  may  be  thereby 
increased;  and  agreements  or  combinations  relating  to  the 
amount  of  such  charges  or  the  furnishing  of  such  facilities  are 

were,  as  alleged,  to  prevent  any  inter-  extent    a   combination   must    control 

state  transportation  at  all,   the   fact  disposition  — •  what  must  be  done  in 

that  the  means  operated  at  one  end  addition    to    manufacturing    articles 

beyond  physical  transportation  com-  designed  to  be  shipped  to  other  States 

menced  and  at  the  other  end   after  —  in   order   to   directly   affect   inter- 

the     physical     transportation     ended  state  commerce  cannot  well  be  deter- 

was  immaterial. "  mined  in  advance  of  a  dectsion  of  the 

1  But  while  the  distinction  stated  Supreme  Court. 
in     the     text     is     undoubtedly    well  ^  Swift  v.  United  States,  196  U.  S. 

founded,  its   practical   application  in  375  (1905),  (25  Sup.  Ct.  Rep.  276); 

particular  cases,  e.g.  the  case  of  a  cor-  Loewe  v.  Lawlor,  208  U.  S.  274  (1908), 

porate  combination  engaged  in  manu-  (28  Sup.  Ct.  Rep.  301)  ;    Montague  v. 

facturing,     is     most     difficult.     The  Lowry,  193  U.  S.  38  (1904),  (24  Sup. 

later  decisions  of  the   Supreme  Court  Ct.  Rep.  307). 

of  the  United  States  to  which  refer-  See  extracts  from  the  opinions  in 

ence    has    been   made,    indicate   that  these  cases  in  preceding  notes  to  this 

the  decision  in  the  Knight  case  is  of  section, 
limited    application.     But    to    what 

726 


CHAP.  XXXIX]  CONSTRUCTION  AND   APPLICATION 


§394 


not  in  contravention  of  the  federal  statute,  however  much  they 
may  offend  against  pubhc  poHcy  or  local  law.* 

In  Hopkins  v.  United  States,^  —  a  case  which  related  to  un 
association  of  commission  men  for  the  purpose,  primarily,  of 
regulating  the  sale  of  live  stock  upon  its  arrival  at  stockyards  — 
the  Supreme  Court  of  the  United  States  said:  "  The  selling  of 
an  article  at  its  destination,  which  has  been  sent  from  another 
State,  while  it  may  be  regarded  as  an  interstate  sale  anil  one 
which  the  importer  was  entitled  to  make,  yet  the  services  of  the 
individual  employed  at  the  place  where  the  article  is  sold  are 
not  so  connected  with  the  subject  sold  as  to  make  them  a  por- 
tion of  interstate  commerce,  and  a  combination  in  regard  to 
the  amount  to  be  charged  for  such  service  is  not,  therefore,  a 
combination  in  restraint  of  that  trade  or  commerce."  ^ 


•  Hopkins  v.  United  States,  171 
U.  S.  578  (1898),  (19  Sup.  Ct.  Rep. 
40)  ;  Anderson  v.  United  States,  171 
U.  S.  604  (1898),  (19  Sup.  Ct.  Rep. 
50). 

2  Hopkins  v.  United  States,  171 
U.  S.  590  (1898),  (19  Sup.  Ct.  Rep. 
40).  The  following  is  a  summary 
of  the  facts  in  this  case  :  The  Kansas 
City  Live  Stock  Exchange  was  a  vol- 
untary association  doing  business  at 
the  stockj^ards  in  Kansas  City.  The 
business  of  its  members  was  to  receive, 
individually,  consignments  of  live 
stock  from  owners  living  in  different 
States,  to  feed  the  stock  and  prepare 
it  for  the  market ;  to  sell  it,  receive 
the  price  and  remit  the  proceeds, 
after  deducting  commissions,  ad- 
vances and  expenses,  to  the  owners. 
The  members  solicited  consignments 
and  made  advances  thereon.  The 
rules  of  the  association  forbade  mem- 
bers from  bujing  stock  of  merchants 
in  Kansas  City,  not  members  of  the 
exchange,  fixed  commissions,  and 
provided  that  no  member  should  do 
business  with  any  person  violating  the 
rules.  The  stockyards  were  situated 
partly  in  Missouri  and  partly  in  Kan- 
sas, but  this  fact  was  deemed  unim- 
portant by  all  the  courts. 


A  bill  by  the  United  States  against 
Hopkins,  and  other  members  of  the 
as.sociatiou,  was  filed,  charging  that 
the  association  was  in  violation  of 
the  Act  of  July  2,  1890,  and  praying 
for  an  injunction.  The  trial  court 
granted  the  injunction  (82  Fed.  529 
(1897)),  and  the  case  came  by  cer- 
tiorari from  the  Circuit  Court  of  Ap- 
peals to  the  Supreme  Court,  which 
reversed  the  decree.  See  also  Green 
V.  Stoller,  77  Fed.  1  (1896),  which 
related  to  the  Kansas  City  Live  Stock 
Exchange. 

3  In  Swift  V.  United  States,  196 
U.  S.  375,  397  (1905),  (25  Sup.  Ct. 
Rep.  276)  (see  note  to  §  393,  ante), 
the  Supreme  Court  distinguished 
the  Hopkins  ca.se,  saying:  "All  that 
was  decided  there  was  that  the  local 
business  of  commission  merchants  was 
not  commerce  among  the  States,  even 
if  what  the  brokers  were  employed 
to  sell  was  an  object  of  such  com- 
merce. The  brokers  were  not,  like 
the  defendants  before  us,  themselves 
the  buj'ers  and  sellers.  They  only 
furnished  certain  facilities  for  the 
sales.  Therefore,  there  again  the 
effect  of  the  combination  of  brokers 
upon  the  commerce  was  only  indirect 
and  not  within  the  act." 

727 


§  395 


INTERCORPORATE    RELATIONS 


[part  V 


§  395.  Restraint  upon  Interstate  Commerce  must  be  Direct 
—  (D)  Exchanges  and  Similar  Associations.  —  Upon  the  prin- 
ciple stated  in  the  preceding  sections  that,  in  order  to  come 
within  the  provisions  of  the  federal  statute,  the  direct  effect 
of  a  combination  must  be  in  restraint  of  interstate  commerce, 
it  follows  that  a  voluntary  association  or  "  exchange  "  formed 
by  dealers  in  articles  of  a  similar  nature  in  a  particular  locality 
for  the  purpose  of  fairly  regulating  the  methods  of  conducting 
business  and  establishing  a  general  headquarters,  and  the  by- 
laws of  which  provide  rules  for  fair  dealing  among  the  members, 
but  which  exercises  no  control  over  prices  or  production,  is 
not  in  contravention  of  the  statute.^     Neither  the  object  nor 


•  Anderson  v.  United  States,  171 
U.  S.  604  (1898),  (19  Sup.  Ct.  Rep.  50) ; 
Hopkins  v.  United  States,  171  U.  S. 
578  (1898),  (19  Sup.  Ct.  Rep.  40). 

In  the  Anderson  case,  the  Traders' 
Live  Stock  Exchange  was  a  voluntary- 
association  in  Kansas  City,  whose 
members  carried  on  much  the  same 
business,  and  in  the  same  manner,  as 
that  carried  on  by  members  of  the 
Kansas  City  Live  Stock  Exchange 
passed  upon  in  the  Hopkins  case  (ante, 
§  394,  note).  The  principal  difference 
was  that  the  members  of  the  Traders' 
Exchange  were  tliemselves  purchasers 
of  cattle  in  the  market,  while  the 
members  of  the  other  association  sold 
cattle  upon  commission.  In  holding 
that  the  association  did  not  \aolate 
the  anti-trust  act,  the  Supreme  Court 
of  the  United  States  {per  Peckham, 
J.)  said  (p.  616)  :  "From  very  early 
times  it  has  been  the  custom  for  men 
engaged  in  the  business  of  buying 
and  selling  articles  of  a  similar  nature, 
at  any  particular  place,  to  a.ssociate 
themselves  together.  The  object  of 
the  association  has,  in  many  cases, 
been  to  provide  for  the  ready  trans- 
action of  the  business  of  the  associates 
by  obtaining  a  general  headquarters 
for  its  conduct,  and  thus  to  insure 
a  quick  and  certain  market  for  the 
sale  or  purchase  of  the  article  dealt  in. 
Another  purpose  has  been  to  provide  a 

728 


standard  of  business  integrity  among 
the  members  by  adopting  rules  for 
just  and  fair  dealing  among  them, 
and  enforcing  the  same  by  penalties 
for  their  violation.  The  agreements 
have  been  voluntary,  and  the  penalties 
have  been  enforced  under  the  super- 
visions and  by  the  members  of  the 
association.  The  preamble  adopted 
by  the  association  in  this  case  shows 
the  ostensible  purpose  of  its  formation. 
It  was  not  formed  for  pecuniary 
profits,  and  a  careful  perusal  of  the 
whole  agreement  fails,  as  we  think, 
to  show  that  its  purpose  was  other 
than  as  stated  in  the  preamble,  and 
that  the  result  naturally  to  be  ex- 
pected from  an  enforcement  of  the 
rules  would  not  directly,  if  at  all, 
affect  interstate  trade  or  commerce." 
The  Court  then  distinguished  the 
agreement  in  question  from  those  in 
United  States  v.  Jellico  Mountain 
Coal,  etc.  Co.,  46  Fed.  432  (1891); 
United  States  v.  Coal  Dealers  Ass'n, 
85  Fed.  252  (1898) ;  and  United  States 
V.  Addyston  Pipe,  etc.  Co.,  85  Fed. 
271  (1898),  (affirmed  175  U.  S.  211) 
(1899),  (20  Sup.  Ct.  Rep.  96),  upon 
the  ground  that  the  agreements  in 
all  those  cases  provided  for  fixing 
the  prices  of  the  articles  dealt  in. 
In  comparing  these  cases,  also  note 
United  States  v.  Chesapeake,  etc. 
Fuel  Co..  105  Fed.  93  (1900),  affirmed 


CHAP.  XXXIX]  CONSTRUCTION   AND    APPLICATION 


396 


consequence  of  such  an  association  is  to  suppress  competition 
and  its  effect  upon  interstate  commerce,  if  any,  is  remote. 

§  396.  Restraint  may  be  imposed  upon  those  engaged  in 
Interstate  Commerce  by  those  not  engaged  therein.  —  The 
federal  statute  makes  unhiwful  "every"  contract,  combination 
or  conspiracy  in  restraint  of  interstate  commerce.  It  makes 
no  distinction  of  persons  or  classes.  Persons  not  themselves 
engaged  in  interstate  commerce  who  enter  into  a  combination 
to  compel  third  persons  to  refrain  from  engaging  in  .such  com- 
merce, except  upon  conditions  imposed  by  them,  violate  its  pro- 
visions.^ Thus,  a  combination  in  the  form  of  a  labor  organiza- 
tion which,  for  the  purpose  of  enforcing  compliance  with  its 
requirements,  attempts  to  prevent  a  manufacturer  from  making 
articles  for  interstate  shipment,  and  purchasers  of  such  articles 
in  other  States  from  reselling  them  and  making  further  pur- 
chases, is  in  contravention  of  the  act.^ 


115  Fed.  610  (1902);  Gibbs  v.  Mc- 
Neeley,  118  Fed.  120  (1902);  Lowry 
V.  Tile,  etc.  Assoc,  106  Fed.  38  (1900), 
affirmed  sub  nom.  Montague  v.  Lowry, 
115  Fed.  27  (1902);  193  U.  S.  38 
(1904),  (24  Sup.  Ct.  Rep.  307). 

In  the  la-st  case  the  Supreme  Court 
distinguished  the  association  in  ques- 
tion from  those  in  the  Hopkins  and 
Anderson  cases,  supra,  saying:  "In 
the  first  case  it  was  held  that  the 
occupation  of  the  members  of  the 
association  was  not  interstate  com- 
merce and  in  the  other  that  the  sub- 
ject of  the  agreement  did  not  directly 
relate  to,  embrace  or  act  upon,  inter- 
state commerce." 

And  in  Swift  v.  United  States,  196 
U.  S.  375,  397  (1905),  (25  Sup.  Ct. 
Rep.  276)  (.see  note  to  §  393,  ante), 
the  Supreme  Court  again  said  of  the 
Anderson  case:  "In  [it]  the  defend- 
ants were  buyers  and  sellers  at  the 
stockyards,  but  their  agreement 
was  merely  not  to  employ  brokers,  or 
to  recognize  yard  trailers,  who  were 
not  members  of  their  a.ssociation. 
Any  yard  trader  could  become  a 
member  of  the  association  on  comply- 
ing   with    the   conditions,    and    there 


was  said  to  be  no  feature  of  monopoly 
in  the  ca.se.  It  was  held  that  the 
combination  did  not  directly  regulate 
commerce  between  the  States,  and, 
being  formed  with  a  different  intent, 
was  not  within  the  act." 

'  In  Loewe  i'.  Lawlor,  208  U.  S.  274 
(1908),  (28  Sup.  Ct.  Rep.  301),  the 
Supreme  Court  said:  "Nor  can  the 
act  be  held  inapplicable  because  de- 
fendants were  not  themselves  en- 
gaged in  interstate  commerce.  The 
act  made  no  distinction  between 
classes.  It  pro\ided  that  'every' 
contract,  combination  or  conspiracy 
in  restraint  of  traile  was  illegal.  The 
records  of  Congress  show  that  several 
effects  were  made  to  exempt,  by 
legislation,  organizations  of  farmers 
and  laborers  from  the  operation  of  the 
act,  and  that  all  these  efforts  failed, 
so  that  the  act  remained  as  we  have 
it  before  us."  See  also  Unitetl  States 
V.  Workingmen's  Amalgamateil  Coun- 
cil, 54  Fed.  994  (1893),  affirmed  57  Fed. 
85  (1893). 

2  Loewe  v.  Lawlor,  208  U.  S.  274 
(1908),  (28  Sup.  Ct.  Rep.  .301).  In 
this  case  the  Supreme  (\)urt  heM  that 
a  complaint  stated  an  unlawful  com- 

729 


§   397  INTERCORPORATE    RELATIONS  [PART   V 

§  397.  Form  of  Combination  Immaterial.  Illegality  of  Cor- 
porate Device.  —  In  the  Trans-Missouri  Freight  Association 
Case  it  was  urged  that  the  federal  statute  was  inapplicable 
to  an  association  of  railroad  companies  for  the  purpose  of 
regulating  traffic  rates,  because  the  language,  "  every  con- 
tract, combination  in  the  form  of  trust  or  otherwise,"  covers 
only  contracts  or  combinations  in  the  trust  form  or  those 
which,  while  not  exactly  trusts,  are  of  a  similar  form  or  nature. 
But  the  Supreme  Court  of  the  United  States  said:^  "  This  is 
clearly  not  so.  While  the  statute  prohibits  all  combinations 
in  the  form  of  trust  or  otherwise,  the  limitation  is  not  confined 
to  that  form  alone.  All  combinations  which  are  in  restraint  of 
trade  or  commerce  are  prohibited,  whether  in  the  form  of  trusts 
or  in  any  other  form  whatever." 

Every  contract,  combination  or  conspiracy  in  restraint  of 
interstate  or  foreign  commerce  is  illegal.  The  method  adopted 
in  bringing  about  the  combination  is  immaterial;  and  the 
device  of  a  holding  corporation  for  the  purpose  of  circumvent- 
ing the  law  can  be  no  more  effectual  than  any  other  means. 
While  a  corporation,  in  the  legitimate  exercise  of  power  con- 
ferred, may  purchase  and  hold  the  shares  of  other  corporations, 
the  formulation  of  a  holding  corporation,  as  a  part  of  a  scheme 

bination    within    the    statute    which  (1894):   "It  is,  therefore,  the  privilege 

averred    in    substance     "that    there  and  duty  of  the  court,  uncontrolled 

was     an     existing     interstate     traffic  by  considerations  drawn  from  other 

between    plaintiffs    and    citizens    of  sources,   to  find  the  meaning  of  the 

other  States,  and  that  for  the  direct  statute  in  the  terms  of  its  pro\'isions, 

purpose  of  destroying  such  interstate  interpreted    by    the    settled    rules    of 

traffic  defendants  combined  not  only  construction.     That   the   original  de- 

to     prevent     plaintiffs     from     manu-  sign  to  suppress  trusts  and  monopo- 

facturing  articles  then   and  there  in-  lies  created  by  contract  or  combina- 

tended  for  transportation  beyond  the  tion  in  the  form  of  trust,  which  of 

State,  but  also  to  prevent  the  vendees  course    would    be    of    a    '  contractual 

from  reselling  the  hats  which  they  had  character, '  was  adhered  to,  is  clear ; 

imported  from  Connecticut,  or  from  but  it  is  equally  clear  that  a  further 

further     negotiating    with     plaintiffs  and     more     comprehensive     purpose 

for  the  purchase  and  intertransporta-  came    to    be    entertained,    and    was 

tion   of  such  hats   from   Connecticut  embodied   in   the    final    form    of   the 

to    the    various    places     of     destina-  enactment.     Combinations    are    con- 

tion."  demned,  not  only  when  thej^  take  the 

*  United   States   v.   Trans-Missouri  form  of  trusts,  but  in  whatever  form 

Freight  Ass'n,  166  U.  S.  326  (1897),  found,  if  they  be  in  restraint  of  trade. 

(17  Sup.  Ct.  Rep.  540).  That   is  the  effect   of  the  words   'or 

United  States  v.  Debs,  64  Fed.  747  otherwise.'  " 

730 


CHAP.  XXXIX]  CONSTRUCTION   AND    APPLICATION  §   397a 

to  bring  about  a  combination  of  competing  railroad  companies 
—  a  practical  consolidation  through  the  pooling  of  earnings 
and  virtual  pooling  of  stocks  —  in  restraint  of  interstate  or 
foreign  commerce,  seems  clearly  in  violation  of  the  provisions 
of  the  statute.^ 

§  397a.  The  Northern  Securities  Case.  —  The  opinion  ex- 
pressed in  the  preceding  section  that  a  combination  of  com- 
peting railroads  by  means  of  a  holding  corporation  contravenes 
the  federal  statute  has,  since  the  first  edition  of  this  treatise, 
been  fully  sustained  by  the  Supreme  Court  of  the  United  States 
in  one  of  the  most  important  cases  ever  brought  before  tnat 
tribunal. 

The  Great  Northern  and  Northern  Pacific  railroad  com- 
panies own  competing  and  practically  parallel  roads  engaged 
in  interstate  commerce  and  extending  from  the  Great  Lakes 
and  Mississippi  River  to  the  Pacific  coast.  Stockholders  of 
these  corporations  combined,  and  conceived  the  scheme  of 
organizing  a  New  Jersey  corporation  which  should  acquire  the 
shares  of  the  two  corporations  —  issuing  its  own  shares  to  their 
stockholders  in  exchange  therefor  upon  an  agreed  basis  —  and 
thus  obtain  control  of  both  corporations.  To  carry  out  this 
plan,  the  Northern  Securities  Company  was  organized,  with 
the  necessary  powers,  as  the  holding  corporation.  The  stock- 
holders of  the  two  constituent  corporations  then  exchanged 


'A     corporate     combination     by  "  Analysis  of  Rules  governing  Private 

means    of   a    purchasing    corporation  Corporations.     Form    of  Combination 

(see  ante,  §§  310,  318),  when  producing  Immaterial." 

similar    results,    is    as    much   subject  The     pro^'isions     of     the     federal 

to  the  provisions  of  the  federal  anti-  statute   against   the    jnonopolizing   of 

trust  statute  as  a  corporate  combina-  interstate  trade  or  commerce   neccs- 

tion  by  means  of  a  holding  corpora-  sarily  relate  to  different  acts  than  the 

tion  (see  ante,  §§  310,  323).     There  is  provisions   against   combinations.     A 

no    merit    in    the   corporate    form    of  single  corporation  actually  purchasing 

combination    in    imposing    restraints  all    the    plants   engaged    in    the    pro- 

upon     interstate     commerce.      That  duction    of    an    article    of   commerce 

which  contravenes  the  statute  when  undoubtedly  might  monopolize  trade 

done  by  individuals  collectively  \\o-  and  commerce  in  such  article  in  con- 

lates  it  when  effected  by  them  through  travention    of    the    statute    without 

the  instrumentality  of  a  corporation.  there    being    any    element    whatever 

For  distinction  between  actual  of  combination  present.  But  this 
purchases  and  sales  and  combinations  phase  of  the  subject  has  as  yet  re- 
in the  forin  of  sales,  see  ante,  §  354  :  ceived  slight  judicial  consideration. 

731 


§   397a  INTERCORPORATE    RELATIONS  [PART   V 

their  shares  upon  the  agreed  basis  for  those  of  the  holding  cor- 
poration, which  thus  obtained  controlUng  interests  in  both  cor- 
porations. The  result  was  a  corporate  combination  by  means  of 
a  holding  corporation  which  we  have  already  considered.'  A 
suit  was  brought  by  the  United  States  under  the  federal  anti- 
trust statute  to  have  the  combination  declared  illegal.  The 
case  came  to  the  Supreme  Court,  which  held  that  the  arrange- 
ment was  a  combination  in  restraint  of  interstate  commerce 
in  violation  of  the  federal  statute  and,  in  effect,  enjoined  its 
continuance.^ 

Mr.  Justice  Harlan,^  in  his  opinion,  stated  these  proposi- 
tions as  deducible  from  former  decisions  upon  the  statute 
and,  consequently,  as  controlUng  the  disposition  of  the 
case : 

"  That  although  the  act  of  Congress  known  as  the  Anti-trust 
Act  has  no  reference  to  the  mere  manufacture  or  production  of 
articles  or  commodities  within  the  limits  of  the  several  States, 
it  does  embrace  and  declare  to  be  illegal  every  contract,  com- 
bination or  conspiracy,  in  whatever  form,  of  whatever  nature, 
and  whoever  may  be  parties  to  it,  which  directly  or  necessarily 
operates  in  restraint  of  trade  or  commerce  among  the  several 
States  or  with  foreign  nations; 

'  See  ante,  §  310:  "Formation  of  Cor-  the  Supreme  Court,  however,  it  held 
porate  Combinations."  that  the  Securities  Company  was  the 
^  Northern  Securities  Co.  v.  United  owner  of  the  shares  in  question  free 
States,  193  U.  S.  197  (1904),  (24  Sup.  from  any  trust  and  might  properly 
Ct.  Rep.  436).  distribute  them  among  its  stock- 
After  the  decree  of  the  Supreme  holders  as  proposed. 
Court  declaring  the  Northern  Securi-  Harriman  v.  Northern  Securities 
ties  Company  a  combination  in  vio-  Co.,  197  U.  S.  244  (1905),  (25  Sup.  Ct. 
lation  of  the  federal  anti-trust  statute  Rep.  493). 

it  adopted  a  resolution  reducing  its  For  other  phases  of  the  litigation 

corporate    stock    and    pro\dding    for  regarding     the     Northern     Securities 

the     distribution     of     its     assets —  Company  see  ante,  §  36:    "Construe- 

shares    in    the    Great    Northern    and  tion  of  Prohibitions  —  (D)    Control  of 

Northern   Pacific   railroad  companies  Cojnpeting  Railroads  by  Holding  Cor- 

—  pro  rata  among  its  stockholders.  poration." 

A  suit  was  brovight  to  restrain  such  ^  The  opinion  of  Mr.  Justice  Harlan 

distribution  upon  the  ground  that  the  was  concurred  in  by  Brown,  McKenna 

complainants     had     delivered     their  and    Day,   J.J.      Mr.   Justice   Brewer 

Northern  Pacific  stock  to  the  Securi-  concurred  in  the  result  but  wrote  a 

ties  Company  in  trust  and  were  en-  separate  opinion.     The  other  justices 

titled    to   have   such    stock   returned  dissented, 
to  <  hem.     When  the  case  came  before 

732 


CHAP.  XXXIX]  CONSTRUCTION   AND    APPLICATION  §   397a 

That  the  act  is  not  limited  to  restraints  of  interstate  and  inter- 
national trade  or  commerce  that  are  unreasonable  in  their 
nature,  but  embraces  all  direct  restraints  imposed  by  any  com- 
bination, conspiracy  or  monopoly  upon  such  trade  or  com- 
merce; 

That  railroad  carriers  engaged  in  interstate  or  international 
trade  or  commerce  are  embraced  by  the  act; 

That  combinations  even  among  'private  manufacturers  or 
dealers  whereby  interstate  or  international  commerce  is  restrained 
are  equally  embraced  by  the  act; 

That  Congress  has  the  power  to  establish  rules  by  which  inter- 
state and  international  commerce  shall  be  governed,  and,  by  the 
Anti-trust  Act,  has  prescribed  the  rule  of  free  competition 
among  those  engaged  in  such  commerce; 

That  every  combination  or  conspiracy  which  would  extinguish 
competition  between  otherwise  competing  railroads  engaged  in 
interstate  trade  or  comvierce,  and  which  would  in  that  way  restrain 
such  trade  or  commerce,  is  made  illegal  b}'  the  act; 

That  the  natural  effect  of  competition  is  to  increase  com- 
merce, and  an  agreement  whose  direct  effect  is  to  prevent  this 
play  of  competition  restrains  instead  of  promotes  trade  and 
commerce; 

That  to  vitiate  a  combination,  such  as  the  act  of  Congress 
condemned,  it  need  not  be  shown  that  the  combination  in  fact 
results  or  will  result  in  a  total  suppression  of  trade  or  in  a  com- 
plete monopoly,  but  it  is  only  essential  to  show  that  by  its 
necessary  operation  it  tends  to  restrain  interstate  or  interna- 
tional trade  or  commerce  or  to  ileprive  the  public  of  the  ad- 
vantages that  flow  from  free  competition; 

That  the  constitutional  guaranty  of  liberty  or  contract  does 
not  prevent  Congress  from  prescribing  the  rule  of  free  competi- 
tion for  those  engaged  in  interstate  and  international  commerce; 
and, 

That  under  its  power  to  regulate  commerce  among  the  several 
States  and  with  foreign  nations.  Congress  had  authority  to  enact 
the  statute  in  question." 

Mr.  Justice  Harlan  further  said  in  declaring  the  particular 
combination  in  conflict  with  the  federal  statute: 

"  Such  holding  corporation  has  beconie  the  holder  —  more 

733 


§  398  INTERCORPORATE   RELATIONS  [PART   V 

properly  speaking,  the  custodian  —  of  more  than  nine-tenths 
of  the  stock  of  the  Northern  Pacific,  and  more  than  three- 
fourths  of  the  stock  of  the  Great  Northern,  the  stockholders 
of  the  companies  who  delivered  their  stock  receiving  upon  the 
agreed  basis  shares  of  stock  in  the  holding  corporation.  The 
stockholders  of  these  two  competing  companies  disappeared, 
as  such,  for  the  moment,  but  immediately  reappeared  as  stock- 
holders of  the  holding  company  which  was  thereafter  to  guard 
the  interests  of  both  sets  of  stockholders  as  a  unit,  and  to 
manage,  or  cause  to  be  managed,  both  lines  of  railroad  as  if 
held  in  one  ownership.  Necessarily  by  this  combination  or 
arrangement  the  holding  company  in  the  fullest  sense  dominates 
the  situation  in  the  interest  of  those  who  were  stockholders  of 
the  constituent  companies;  as  much  so,  for  every  practical 
purpose,  as  if  it  had  been  itself  a  railroad  corporation  which 
had  built,  owned,  and  operated  both  Hues  for  the  exclusive 
benefit  of  its  stockholders.  Necessarily,  also,  the  constituent 
companies  ceased,  under  such  a  combination,  to  be  in  active 
competition  for  trade  and  commerce  along  their  respective 
lines,  and  have  become,  practically,  one  powerful  consolidated 
corporation,  by  the  name  of  a  holding  corporation  the  principal, 
if  not  the  sole,  object  for  the  formation  of  which  was  to  carry 
out  the  purpose  of  the  original  combination  under  which  com- 
petition between  the  constituent  companies  would  cease.  .  .  . 
No  scheme  or  device  could  more  certainly  come  within  the 
words  of  the  act  —  '  combination  in  the  form  of  a  trust  or  other- 
wise ...  in  restraint  of  commerce  among  the  several  States 
or  with  foreign  nations,'  —  or  could  more  effectively  and  cer- 
tainly suppress  free  competition  between  the  constituent  com- 
panies. This  combination  is,  within  the  meaning  of  the  act, 
a  '  trust ' ;  but  if  not  it  is  a  combination  in  restraint  of  interstate 
and  international  commerce;  and  that  is  enough  to  bring  it 
under  the  condemnation  of  the  act." 

§  398.  Application  of  Statute  to  Combinations  of  Railroads 
and  Other  Carriers.  Combinations  of  Railroad  Employees.  — 
The  statute  declares  illegal  every  contract,  combination  or  con- 
spiracy in  restraint  of  commerce  among  the  several  States. 
Railroad  companies  and  other  carriers  engaged  in  transporting 
persons  and  property  between  different  States  are  engaged  in 
734 


CHAP.   XXXIX]  CONSTRUCTION   AND   APPLICATION 


398 


interstate  commerce,*  and,  as  indicated  in  the  last  two  sections, 
any  contract  or  combination  between  competing  carfiers  for 
tiie  purpose  of  maintaining  rates  or  preventing  competition, 
directly  restrains  interstate  commerce  and  contravenes  the 
federal  statute.^ 


'  United  States  v.  Joint  Traffic 
Ass'n,  171  U.  S.  570  (1898),  (20  Sup. 
Ct.  Rep.  96)  :  "The  business  of  a  rail- 
road carrier  is  of  a  public  nature,  and 
in  performing  it  the  carrier  is  also  per- 
forming, to  a  certain  extent,  a  func- 
tion of  government  which,  as  counsel 
observed,  requires  them  to  perform 
the  ser\ice  on  equal  terms  to  all. 
This  public  service,  that  of  transpor- 
tation of  passengers  and  freight,  is  a 
part  of  trade  and  commerce,  and 
when  transported  between  States, 
such  commerce  becomes  what  is 
described  as  interstate,  and  comes, 
to  a  certain  extent,  under  the  juris- 
diction of  Congress,  by  virtue  of  its 
power  to  regulate  commerce  among 
the  several  States." 

^  United  States  v.  Trans-Missouri 
Freight  Ass'n,  166  U.  S.  290  (1897), 
(17  Sup.  Ct.  Rep.  540) ;  United  States 
V.  Joint  Traffic  A.ss'n,  171  U.  S.  505 
(1898),  (19  Sup.  Ct.  Rep.  25).  The 
nature  of  an  agreement  between  car- 
riers which  falls  within  the  provisions 
of  the  federal  anti-trust  act,  cannot  be 
better  illustrated  than  by  outlining 
the  traffic  arrangements  involved  in 
these  two  leading  cases. 

In  the  Trans-Missouri  Case  it  ap- 
peared that  eighteen  competing  West- 
ern railroad  companies  formed,  in 
1889,  a  voluntary  association  called 
the  "Trans-Missouri  Freight  Associa- 
tion," for  the  purpose,  as  stated  in 
the  agreement,  "of  mutual  protection 
by  establishing  anil  maintaining 
reasonable  rates,  rules  and  regula- 
tions, on  all  freight  traffic,  both 
through  and  local."  The  agreemetit 
provided  for  electing  a  chairman  of 
the  association,  and  representatives 
of  each  company  to  vote  in  its  behalf 


at  the  monthly  meetings  of  the  a.sso- 
ciation ;  for  appointing  a  committee 
to  establish  traffic  rates  and  regula- 
tions, "and  to  make  rules  for  meeting 
the  competition  of  outside  lines;" 
for  changing  rates  ;  for  arranging  with 
connecting  lines  when  authorized  by 
the  as.sociation,  and  for  imposing  and 
enforcing  the  penalties  prescribed  for 
infractions  of  the  agreement. 

Bill  by  the  United  States  for  dis- 
solution of  the  association,  and  for  an 
injunction,  on  the  ground  that  the 
agreement  xnolated  the  federal  anti- 
trust act  was  dismi.ssed  by  the  Circuit 
Court  (53  Fed.  440  (1892)).  This  de- 
cree was  affirmed  by  the  Circuit  Court 
of  Appeals  (58  Fed.  58  (1893)),  but 
was  reversed  by  the  Supreme  Court. 

In  the  Joint  Traffic  Association 
Case  it  appeared  that  thirty-one  rail- 
road companies  engaged  in  transpor- 
tation between  Chicago  and  the  At- 
lantic Coast,  formed  a  voluntary 
association  called  the  Joint  Traffic 
Association,  by  which  they  agreed 
that  the  association  shoidd  have 
jurisdiction  over  all  competitive 
traffic,  with  certain  exceptions,  pa-ss- 
ing  through  the  western  termini  of 
the  trunk  lines  and  certain  other 
points,  and  to  fix  the  rates,  fares  and 
charges  therefor,  and  to  change  the 
same,  and  no  party  to  the  agreement 
was  permittetl  to  dcNnate  from  the 
rates  so  fixed.  The  agreement  also 
provided  for  the  appointment  of 
managers  of  the  association;  that  the 
powers  conferred  upon  the  managers 
should  be  exercised  in  conformity  to 
the  provisions  of  the  interstate  com- 
merce act,  antl  that  the  managers 
should  have  power  to  deal  with  con- 
necting companies,  not  parties  to  the 

735 


§   398  INTERCORPORATE    RELATIONS  [PART   V 

In  United  States  v.  Trans-Missouri  Freight  Association,^ 
the  Supreme  Court  of  the  United  States  said:  "  Congress  has, 
so  far  as  its  jurisdiction  extends,  prohibited  all  contracts  or 
combinations  in  the  form  of  trust  or  otherwise  entered  into 
the  purpose  of  restraining  trade  and  commerce.  The  results 
naturally  flowing  from  a  contract  or  combination  in  restraint  of 
trade  or  commerce,  when  entered  into  by  a  manufacturing 
or  trading  company,  such  as  above  stated,  while  differing 
somewhat  from  those  which  may  follow  a  contract  to  keep 
up  transportation  rates  by  railroads,  are  nevertheless  of  the 
same  nature  and  kind,  and  the  contracts,  themselves,  do  not 
so  far  differ  in  their  nature  that  they  may  not  all  be  treated 
alike  and  be  condemned  in  common.  It  is  entirely  appro- 
priate, generally,  to  subject  corporations  or  persons  engaged 
in  trading  or  manufacturing  to  different  rules  from  those 
applicable  to  railroads  in  their  transportation  business;  but 
when  the  evil  to  be  remedied  is  similar  in  both  kinds  of  cor- 
porations, such  as  contracts  which  are  unquestionably  in 
restraint  of  trade,  we  see  no  reason  why  similar  rules  should 
not  be  promulgated  in  regard  to  both,  and  both  be  covered  in 
the  same  statute  by  general  language  sufficiently  broad  to  in- 
clude them  both.  We  see  nothing  either  in  contemporaneous 
history,  in  the  legal  situation  at  the  time  of  the  passage  of  the 
statute,  in  its  legislative  history,  or  in  any  general  difference  in 
the  nature  or  kind  of  these  trading  or  manufacturing  companies, 
which  would  lead  us  to  the  conclusion  that  it  cannot  be  supposed 
the  legislature,  in  prohibiting  the  making  of  contracts  in  re- 
straint of  trade,  intended  to  include  railroads  within  the  pur- 
view of  that  act.  ...  If  the  law  prohibits  any  contract  or 
combination  in  restraint  of  trade  or  commerce,  a  contract  or 
combination  made  in  violation  of   such  law  is  void,  whatever 

agreement,  which  declined  to  observe  Secunties  Case, "  in  wliich  case  Mr. 
the  estabUshed  rates.  Bill  by  the  Justice  Harlan  said  as  already  shown  : 
United  States  was  dismissed  by  the  "  Railroad  carriers  engaged  in  inter- 
Circuit  Court  (76  Fed.  895) ;  the  de-  state  or  international  trade  or  com- 
cree  was  affirmed  by  the  Circuit  Court  merce  are  embraced  by  the  act." 
of  Appeals,  without  opinion  (89  Fed.  '  United  States  v.  Trans-Missouri 
1020),  but  was  reversed  by  the  Su-  Freight  .\ss'n,  166  U.  S.  324  (1897), 
preme  Court.  (17  Sup.  Ct.  Rep.  540). 
See  also  ante,  §  397a :  "  The  Northern 

736 


CHAP.    XXXIX]  CONSTRUCTION    AND    APPLICATION 


398 


may  have  been  theretofore  decided  by  the  courts  to  have  been 
the  pubhc  pohcy  of  the  country  on  that  subject.  The  conclu- 
sion which  we  have  drawn  from  the  examination  above  made 
into  the  question  before  us  is  that  the  anti-trust  act  appUes  to 
raih'oads,  and  that  it  renders  illegal  all  agreements  which  are 
in  restraint  of  trade  or  commerce  as  we  have  above  defined  that 
expression."  ^ 

While  traffic  associations  and  other  combinations  between 
competing  carriers  for  the  purpose  of  maintaining  rates,  or 
otherwise  controlling  or  regulating  competition,  are  in  viola- 
tion of  the  federal  statute,^  it  has  been  held  that  an  agreement 
between  connecting  railroad  companies  for  the  reception  and 
forwarding  of  freight  beyond  their  own  lines,  does  not  fall 


*  The  conclusion  tliat  the  statute 
applies  to  combinations  of  railroads 
unavoidably  follows  from  the  premise 
that  all  combinations  in  restraint  of 
interstate  commerce  violate  its  pro- 
^'^sions.  In  reaching  this  conclusion, 
however,  the  Supreme  Court  in  the 
Trans- Missouri  Freight  Association 
Case,  supra,  was  met  by  two  con- 
tentions : 

First.  "That  the  debates  in  Con- 
gress show  beyond  a  doubt  that  the 
act  as  passed  does  not  include  rail- 
roads." But  after  re\'iewing  the 
debates  referred  to,  Mr.  Justice  Peck- 
ham  said  :  "  All  that  can  be  deter- 
mined from  the  debates  and  reports 
is,  that  various  members  had  various 
views,  and  we  are  left  to  determine 
the  meaning  of  this  act,  as  we  deter- 
mine the  meaning  of  other  acts,  from 
the  language  used  therein." 

Second.  That  the  statute  did  not 
apply  to  traffic  contracts  between 
railroad  companies,  because  they  were 
authorized  by  the  interstate  com- 
merce act,  and  that  a  construction 
should  not  be  adopted  which  would 
repeal,  by  implication,  any  provision 
of  that  act.  Mr.  Justice  Pcckham, 
however,  said:  "The  first  answer  to 
this  argument  is  that,  in  our  opinion, 
the  connnerce  act  docs  not  authorize 
an  agreement  of  this  nature.     It  may 


not  in  terms  prohibit,  but  it  is  far 
from  conferring,  either  directly  or 
by  implication,  any  authority  to 
make  it.  If  the  agreement  be  legal, 
it  does  not  owe  its  validity  to  any  pro- 
^^sion  of  the  commerce  act,  and  if 
illegal,  it  is  not  made  so  by  that  act. 
The  fifth  section  prohibits  what  is 
termed  'pooling,'  but  there  is  no 
express  provision  in  the  act  proliibit- 
ing  the  maintenance  of  traffic  rates 
among  competing  roads  by  making 
such  an  agreement  as  this,  nor  is  there 
any  provision  which  permits  it.  .  .  . 
As  the  commerce  act  does  not  author- 
ize this  agreement,  argument  against 
a  repeal  by  implication  of  the  pro- 
^•isions  of  the  act  which,  it  is  alleged, 
grant  such  authority  becomes  inef- 
fective. There  is  no  repeal  in  the 
case  and  both  statutes  may  stand,  as 
neither  is  inconsistent  with  the 
other." 

2  A  pooling  contract  between  car- 
riers by  water  operating  between 
points  in  different  States  is  in  viola- 
tion of  the  federal  anti-trust  statute 
and  it  is  immaterial  that  it  ixiight  be 
valid  with  respect  to  traffic  between 
points  in  one  of  the  States. 

White  Star  Line  v.  Star  Line,  141 
Mich.  G04  (ino.^),  (105  N.  W.  Rep. 
1.3.5,  113  Am.  St.  Rep.  551). 

737 


398 


INTERCORPORATE    RELATIONS 


[part  V 


within  the  provision  of  the  statute;  *  nor  is  this  result  altered 
by  the  fact  that  special  facilities,  in  the  way  of  advancement 
of  freight  charges,  may  be  granted.^  Upon  similar  principles, 
it  was  held  that  a  custom  or  usage  existing  among  several 
express  companies  for  mutual  advantage,  for  a  receiving  com- 
pany to  pay  accrued  charges  on  goods,  or  transport  them  to 
their  destination  without  prepayment  of  charges,  was  not  pro- 
hibited by  the  statute.^ 

In  determining  whether  a  particular  combination  of  car- 
riers comes  within  the  provisions  of  the  statute,  the  intent  of 
the  parties  and  the  degree  of  the  restraint  are  unimportant.* 
The  essential  question  is  whether  the  contract  or  combination  in 
design  or  effect  restrains  trade  and  commerce  in  any  way  and 
to  any  extent.^ 


'  Prescott,  etc.  R.  Co.  v.  Atchison, 
etc.  R.  Co.,  73  Fed.  438  (1896).  The 
conclusion  of  the  Court  in  this  case, 
that  the  agreement  in  question  did 
not  contravene  the  provisions  of  the 
federal  anti-trust  act,  is  probably 
well  founded,  but  the  reasons  stated 
for  so  holding,  that  that  act  "is 
directed  solely  against  contracts 
which  would  have  been  unlawful 
before  the  passage  of  the  act,"  is 
directly  opposed  to  the  ruling  of  the 
Supreme  Court  in  the  Trans-Missouri 
case  {ante,  §  387),  which  was  an- 
nounced after  the  decision  in  this 
case.  The  true  reason  for  holding 
the  agreement  not  in  contravention 
of  the  statute  would  seem  to  be  that 
it  was  not  in  restraint  of  trade  or  com- 
merce. 

^  Gulf,  etc.  R.  Co.  r.  Miami  Steam- 
ship Co.,  86  Fed.  407  (1898). 

A  contract  between  a  railroad  com- 
pany and  an  indi\ddual  for  the  pur- 
pose of  developing  the  business  of 
transporting  milk  upon  the  former's 
road  whereby  the  latter  was  granted 
full  charge  of  such  business  and  the 
exclusive  pri%-ilege  of  transporting 
milk  so  far  as  permitted  by  law, 
upon  a  commission  basis,  pro\'ided 
that  he  should  not  charge  rates  above 

738 


those  charged  by  competitive  roads, 
was  held  not  to  \'iolate  the  federal 
anti-trust  statute. 

Delaware,  etc.  R.  Co.  v.  Kutter, 
147  Fed.  51  (1906). 

^  Southern  Indiana  Exp.  Co.  v. 
United  States  Exp.  Co.,  88  Fed.  659 
(1898),  affirmed  92  Fed.  1022  (1899). 

*  United  States  v.  Trans-Missouri 
Freight  Ass'n,  166  U.  S.  341  (1897), 
(17  Sup.  Ct.  Rep.  540). 

*  Desirability  of  exempting  railroad 
traffic  contracts  from  operation  of 
federal  anti-trust  statute. 

Whatever  may  be  said  regarding 
the  desirabiUty  of  an  amendment  to 
the  federal  statute  making  it  appli- 
cable only  to  contracts  and  combina- 
tions in  unreasonable  restraint  of 
trade  (see  ante,  §  388)  the  propriety 
of  one  amendment  of  more  limited 
scope  seems  unquestionable. 

As  we  have  seen,  the  decisions  in 
the  Trans-Missouri  and  Joint  Traffic 
Association  cases,  although  necessarily 
following  from  the  broad  language 
of  the  statute,  confine  the  right  of 
railroad  companies  to  cooperate 
within  very  narrow  limits.  They 
have  no  right  to  enter  into  agree- 
ments in  any  form  to  maintain  rates. 
And  yet  some  measure  of  cooperation 


CHAP.    XXXIX]  CONSTRUCTION    AND    APPLICATION 


399 


The  federal  anti-trust  statute  applies  not  only  to  combina- 
tions of  railroad  companies  and  other  carrier  corporations 
engaged  in  interstate  commerce  but  to  the  agreements  and  com- 
binations of  the  employees  of  such  corporations  when  their 
object  or  effect  is  the  obstruction  of  such  commerce.' 

§  399.  Application  of  Statute  to  Combinations  under  Patents. 
—  The  object  of  patent  laws  being  monopoly,  conditions 
imposed  by  a  patentee  in  licenses  granted  under  his  patent, 
with  respect  to  the  use  of  the  patented  article  when  manu- 
factured, the  price  to  be  charged  therefor  and  any  other  con- 
ditions not  in  themselves  unlawful,  are  not  in  contravention 
of  the  federal  anti-trust  statute.  The  Ucense  may  run  exclu- 
sively to  the  licensee,  who  may  in  turn  stipulate  to  manufacture 
only  under  the  patent,  and  other  provisions  may  be  inserted  for 
the  express  purpose  of   keeping  up   the  monopoly.     Still  the 


with  respect  to  rates  is  necessary. 
If  each  railroad  company  should, 
make  its  own  classification  and  fix 
its  rates  without  regard  to  the 
charges  of  its  competitors,  rebates 
and  other  discriminations  would 
become  the  rule.  The  railroad  which 
happened  to  make  the  lowest  rate 
would  get  all  the  traffic.  Business 
could  hardly  be  carried  on  under  such 
conditions.  The  result  is  that  while 
formal  traffic  contracts  have  been 
eliminated  since  the.se  decisions, 
informal  understandings  —  "gentle- 
men's agreements" — have  taken 
their  place. 

But  this  is  not  a  proper  basis  for 
railroad  business  to  be  conducted 
upon.  Informal  understandings  are 
shifting  and  uncertain.  They  are 
lived  up  to  in  prosperous  times  when 
there  is  less  need  for  them.  But  in 
times  of  depression  when  they  are 
needed  and  when  there  is  not  enough 
business  to  go  around  they  can  be 
and  are  readily  evaded.  And,  more- 
over, railroad  companies  should  not 
be  driven  to  subterfuges. 

Whether,  tliorefore,  it  be  desirable 
to  legalize  pooling  (.sec  ante,  §  364a, 
Associations  of  Railroads —  (C)  Pools), 


it  is  believed  that  the  federal  anti- 
trust statute  should  be  modified  in 
its  effect  upon  railroad  agreenacnts. 
A  statute  pro\-iding  that  traffic 
agreements,  when  approved  b\'  the 
Interstate  Commerce  Commi.s.sion, 
should  be  lawful  and  enforceable, 
would  be  both  conservative  and 
effective. 

'  A  combination  of  railroad  em- 
ployees to  prevent  railroad  companies 
engaged  in  interstate  commerce  from 
operating  their  roads  until  certain 
demands  upon  them  are  complied 
with  is  a  conspiracy  in  restraint  of 
trade  and  commerce  in  \nolation  of 
the  federal  statute.  United  States  v. 
Elliott,  64  Fed.  27  (1894),  s.  c.  62 
Fed.  801  (1894).  See  also  Thomas 
r.  Cincinnati,  etc.  R.  Co.,  62  Fed.  803 
(1894).  Compare  United  States  v. 
Patterson,  55  Fed.  605  (1893).  And 
see  also  United  States  v.  Working- 
men's  Amalg.  Council,  54  Fed.  994 
(1893);  In  re  Debs,  64  Fed.  724 
(1894) ;  158  U.  S.  564  (1895),  (15  Sup. 
Ct.  Rep.  900). 

For  consideration  of  application 
of  statute  to  rules  of  an  association  of 
railroad  employees,  see  Waterhouse 
V.  Comer,  55  Fed.  150  (1893). 

739 


§   399  INTERCORPORATE    RELATIONS  [PART   V 

agreement  is  neither  unlawful  at  common  law  nor  under  the 
federal  act  because  the  monopoly  is  not  created  by  it  but  by  the 
grant  of  the  patent.^ 

In  Bement  v.  National  Harrow  Company  ^  the  Supreme 
Court  of  the  United  States  said  :  "  The  general  rule  is  absolute 
freedom  in  the  use  or  sale  of  rights  under  the  patent  laws  of 
the  United  States.  The  very  object  of  these  laws  is  monopoly, 
and  the  rule  is,  with  few  exceptions,  that  any  conditions  which 
are  not  in  their  very  nature  illegal  with  regard  to  this  kind  of 
property,  imposed  by  the  patentee  and  agreed  to  by  the  licensee 
for  the  right  to  manufacture  or  use  or  sell  the  article,  will  be 
upheld  by  the  courts.  The  fact  that  the  conditions  in  the 
contracts  keep  up  the  monopoly  or  fix  prices  does  not  render 
them  illegal.  ...  It  is  true  that  it  has  been  held  by  this 
court  that  the  [federal  anti-trust]  act  includes  any  restraint 
of  commerce,  whether  reasonable  or  unreasonable.  .  .  .  But 
that  statute  clearly  does  not  refer  to  that  kind  of  a  restraint 
of  interstate  commerce  which  may  arise  from  reasonable  and 
legal  conditions  imposed  upon  the  assignee  or  licensee  of  a 
patent  by  the  owner  thereof,  restricting  the  terms  upon  which 
the  article  may  be  used  and  the  price  to  be  demanded 
therefor." 

Upon  similar  principles  different  licensees  under  the  same 

•  Bement  v.  National  Harrow  Co.,  the  harrow  pre\nously  made  —  the 
186  U.  S.  70  (1902),  (22  Sup.  Ct.  Rep.  corporation  fixing  the  price.  This 
747) ;  Indiana  Mfg.  Co.  v.  J.  I.  Case  corporation  had  been  repeatedly  held 
Threshing  Mach.  Co.,  154  Fed.  365  to  be  an  unlawful  combination  before 
(1907) ;  Rubber  Tire  Wheel  Co.  v.  the  decision  by  the  Supreme  Court 
Milwaukee  Rubber  Works  Co.,  154  in  the  Bement  case,  supra.  See  Na- 
Fed.  358  (1907) ;  U.  S.  ConsoUdated  tional  Harrow  Co.  v.  Hench,  76  Fed. 
Seeded  Raisin  Co.  v.  Griffin,  126  Fed.  669  (1896),  affirmed  83  Fed.  36  (1897) ; 
364  (1903) ;  Victor  Talking  Mach.  National  Harrow  Co.  v.  Quick,  67 
Co.  V.  The  Fair,  123  Fed.  424  (1903).  Fed.    130  (1895).     And  see  Strait  v. 

*  Bement  v.  National  Harrow  Co.,  National  Harrow,  18  N.  Y.  Supp.  224 
196  U.  S.  91  (1902),  (22  Sup.  Ct.  Rep.  (1891).  Compare  Strait  v.  National 
747).  Harrow  Co.,  51  Fed.  819  (1892). 

The    National    Harrow    Company  It  must  be  observed  that  only  one 

was    a    corporation    to    which    about  phase  of  the  legal  questions  involved 

twenty  manufacturers  of  spring  tooth  in  determining  whether  the  National 

harrows  assigned  the  patents  owned  Harrow   Company   was   an    unlawful 

by  them  —  eighty-five  in  number  —  combination    was    presented    to    the 

recei\'ing  in  return  stock  in  the  cor-  Supreme  Court  in  the   Bement  case, 

poration  and  a  license  to  manufacture  viz.  :     that  of    the    license    contract. 

740 


CHAP.    XXXIX]  CONSTRUCTION   AND   APPLICATION  §   399 

patent  may  combine  for  the  regulation  of  prices  and  production.' 
Unless  such  a  combination  amounts  to  a  conspiracy  the  injury 
to  the  public  resulting  therefrom  arises  rather  from  the  exclu- 
sive nature  of  the  patent  than  from  the  combination  under  it. 
So,  undoubtedly,  where  a  corporation  or  individual  acquires 
in  a  single  ownership  different  patents  and  grants  licenses  for 
their  use  —  even  to  different  manufacturers  —  containing  con- 
ditions with  respect  to  the  manufacture  and  sale  of  the  article 
covered  by  them  the  result,  although  in  a  sense  a  combination, 
is  not  unlawful  if  confined  to  the  preservation  of  the  monopoly 
in  the  specific  patent  privileges.^  Indeed,  it  has  been  held  that 
such  license  contracts  would  not  confUct  with  the  federal 
statute  if  all  the  manufacturers  of  the  article  in  the  country 
obtained  them.^ 

And,  carrj'ing  the  doctrine  further  and  to  the  not  illogical 
extent  that  patented  articles  are  really  not  articles  of  commerce 
at  all  —  that  the  public  have  no  right  to  require  that  compe- 
tition in  them  should  be  kept  open  —  the  weight  of  authority 
supports  the  view  that  combinations  of  different  owners  of  dif- 
ferent patents  vnih  respect  to  the  production  and  prices  of  the 
article  covered  by  them  are  not  in  violation  of  the  federal 
statute.^     But  if  this  broad  view  be  correct  it  must  be  subject 

It  did  not  appear  that  other  manu-  ^  Indiana   Mfg.    Co.    v.    J.    I.    Case 

facturers    had    entered    into    similar  Threshing   Mach.    Co.,  154    Fed.    365 

contracts,    and    the    Supreme    Court  (1907). 

expressly    refrained    from    expressing  *  In    Rubber    Tire    Wheel    Co.    v. 

an    opinion    based    upon    the    theory  Milwaukee   Rubber  Work,   154    Fed. 

that  they  had  done  so.  358  (1907)  the  Circuit  Court  of  .\p- 

'  The  ca-ses  cited  in  the  first  note  peals    for    the    Seventh    Circuit    said 

to  this  section   necessarily  establish  (p.  362):    "Under  its  constitutional 

this  proposition.-  right  to  regulate  interstate  commerce 

2  Indiana   Mfg.   Co.    v.   J.    I.   Case  Congress  made  illegal 'every  contract. 

Threshing    Mach.    Co.,    148    Fed.   28  combination  in  the  form  of  trust  or 

(1906).     The   decision   in    this    case,  otherwise,  or  conspiracy  in  restraint  of 

although  reversed  upon  appeal   (154  trade  or  commerce  among  the  several 

Fed.   365   (1907)),   as  not    going    far  States,'    and    .subjected    to    Uability 

enough,  is  entitled  to  much  considera-  to  fine  or    imprisonment   'every  per- 

tion.     See  also  National  Harrow  Co.  son  who  shall  monopolize,  or  attempt 

XI.   Hench,   76    Fed.    667    (1896),   af-  to  monopolize,  or  combine,  or  consjiire 

firmed   83    Fed.    36    (1897);     Rubber  with    any    other    person    or    persons. 

Wheel     Co.     v.     Milwaukee     Rubber  to  monopolize  any  part  of  the  trade 

Works  Co.,    142   Fed.  531  (1906),  re-  or     commerce     among     the     several 

versed  154  Fed.  358  (1907).  states.'      Congress,     haWng     created 

741 


400 


INTERCORPORATE    RELATIONS 


[part  V 


to  the  limitation  that  the  right  to  combine  with  respect  to  the 
sale  of  an  article  covered  by  patents  can  never  be  extended  to 
justify  a  combination  to  control  the  sale  of  an  article  not  cov- 
ered by  such  patents. 

§  400.  Application  of  Statute  to  Combinations  under  Copy- 
rights. —  The  broad  principle  indicated  in  the  last  section  that 
agreements  for  the  purpose  of  keeping  up  a  lawful  monopoly 
are  not  within  the  federal  statute  is  as  applicable  to  contracts 
in  respect  of  copyrights  as  to  contracts  in  respect  of  patents. 
The  anti-trust  act  in  no  way  curtails  the  privileges  granted  by 
the  copyright  or  patent  laws. 

Agreements,  therefore,  between  a  publisher  owning  or  con- 
trolling copyrights  and  retailers,  with  respect  to  the  prices  at 
which  the  books  protected  by  such  copyrights  shall  be  sold, 
are  valid  and  enforceable.  But  in  the  absence  of  such  an  agree- 
ment, and  based  upon  the  copyright  statute  alone,  a  publisher 


the  patent  law,  had  the  right  to  repeal 
or  modify  it,  in  whole  or  in  part, 
directly  or  by  necessary  implication. 
The  Sherman  law  contains  no  ref- 
erence to  the  patent  law.  Each  was 
passed  under  a  separate  and  distinct 
constitutional  grant  of  power ;  each 
was  passed  professedly  to  advantage 
the  public ;  the  necessary  implica- 
tion is  not  that  one  iota  was  taken 
away  from  the  patent  law ;  the  neces- 
sary implication  is  that  patented 
articles,  unless  or  until  they  are  re- 
leased by  the  owner  of  the  patent 
from  the  dominion  of  his  monopoly, 
are  not  articles  of  trade  or  commerce 
among  the  several  States.  The  evils 
to  be  remedied  by  the  Sherman  law 
are  well  understood.  Articles  in 
which  the  people  are  entitled  to  free- 
dom of  trade  were  being  taken  as  the 
subjects  of  monopoly ;  instrumen- 
talities of  commerce  between  which 
the  people  are  entitled  to  free  com- 
petition were  being  combined.  The 
means  of  effecting  and  the  form  of  the 
combination  are  immaterial ;  the 
result  is  the  criterion.  The  true  test 
of  \nolation   of  the   Sherman   law  is 

742 


whether  the  people  are  injured, 
whether  they  are  deprived  of  some- 
thing to  which  they  have  a  right." 

And  in  Indiana  Mfg.  Co.  v.  J.  I. 
Case  Threshing  Mach.  Co.,  154  Fed. 
365,  371  (1907),  the  same  Court  said : 
"The  contracts  and  the  business  of 
the  licensees  are  separate.  But  if  as 
a  condition  to  enjojdng  the  inventions, 
the  appellant  had  required  the 
licensees  to  form  a  pool  or  combina- 
tion for  controlling  the  price  and  out- 
put of  the  patented  article,  the  public 
would  not  have  been  injured,  and 
consequently  the  Sherman  law  would 
not  have  been  violated." 

See  also  U.  S.  Consolidated  Seeded 
Raisin  Co.  v.  GrifRn,  126  Fed.  364 
(1903);  Central  Shade  Roller  Co.  v. 
Cushman,  143  Mass.  353  (1887), 
(9  N.  E.  Rep.  629).  Cojitra  Na- 
tional Harrow  Co.  v.  Hench,  76  Fed. 
667  (1896),  affirmed  83  Fed.  38  (1897) ; 
National  Harrow  Co.  v.  Quick,  67 
Fed.  130  (1895) ;  Vulcan  Powder  Co. 
V.  Hercules  Powder  Co.,  96  Cal.  510 
(1892),  (31  Pac.  Rep.  581,  31  Am. 
St.  Rep.  342). 


CHAP.    XXXIX]  CONSTRUCTION    AND    APPLICATION  §   401 

cannot  by  notice  in  a  copyrighted  book  attach  limitations  upon 
the  price  at  which  it  may  be  resold.^ 

Upon  the  theory  of  the  recent  cases  relating  to  combinations 
under  patents  that  the  anti-trust  statute  applies  only  to  con- 
tracts concerning  articles  in  which  the  public  are  entitled  to 
freedom  of  trade,  it  follows  that  agreements  between  different 
publishers  of  copyrighted  books  and  retailers,  with  respect 
to  the  prices  to  be  charged  for  such  books,  are  not  in  violation 
of  the  federal  statute.  But  it  has  been  held  that  an  agreement 
between  publishers  which  goes  further,  and  in  which  the  mem- 
bers agree  not  to  sell  to  dealers  who  cut  prices  in  copyrighted 
books,  and  to  keep  a  black-list  of  offending  dealers  who  are  not 
to  be  permitted  to  purchase  any  books  of  any  member,  is  a  com- 
bination in  restraint  of  trade  contrary  to  the  act.^  Certainly 
such  a  combination  would  be  unlawful  if  its  purpose  or  effect 
were  to  impose  any  restraints  upon  the  purchase  and  sale  of 
books  not  protected  by  copyright. 

§  401.  Application  of  Statute  to  Combinations  under  Secret 
Processes.  — The  right  of  property  in  a  trade  secret  is  a  mo- 
nopoly not  dissimilar  to  that  under  a  patent  or  copyright  and 
contracts  by  manufacturers  of  articles  made  under  secret 
processes  with  dealers  in  respect  of  the  conditions  of  resale  are, 
upon  the  principles  examined  in  the  last  two  sections,  valid 
and  outside  the  scope  of  the  federal  anti-trust  statute.^     It 

*  In  the  very  recent  case  of  Bobbs-  The  decision  in  this  case  was,  how- 
Merrill  Co.  V.  Straus,  decided  by  the  ever,  affirmed  by  the  Circuit  Court  of 
Supreme  Court,  June  1,  1908,  it  was  Appeals  (147  Fed.  15  (190G))  and  by 
held  that  a  notice  printed  in  a  copy-  the  Supreme  Court  (Jvme  1,  1908) 
righted  book  stating  the  retail  price  upon  the  grounds  stated  in  the  pre- 
at  which  it  must  be  sold  did  not  im-  ceding  note. 

pose  a  limitation   upon  the  price  at  See  also  Straus  v.  American  Pub- 

which    the    book    should    be    sold    at  lishers  Ass'n,   177  N.  Y.  473  (1904), 

retail     by     future     purchasers     with  (69  N.   E.   Rep.   1107,    101    Am.   St. 

whom  there  was  no  privity  of  con-  Rep.  819,  G4  L.  R.  .\.  701),  where  it 

tract.  was  held  that  the  association  in  ques- 

See    also    Scribner    v.    Straus,    de-  tion  in  all  these  ca.ses  had  the  effect 

cided  by  the  Supreme  Court  at  the  of    restricting    the    sale    of    uncopy- 

same  time.  righted  books  and  wa-s  illegal  vmder  the 

2  Mines  v.  Scribner,   147   Fed.  927  New  York  anti-trust  statute. 
(1906).  See  pout,  Ch.  XLII:  " Coustruclion 

In    Bobbs-Merrill    Co.    v.    Straus,  and    Application   of   Stale    Anti-trust 

139  Fed.  191  (190,'')),  a  similar  conclu-  Statutes." 
sion    was    reached    by    Judge    Ray.  '  In  Dr.  Miles  Medical  Co.  i'.  Jaynes 

743 


§401 


INTERCORPORATE    RELATIONS 


[part  V 


seems  also  to  follow  from  the  analogous  decisions  with  respect 
to  agreements  between  the  owners  of  different  patents  that 
contracts  between  the  proprietors  of  articles  made  under  dif- 
ferent secret  processes,  e.g.  proprietary  medicines,  with  respect 
to  prices  to  be  charged  therefor,  would  not  contravene  the 
federal  statute.  If  the  public  have  no  right  to  free  competition 
in  the  sale  of  such  articles  it  is  not  injured  by  the  elimination 
of  competition.  Thus  the  New  York  Court  of  Appeals  has  held 
that  an  agreement  between  the  manufacturers  of  proprietary 
medicines  and  an  association  of  wholesale  dealers  in  such  articles 
to  sell  their  goods  at  a  uniform  jobbing  price  for  fixed  quantities 
only  to  such  dealers  as  should  conform  to  the  manufacturers' 
prices  did  not  establish  a  monopoly  at  common  law  —  all  whole- 
sale dealers  having  the  right  to  purchase  from  the  manufacturers 
on  the  same  terms  as  members  upon  agreeing  to  maintain 
prices.^  But  a  different  conclusion  with  respect  to  such  an 
agreement  was  reached  by  the  Circuit  Court  of  Appeals  for  the 
Third  Circuit  and  it  was  held  to  violate  the  federal  statute.^ 


Drug  Co.,  149  Fed.  841  (1906),  Judge 
Colt  said  :  "The  bill  alleges  that  the 
complainant  is  the  exclusive  owner 
of  these  secret  formulas,  and  the 
exclusive  manufacturer  of  these  reme- 
dies. It  follows  that,  until  voluntary- 
disclosure  or  lawful  discovery,  the 
complainant  has  an  exclusive  property 
in  these  trade  secrets,  and  has  the 
exclusive  right  to  make,  use,  and 
vend  the  article  made  thereunder. 
The  exclusive  right  of  property  in  a 
trade  secret  is,  of  necessity,  a  monop- 
oly, the  same  as  a  patent  or  a  copy- 
right. The  complainant  may  make 
these  articles,  or  refrain  from  making 
them.  It  may  sell  them,  or  refrain 
from  selling  them.  It  may  sell  them 
to  one  person,  and  not  to  another, 
and  at  such  prices  and  upon  such  con- 
ditions as  it  may  deem  most  advan- 
tageous. Contracts  like  those  set 
out  in  the  bill  concerning  articles 
made  under  trade  secrets,  the  same 
as  similar  contracts  concerning  articles 
made  under  a  patent  or  a  copyright, 
are   outside   the   rule   of  restraint   of 

744 


trade,  whether  at  common  law  or 
under  the  federal  statute." 

See  also  Fowle  v.  Park,  131  U.  S. 
88  (1889);  Dr.  Miles  Medical  Co.  v. 
Piatt,  142  Fed.  606  (1906);  Wells 
and  Richardson  Co.  v.  Abraham,  146 
Fed.  190  (1906) ;  Dr.  Miles  Medical 
Co.  V.  Goldthwaite,  133  Fed.  794 
(1904). 

In  Garst  v.  Harris,  177  Mass.  74 
(1900),  (58  N.  E.  Rep.  174),  the  Su- 
preme Judicial  Court  of  Massachu- 
setts clearly  states  the  reason  for  the 
rule  :  "A\Ttien,  as  here,  there  is  a  secret 
composition,  which  the  defendant 
presumably  would  have  no  chance 
to  sell  at  a  profit  at  all  but  for  the 
plaintiff's  permission,  a  limit  to  the 
license,  in  the  form  of  a  restriction 
of  the  price  at  which  he  may  sell,  is 
proper  enough." 

1  John  D.  Park  &  Sons  Co.  v.  Na- 
tional Wholesale  Druggists  Ass'n, 
175  N.  Y.  1  (1903),  (67  N.  E.  Rep. 
136).  See  also  Hartmann  v.  John  D. 
Park  &  Sons  Co.,  145  Fed.  358  (1906). 

2  JajTie     V.    Loder,    149    Fed.    21 


CHAP.    XXXIX]  CONSTRUCTION   AND    APPLICATION  §   403 

In  view  of  the  conflicting  decisions  —  especially  in  view  of 
the  differing  decisions  upon  the  analogous  subject  of  combina- 
tions under  patents  —  the  right  of  the  owners  of  different 
patents,  copyrights,  and  secret  processes  to  combine  cannot 
be  considered  as  settled  in  advance  of  a  decision  of  the  Supreme 
Court  of  the  United  States. 

§  402.  Application  of  Statute  to  Contracts  concerning  Market 
Quotations.  — A  collection  of  market  quotations  stands  like 
a  trade  secret.  Consequently,  upon  the  principles  stated  in 
the  last  three  sections,  it  follows  that  contracts  under  which 
an  exchange  confidentially  furnishes  its  quotations  to  telegraph 
companies  upon  condition  that  they  shall  be  distril^uted  only 
to  persons  approved  by  it  are  not  contrary  to  the  federal  statute. 
As  said  by  Mr.  Justice  Holmes  in  Board  of  Trade  v.  Christie 
Grain,  etc.  Co. ;  *  "So  far  as  these  contracts  limit  the  communi- 
cation of  what  the  plaintiff  might  have  refrained  from  com- 
municating to  any  one,  there  is  no  monopoly  or  attempt  at 
monopoly,  and  no  contract  in  restraint  of  trade,  either  under 
the  statute  or  at  common  law." 

§  403.  Application  of  Statute  to  State's  Monopoly  and  State 
Regulations. —  The  statute  declares  that  every  person  monop- 
olizing interstate  trade  or  commerce  shall  be  deemed  guilty 
of  a  misdemeanor,  and  that  the  word  "  person  "  shall  include 
"  corporation  "  and  "  association."  A  State,  however,  is 
neither  a  person,  corporation  or  association,  and  the  federal 
statute  is  inai)plicable  to  a  monopoly  maintained  by  a  State. - 

State  pilotage  regulations  are  not  in  contravention  of  the 
statute  because  they  create  a  monopoly  in  favor  of  the  pilots 
licensed  under  them.  "  No  monopoly  or  combination  in  a  legal 
sense  can  arise  from  the  fact  that  the  duly  authorized  agents 

(1906).  The  Court  held  in  tliis  case  '  Board  of  Trade  v.  Christie  Grain, 
that  a  manufacturer  of  proprietary  etc.  Co.,  198  U.  S.  23G,  252  (1905), 
medicines  may  .sell  or  withhold  from  (25  Sup.  Ct.  Rep.  637). 
selling  as  he  pleases,  and  may  attach  ^  Lowcnstein  v.  Evans,  69  Fed. 
such  conditions  to  the  sale  of  his  908  (1895),  holtling  that  the  federal 
goods  as  he  deems  proper,  but  that  anti-trust  act  was  inai>plicable  to 
where  two  or  more  combine  and  the  State  of  South  Carolina,  which, 
agree  that  they  will  not  sell  to  any  by  its  laws,  assumed  a  complete  mo- 
one  who  cuts  the  prices  of  the  others  nopoly  of  the  traffic  in  intoxicating 
a  combination  in  violation  of  the  liquors, 
federal    statute    is  created. 

745 


§   405  INTERCORPORATE    RELATIONS  [PART    V 

of  the  State  are  alone  allowed  to  perform  the  duties  devolving 
upon  them  by  law."  ^ 

§  404.  Statute  not  Retroactive  but  applies  to  Continuing 
Combinations.  —  While  the  federal  statute  is  not  retroactive,^ 
it  applies  to  combinations  continued  in  force  after  its  enact- 
ment.^ Although  a  combination  may  have  been  lawful  when 
formed,  its  continuation  after  it  has  been  declared  illegal 
becomes  a  violation  of  the  act.  The  statute  is  not  of  an 
ex  post  facto  nature,  but  the  legal  effect  of  its  enactment 
was  to  prohibit  the  continuance  of  existing  combinations 
in  contravention  of  its  provisions,  and  the  formation  of 
such  combinations  in  the  future. 


CHAPTER    XL 


BIGHTS,    EEMEDIES    AND    PROCEDURE    UNDER    FEDERAL   STATUTE 

§  405.  Invalidity  under  Federal  Statute  as  a  Ground  of  Collateral  Attack. 

§  406.  Proceedings  in  Equity  by  Government.      Injunctive  Relief.      Parties. 

§  407.  Criminal  Proceedings.      Indictments.      Parties. 

§  408.  Actions  by  Government  to  enforce  Forfeiture. 

§  409.  Actions  for  Treble  Damages.      Pleadings. 

§  410.  Limitations  of  Actions. 

§  411.  Effect  of  Voluntary  Dissolution  of  Combination  pending  Proceedings. 

§  412.  Proof  of  Violation  of  Statute.      Evidence. 

§  413.  Interpretation  of  Immunity  Proviso. 

§  405.  Invalidity  under  Federal  Statute  as  a  Ground  of  Col- 
lateral Attack.  —  Upon  principles  elsewhere  stated  in  refer- 
ence to  illegal  combinations  in  general,*  the  fact  that  one 
of  the  parties  to  an  agreement  may  be  a  combination  in  vio- 
lation of  the  federal  statute  cannot  be  invoked  collaterally 

*  Olsen  V.  Smith,  195  U.  S.  332,  345  ^ipon  Independent  Contracts."  Ref- 
(1904),  (25  Sup.  Ct.  Rep.  52).  erence  should  be  had  to  this  section 

^  In  re  Greene,  52  Fed.  112  (1892).  for  consideration  of  the  general  prin- 

^  L^nited   States   v.   Trans-Missouri  ciples  applicable  as  well  to  combina- 

Freight  Ass'n,   166  U.  S.  342  (1897),  tions  in  \'iolation   of  the  federal  stat- 

(17  Sup.  Ct.  Rep.  540).  ute    as    to  those  inimical   to    public 

*  See  ante,   §  369:    "Collateral  At-  policy. 
tack     upon     Combination.     Remedies 

746 


CHAP.    XL] 


RIGHTS,    REMEDIES   AND    PROCEDURE 


§405 


to  affect,  in  any  manner,  its  independent  contractual  obliga- 
tions or  rights.'  Parties  dealing  with  the  combination  cannot 
set  up  its  illegality  as  a  defence  to  demands  not  connected 
with  the  illegal  transaction  and  not  dependent  upon  it  for 
enforcement. 

Conversely,  when  the  combination  must  estabhsh  its  claim 
through  the  illegal  transaction,  it  will  fail.  Clean  hands 
are  essential  in  a  court  of  equity,  and  a  combination  in  violation 
of  the  anti-trust  law  cannot  invoke  the  aid  of  a  court  of  equity 


'  In  Connolly  v.  Union  Sewer  Pipe 
Co.,  184  U.  S.  550  (1902),  (22  Sup.  Ct. 
Rep.  431),  the  Supreme  Court  of  the 
United  States  said  :  "  If  the  contract 
between  plaintiff  corporation  and  the 
other  named  corporations,  persons 
and  companies,  or  the  combination 
thereby  formed,  was  illegal  under  the 
act  of  Congress,  then  all  those,  whether 
persons,  corporations  or  associations, 
directly  connected  thcrewitli,  became 
subject  to  the  penalties  prescribed  by 
Congress.  But  the  act  does  not 
declare  illegal  or  void  any  sale  made 
by  such  combination,  or  bj'  its  agents, 
of  property  it  acquired  or  which 
came  into  its  possession  for  the  pur- 
pose of  being  .sold,  such  property  not 
being,  at  the  time,  in  the  course  of 
transportation  from  one  State  to 
another  or  to  a  foreign  country.  The 
buyer  could  not  refuse  to  comply 
with  his  contract  of  purchase  upon  the 
ground  that  the  seller  was  an  illegal 
combination  which  might  be  re- 
strained or  suppressed  in  the  mode 
prescribed  by  the  r.ct  of  Congress ; 
for  Congress  did  not  declare  that  a 
combination  illegally  formed  under 
the  act  of  1890  sliould  not,  in  the 
conduct  of  its  business,  become  the 
owner  of  property  which  it  miglit  sell 
to  who  soeve  ■  wished  to  buy  it.  So 
that  there  is  no  necessary  legal  con- 
nection here  between  the  sale  of  pipe 
to  the  defendants  by  the  plaintiff 
corporation  and  the  alleged  arrange- 
ment made  by  it  with  other  corpora- 
tions,  companies     and     firms.      The 


contracts  under  which  the  pipe  in 
question  was  sold  were,  as  already 
said,  collateral  to  the  arrangement 
for  the  combination  referred  to,  and 
this  is  not  an  action  to  enforce  the 
terms  of  such  arrangement.  That 
combination  may  have  been  illegal, 
and  yet  the  sale  to  the  defendants 
was  valid." 

The  federal  anti-trust  statute  does 
not  prevent  a  recovery  for  the  breach 
of  a  collateral  contract  for  the  .sale 
of  goods  although  entered  into  by  a 
member  of  a  combination  formed  in 
violation  of  its  provisions. 

Hadley  Dean  Plate  Glass  Co.  r. 
Highland  Glass  Co.,  143  Fed.  242 
(1906)  ;  see  also  Harrison  v.  Glucose 
Sugar  Ref.  Co.,  116  Fed.  304  (1902), 
(58  L.  R.  A.  915). 

That  a  complainant  is  a  member 
of  a  combination  in  violation  of  the 
federal  anti-tru.st  act  is  no  defence  to 
suit  for  the  infringement  of  a  pat- 
ent (General  Electric  Co.  v.  Wise, 
119  Fed.  922  (1903))  or  copyright 
(Scribner  v.  Straus,  130  Fed.  389 
(1904). 

One  who  requests  anil  accepts  the 
services  of  a  tug  for  towage  purpo.ses 
cannot  escape  paying  the  rea-sonable 
value  of  the  ser\-ices  rendered  by 
S'tting  up  that  the  owners  of  the  tug 
were  members  of  a  combination  in 
violation  of  the  anti-trust  statute. 

The  Charles  E.  Wiswall,  86  Fed. 
671  (1898),  affirming  74  Fed.  802 
(1896). 

747 


§405 


INTERCORPORATE    UELATIONS 


[part  V 


for  the  protection  of  its  rights  under  contracts  entered  into  as 
the  direct  result  of  the  unlawful  combination.* 


1  In  Bement  v.  National  Harrow 
Co.,  186  U.  S.  70  (1902),  (22  Sup.  Ct. 
Rep.  754),  the  Supreme  Court  said: 
"The  plaintiff  contends  in  the  first 
place  that  only  the  Attorney-General 
of  the  United  States  can  bring  an 
action  under  the  statute,  excepting 
that  by  section  7  of  the  act  any  per- 
son injured  in  his  business  or  propert}% 
as  provided  for  therein,  may  himself 
sue  in  any  circuit  court  of  the  United 
States  in  the  district  in  which  the 
defendant  resides  or  is  found.  As- 
suming that  the  plaintiff  is  right  so 
far  as  regards  any  suit  brought  under 
that  act,  we  are  nevertheless  of  opinion 
that  any  one  sued  upon  a  contract 
may  set  up  as  a  defence  that  it  is  a 
violation  of  the  act  of  Congress,  and, 
if  found  to  be  so,  that  fact  wiU  con- 
stitute a  good  defence  to  the  action." 

In  Delaware,  etc.  R.  Co.  v.  Frank, 
110  Fed.  689  (1901),  a  suit  by  a  rail- 
road company  to  enjoin  the  defend- 
ants, who  were  ticket  brokers,  from 
deaUng  in  special  non-transferable 
limited  railroad  tickets,  it  appeared 
upon  a  preliminary  hearing  that  the 
complainant  was  a  member  of  a  com- 
bination known  as  the  "Trunk  Line 
Association,"  formed  by  a  number  of 
railroads  operating  in  different  States 
for  the  purpose  of  preventing  com- 
petition and  that  the  special  rates 
upon  such  tickets  and  their  terms 
were  prescribed  by  such  association. 
Judge  Hazel  held  that  the  association 
was  in  violation  of  the  federal  anti- 
trust law  and  said  :  "  The  defendants 
do  not  deny  the  charges  of  wrong- 
doing. .  .  .  But  can  the  aid  of  a  fed- 
eral tribunal  be  invoked  to  protect 
the  complainant  in  the  issuance  of  a 
ticket  over  its  railroad,  which,  as 
far  as  it  appears  to  the  court,  is  the 
culmination  as  well  as  the  evidence  of 
an  agreement  between  railroad  cor- 
porations specifically  forbidden  by  an 

748 


act  of  Congress  which  has  been  su.s- 
tained  by  the  Supreme  Court  of  the 
United  States?  .  .  .  The  complain- 
ant contends  that  this  charge  made 
by  the  defendant  does  not  avail,  as 
the  wrong-doing,  if  any  exists,  doe.g 
not  relate  to  the  subject-matter.  I 
am  not  convinced  as  to  the  soundness 
of  this  contention.  Can  the  railroad 
complainant  conspire  unlawfully  to 
fix  rates,  and  then  come  into  a  court 
of  equity  and  invoke  its  aid  to  pro- 
tect those  rates  which  are  represented 
by  the  ticket  presented  to  the  court, 
and  which  is  wrongfully  used  by  the 
defendants?  The  evil  practice  which 
stands  admitted  by  the  papers  is  the 
very  practice  for  which  the  court's 
protection  is  invoked." 

Compare,  however,  Pennsylvania 
Co.  V.  Bay,  138  Fed.  204  (1905),  where 
a  different  conclusion  was  reached  in 
a  similar  case. 

Where  an  ancillary  contract  of  the 
vendor  of  a  business  not  to  engage  in 
a  competing  business  for  a  specified 
period  is  entered  into  as  a  part  of  a 
plan  for  the  formation  of  an  unlawful 
combination  it  is  held  that  it  is  itself 
in  conflict  with  the  statute  and  unen- 
forceable. 

McConnell  v.  Camors-McConnell 
Co.,  152  Fed.  321  (1907). 

A  combination  of  manufacturers 
and  dealers  in  wall  paper  in  \dolation 
of  the  federal  statute  was  formed 
through  the  agency  of  a  corporation 
which  became  the  nominal  seller  of 
all  the  products  of  the  combination 
although  they  were  in  fact  sold  by  the 
different  members.  Certain  dealers 
ha\'ing  been  compelled  to  enter  the 
combination  purchased  , paper  from 
various  members  of  the  combination 
for  which  the  corporation  —  the  nom- 
inal seller  —  brought  suit.  It  was 
held  that  as  the  corporation  was 
obliged  to  rely  upon  the  agreement 


CHAP.    XL] 


RIGHTS,    REMEDIES   AND    PROCEDURE 


§    406 


§  406.  Proceedings  in  Equity  by  Government.  Injunctive 
Relief.  Parties.  —  The  first  three  section.s  of  the  statute  make 
certain  acts  and  agreements  criminal  offences  against  the  United 
States.  The  fourth  section  confers  jurisdiction  upon  the  circuit 
courts  of  the  United  States  to  restrain  viohitions  of  the  act,  and 
declares  it  to  be  the  duty  of  the  several  district  attorneys  "  under 
the  direction  of  the  Attorney-General,  to  institute  proceedings 
in  equity  to  prevent  and  restrain  such  violations."  The  fifth 
section  provides  for  the  citing  in  of  additional  parties;  the  sixth, 
for  the  forfeiture  to  the  United  States  of  certain  property-  in 
cour.se  of  transportation,  and  the  eighth  states  a  rule  of  construc- 
tion. The  only  remedy  afforded  a  private  person  is  provided  in 
the  seventh  section,  which  gives  a  party  injured  the  right  to 
recover  threefold  damages,  costs  and  attorneys'   fees.'      The 


of  combination  to  show  its  right  to 
sue,  the  invalidity  of  such  agreement 
was  a  defence  to  the  suit. 

Continental  Wall  Paper  Co.  v. 
Voight,  148  Fed.  939  (1906). 

Where  a  part  of  a  contract  sued 
upon  is  not  severable  from  otlier  parts 
which  are  in  \'iolation  of  the  federal 
statute  no  recovery  can  be  had  upon 
it. 

Getz  Bros.  &  Co.  v.  Federal  Salt 
Co.,  147  Cal.  11.5  (1905),  (81  Pac.  Rep. 
416,  109  Am.  St.  Hep.  114). 

'  Grccr  v.  StoUer,  77  Fed.  2  (1896), 
{per  Phillips,  J.):  "  Can  a  private  citi- 
zen for  a  redress  of  a  private  grievance, 
maintain  a  bill  in  etjuity  for  an  injunc- 
tion under  tliis  act?  The  things  for- 
bidden bj'  the  act  are  declared  to  be 
criminal  offences  against  the  govern- 
ment of  the  United  States.  By  the 
fourth  section,  the  jurisdiction  is  con- 
ferred upon  the  circuit  courts  of  the 
United  States  to  prevent  and  restrain 
the  violations  of  this  act,  'and  it  shall 
be  the  duty  of  the  several  district  attor- 
neys of  the  United  States  in  their  re- 
spective districts,  under  the  direction 
of  the  Attorney-General,  to  institute 
proceedings  in  equity  to  prevent  and 
restrain  such  vnolations ;  .such  pro- 
ceedings may  be  by  way  of  petition 


setting  forth  che  case  and  prajnng 
that  such  violations  shall  be  enjoined 
or  otherwise  prohibited.'  Section  7 
gives  to  the  private  person  'injured  in 
his  business  or  property  by  any  other 
person  or  corporation  by  reason  of 
anything  forbidden,  or  declared  to  be 
unlawful  by  this  act, 'a  right  to  sue  in 
a  circuit  court  of  the  United  States  in 
the  district  in  which  the  defendant 
resides  or  is  fountl  for  threefold  dam- 
ages by  him  sustained.  The  statute, 
being  liighly  penal  in  its  character, 
must  be  strictly  construed ;  and, 
having  created  a  new  offence,  and  im- 
posed new  liabilities,  and  having  pro- 
\'ided  the  modes  of  redress  to  the 
public  and  the  private  citizen,  by  es- 
tablished rules  of  construction,  these 
remedies  are  inclusive  of  all  others. 
.  .  .  My  conclusion  is  that  the  right 
is  limited  by  the  fourth  .section  to  in- 
junction at  the  relation  of  the  district 
attorney,  and  that  the  seventh  section 
gives  to  the  private  citizen  his  only 
remedy." 

Southern  Indiana  Exp.  Co.  i-. 
United  States  Exp.  Co.,  88  Fed.  663 
(1898),  {affirmed  .92  Fed.  1022'), 
(1899)  :  "Tlie  anti-trust  law  of  .luly  2. 
1890,  has  wrought  no  such  change  in 
the  law  as  will    enable  the    court    to 

749 


406 


INTKRCORPORATE   RELATIONS 


[part  V 


statute,  being  penal  in  its  nature,  must  be  strictly  construed. 
It  imposes  new  liabilities  and  provides  particular  modes  of 
redress,  both  for  the  public  and  the  individual,  and  the  methods 
so  prescribed  are  exclusive.  The  United  States,  through  its  dis- 
trict attorneys,  has  the  sole  power  to  maintain  a  bill  for  an  in- 
junction to  prevent  a  violation  of  the  statute,  and  the  only 
remedy  of  the  individual  is  that  provided  by  the  statute.' 

In  proceedings  for  injunctive  relief  it  is  provided  that  a 
petition  shall  be  filed  setting  forth  the  case,  and  praying  that 
the  alleged  violation  of  the  law  may  be  enjoined  or  otherwise 
prohibited;  that,  after  notice  to  the  parties  complained  of,  the 
court  shall  proceed  as  soon  as  may  be  to  hear  and  determine  the 
case,  and  that,  pending  petition  and  before  final  decree,  it  may 
make  such  temporary  restraining  order  as  may  be  just.  In 
construing  these  provisions,  it  has  been  held  that  a  restraining 
order  may  be  issued  without  notice  where,  on  account  of  the 


enforce  its  provisions  in  favor  of  a  pri- 
vate party  by  a  bill  in  equity.  Under 
this  act,  the  only  remedy  given  to 
any  other  party  than  the  government 
of  the  United  States  is  an  action  at 
law  for  threefold  damages,  with  costs 
and  attorney's  fees,  and  the  only  party 
entitled  to  maintain  a  bill  in  equity 
for  injunctive  relief  for  an  alleged  vio- 
lation of  its  provisions  is  the  United 
States  by  its  district  attorney,  on  the 
authorization  of  its  attorney-gen- 
eral." 

See  also  Bement  v.  National 
Harrow  Co.,  186  U.  S.  87  (1902),  (22 
Sup.  Ct.  Rep.  747) ;  Post  v.  Southern 
R.  Co.,  103  Tenn.  184  (1899),  (52  S. 
W.  Rep.  301) ;  Metcalf  v.  American 
School-Furniture  Co.,  108  Fed.  909 
(1901) ;  Block  v.  Standard  Distilling, 
etc.  Co.,  95  Fed.  978  (1899) ;  Gulf,  etc. 
R.  Co.  V.  Miami  Steamship  Co.,  86  Fed. 
407  (1898) ;  Pidcock  v.  Harrington, 
64  Fed.  821  (1894)  ;  Hagan  v.  Bhndell, 
56  Fed.  696  (1893) ;  affirming  Bhndell 
V.  Hagan,  54  Fed.  40  (1893).  Com- 
pare, however,  Bigelow  v.  Calumet, 
etc.  Mining  Co.,  155  Fed.  869 
(1907). 

'  United    States  v.   Tra,ns-Missouri 

750 


Freight  Ass'n,  166  U.  S.  342  (1897), 
(17  Sup.  Ct.  Rep.  540)  :  "It  is  urged 
that  the  United  States  have  no  stand- 
ing in  court  to  maintain  this  bill ;  that 
they  have  no  pecuniary  interest  in  the 
result  of  the  litigation  or  in  the  ques- 
tion to  be  decided  by  the  court.  We 
think  that  the  fourth  section  of  the  act 
invests  the  government  with  full  power 
and  authority  to  bring  such  an  action 
as  tliis,  and,  if  the  facts  are  proved,  an 
injunction  should  issue.  Congress, 
having  the  control  of  interstate  com- 
merce, has  also  the  duty  of  protecting 
it,  and  it  is  entirely  competent  for  tliat 
body  to  give  the  remedy  by  injunction 
as  more  efficient  than  any  other  ci\'il 
remedy."  See  also  In  re  Debs,  158 
U.  S.  564  (1895),  (15  Sup.  Ct.  Rep. 
900). 

It  has  been  held  that  an  injunction 
order  under  the  statute  directed 
against  a  combination  of  railroad  em- 
ployees, is  not  rendered  invahd  by 
providing  that  it  shall  operate  against 
persons  not  named  in  the  bill  but  within 
the  terms  of  the  order.  United  States 
V.  Elliott,  64  Fed.  27  (1894),  62  Fed. 
801  (1894). 


CHAP.    Xl]  rights,    remedies   AND    PROCEDURE  §   407 

exigencies  of  the  case,  notice  might  be  dispensed  with  according 
to  established  usages  of  equity  practice.* 

A  proceeding  in  equity  under  the  statute  is  a  case  arising 
under  the  Constitution  and  laws  of  the  United  States,  and  Con- 
gress may  confer  jurisdiction  upon  any  federal  court  to  hear  it, 
regardless  of  the  residence  of  the  parties  defendant.  Conse- 
quently, the  fifth  section  of  the  act,  providing  that  when,  in  any 
pending  proceeding,  the  interests  of  justice  require  it,  parties 
residing  outside  the  district  may  be  brought  in,  is  valid,  and  such 
parties  may  be  served  with  process  without  the  district.  The 
proper  practice  is  to  make  all  parties  —  resident  and  non- 
resident —  having  an  interest  in  the  controversy,  parties  de- 
fendant to  the  bill,  and,  immediately  upon  fihng  it,  to  apply  for 
an  order  of  service  upon  the  non-resident  defendants.  This 
order  may  be  entered  either  before  or  after  the  senice  of  process 
upon  the  resident  defendants.^ 

In  a  proceeding  by  the  government  to  restrain  an  alleged 
violation  of  the  statute  by  an  unincorporated  association, 
it  is  sufficient  that  the  association,  its  officers  and  a  num- 
ber of  its  members  be  made  parties  defendant.^  This  is 
in  accordance  with  the  rule  that  where  parties  are  numer- 
ous, some  of  them  may  be  cited  in  as  representing  the  whole 
number. 

§  407.  Criminal  Proceedings.  Indictments.  Parties.  — The 
first  and  third  sections  of  the  federal  anti-trust  statute  in  de- 
claring contracts  in  restraint  of  interstate  and  interterritorial 
trade  or  commerce  not  only  illegal,  but  criminal  offences  against 
the  United  States  punishable  by  fine  and  imprisonment,  go 
beyond  the  common  law.  Contracts  in  unreasonable  restraint 
of  trade,  while  invalid  at  common  law  as  being  contrary  to  public 
policy,  were  not  criminal.^  The  other  provisions  of  these  sec- 
tions, however,  directed  against  conspiracies  in  restraint  of  inter- 
state commerce,  and  the  second  section,  imposing  a  penalty  upon 
persons  conspiring  to  monopolize  such  commerce,  relate  to  a 
common  law  offence  and  extend  the  application  of  the  law  of 

'  United    States    v.    Coal    Dealers'  *  United    States    v.    Coal    Dealers' 

Ass'n,  85  Fed.  252  (1898).  A.ss'n,  85  Fed.  260  (1898). 

2  United    States    v.    Standard    Oil  ♦  In     re     Greene,      52      IVil.      KU 

Co.,  152  Fed.  290  (1907).  (1892). 

751 


§   407  INTERCORPORATE    RELATIONS  [PART   V 

criminal  conspiracies  to  combinations  in  restraint  of  interstate 
commerce. 

The  statute  does  not  define  what  constitutes  a  contract,  com- 
bination or  conspiracy  in  restraint  of  trade  or  commerce,  or 
what  the  term  "monopolize"  means,  and  recourse  must  be  had 
to  the  common  law  and  outside  sources  to  obtain  the  proper 
definitions  of  those  terms.  The  statute  fails,  moreover,  to  set 
forth  all  the  elements  necessary  to  constitute  the  several  offences, 
and  an  indictment  simply  following  the  language  of  the  statute, 
without  stating  the  particular  acts  of  the  accused,  would  be 
insufficient.^  An  indictment  must,  therefore,  be  tested  by  the 
specific  acts  alleged  to  have  been  done  or  committed;  and  it 
must  be  distinctly  averred  that,  by  means  of  such  acts,  the  desig- 
nated offence  against  the  freedom  of  interstate  commerce  was 
committed.^ 

An  indictment  for  conspiracy  should  "describe  something 
that  amounts  to  a  conspiracy  under  the  act  conformably  to  the 
rules  of  pleading  at  common  law,  as  perhaps  modified  by  general 
federal  statutes."^  The  gist  of  the  offence — the  combina- 
tion in  restraint  of  interstate  commerce  —  must  be  set  forth, 
although  the  overt  act  may  be  omitted.^ 

An  indictment  sufficiently  sets  forth  the  time  of  the  offence, 
which  alleges  when  the  several  acts  relied  upon  to  show  the  com- 
bination were  committed,  without  stating  precisely  when  the 
unlawful  purpose  was  formed.^ 

An  indictment  under  the  statute  containing  separate  counts, 
one  charging  a  combination  in  restraint  of  interstate  commerce 
and  the  other,  the  monopolizing  of  such  commerce,  states  dis- 
tinct offences.** 

1  In  re  Greene,  52  Fed.  104  (1892) ;  ^  United  States  v.  MacAndrews,  etc. 
United  States  v.  Nelson,  52  Fed.  646  Co.,  149  Fed.  823  (1906).  See  also 
(1892).  United    States  v.  Deba,  64  Fed.  747 

2  United    States    v.    Greenhut,    50  (1894). 

Fed.  469   (1892);    In  re  Corning,   51  *  See    ante,    §325:    "Criminal  and 

Fed.    205    (1892);     United    States    v.  Civil  Conspiracies  distinguished." 
Nelson,    52    Fed.   646    (1892);     In  re  ^  United  States  v.  MacAndrews,  etc. 

Greene,  52  Fed.   104  (1892);    United  Co.,   149  Fed.  823  (1906). 
Statesv.  Patterson,  55  Fed.  605  (1893).  »  United  States  v.  MacAndrews,  etc. 

See  also   In  re  Terrell,   51    Fed.   213  Co.,  149  Fed.  836  (1907). 
(1892).  Compare  United  States  v.  Mac- 
Andrews,  etc.  Co.,  149  Fed.  823  (1906). 

752 


CHAP.    XL]  rights,    remedies    AND    PROCEDURE  §   408 

In  an  indictment  all  the  persons  alleged  to  have  violated  the 
statute  may  be  charged  as  principals.  A  corporation  and  its 
officers  may  be  proceeded  against  jointl}-,  and  the  latter,  after 
having  made  the  arrangements  by  which  their  corporation  was 
to  violate  the  act,  cannot  escape  upon  the  claim  that  they  were 
not  personally  engaged  in  interstate  commerce.*  Corporations 
are,  however,  themselves  responsible  for  violations  of  the  statute, 
and  an  indictment  which  charges  a  mere  stockholder  with  the 
acts  of  his  corporation  is  fatally  defective.^ 

§  408.  Actions  by  Government  to  enforce  Forfeiture.  — The 
sixth  section  of  the  act  provides  for  the  forfeiture  to  the  United 
States  of  property  owned  by  an  unlawful  combination  while 
in  course  of  transportation  from  one  State  to  another.  The 
method  of  procedure  under  this  statute  follows  that  provided 
for  the  seizure,  condemnation  and  forfeiture,  of  property  un- 
lawfully imported  into  the  United  States,  and  involves  a  trial  by 
jury.  There  can  be  no  seizure  in  a  suit  in  equity  for  an  injunc- 
tion under  the  fourth  section  of  the  act.^ 

The  locomotives  and  cars  of  a  railroad  carrier  are  not  subject 
to  forfeiture  because  it  transports  property  shipped  in  violation 
of  the  statute.  Simple  transportation  is  not  a  contract,  com- 
bination or  conspiracy.* 


'  United  States  v.  Mac  Andrews,  etc.  seizure  and  condemnation  of  the  loco- 
Co.,  149  Fed.  823  (1906).  motives  and   cars  of  the  carrier  en- 

*  In  re  Greene,  52  Fed.  104  (1892).  gaged  in  the  transportation  between 

'  United  States  v.  Addyston  Pipe,  the   States  of  those  articles  of  coin- 

etc.  Co.,  85  Fed.  271  (1898).  merce  owned  as  stated  in  that  sixth 

■*  Unitetl  States  v.  Trans-Missouri  section.  There  is  some  justice  and 
Freight  Ass'n,  166  U.  S.  313  (1897),  propriety  in  forfeiting  those  articles, 
(17  Sup.  Ct.  Rep.  540) :  "  Nor  do  we  but  we  see  none  in  forfeiting  the  loco- 
think  that  because  the  sixth  section  motives  or  cars  of  the  carrier  simply 
does  not  forfeit  the  property  of  the  because  such  carrier  was  transporting 
railroad  company  when  merely  engaged  articles  as  described  from  one  State 
in  the  transportation  of  property  to  another,  even  though  the  carrier 
owned  under  and  which  was  the  sub-  knew  that  they  had  been  manufac- 
ject  of  a  contract  or  combination  men-  tured  or  sold  under  a  contract  or  com- 
tioned  in  the  first  section,  any  ground  bination  in  N-iolation  of  the  act.  In 
is  shown  for  holding  the  rest  of  the  the  case  of  simple  transportation  of 
act  inapplicable  to  carriers  by  railroad.  such  articles  the  carrier  would  be 
It  is  not  perceived  why,  if  the  rest  of  guilty  of  no  ^^olation  of  any  of  the 
the  act  were  intended  to  apply  to  such  pr()\-isions  of  the  act.  Why,  there- 
a  carrier,  the  sixth  section  ought  fore,  would  it  follow  that  the  sixth 
necessarily  to  have  provided  for  the  section    should    pro%-ide    for    the    for- 

753 


409 


INTERCORPORATE    RELATIONS 


[part  V 


§  409.  Actions  for  Treble  Damages.  Pleadings.  —  At  com- 
mon law  contracts  and  combinations  in  unreasonable  restraint 
of  trade  —  giving  the  phrase  its  modern  meaning  —  were  illegal 
in  the  sense,  but  only  in  the  sense,  of  being  unenforceable. 
Their  invalidity  prevented  any  action  based  upon  them,  but 
afforded  no  affirmative  cause  of  action.  The  federal  statute 
goes  much  further  than  the  common  law.  It  not  only  makes 
contracts  and  combinations  in  violation  of  its  provisions  per  se 
unlawful,  but  gives  a  person  injured  thereby  a  private  right  of 
action  for  punitive  damages.^  The  seventh  section  provides 
that  any  person  injured  in  his  business  or  property  by  anything 
forbidden  or  declared  to  be  unlawful  by  the  act  may  recover 
threefold  his  damages,  costs  and  attorneys'  fees.^  An  action 
upon  the  statute  may  be  brought  in  any  circuit  court  of  the 
United  States  where  the  defendant  resides  or  is  found,  without 
regard  to  the  amount  in  controversy.  As  already  shown,  how- 
ever, this  action  at  law  is  the  only  remedy  afforded  a  private 
person  by  the  statute.  The  right  to  proceed  in  equity  is  granted 
only  to  the  government.^ 


feiture  of  the  property  of  the  carrier 
if  the  rest  of  the  act  were  intended  to 
apply  to  it?  To  subject  the  locomo- 
tives and  cars  to  forfeiture  under  such 
circumstances  might  also  cause  great 
confusion  to  the  general  business  of 
the  carrier,  and,  in  that  waj%  inflict 
unmerited  punishment  upon  the  inno- 
cent owners  of  other  property  in  the 
course  of  transportation  in  the  same 
cars  and  drawn  by  the  same  locomo- 
tives. If  the  company  itself  violates 
the  act,  the  penalties  are  sufficient  as 
pro%dded   for  therein." 

1  Wheeler-Stenzel  Co.  v.  National 
Window  Glass  Jobbers'  Ass'n,  152 
Fed.  873  (1907):  "But  it  does  not 
follow,  as  is  argued  by  defendant  that 
it  does,  that,  because  at  common  law 
contracts  and  combinations  in  re- 
straint of  trade  were  only  illegal  in 
the  sense  of  being  unenforceable,  as 
being  contrary  to  public  policy,  and 
that  private  wrongs  cannot  be  predi- 
cated thereon,  proper  legislative  au- 
thority has  not,  by  making  such  con- 

754 


tracts  and  combinations  absolutely 
unlawful,  created  a  right  of  private 
action  in  one  who  has  suffered  in 
business  or  property  thereby,  even 
though  such  damage  or  loss  would 
not  have  been  actionable  at  common 
law." 

^  The  amount  of  the  attorneys' 
fees  is  witliin  the  discretion  of  the 
trial  court,  reasonably  exercised. 

Montague  v.  Lowry,  193  U.  S.  38 
(1904),  (24  Sup.  Ct.  Rep.  307). 

For  consideration  of  constitution- 
ality of  a  pro\Tsion  for  the  recovery  of 
attorneys'  fees,  see  In  re  Grice,  79 
Fed.  627  (1897). 

^  See  ante,  §  406:  "Proceedings  in 
Equity  hy  Government.  Injunctive 
Relief.     Parties. " 

In  Leonard  v.  Abner-Drury  Brew- 
ing Co.,  25  App.  D.  C.  161  (1905),  how- 
ever, it  was  held  that  the  fact  that  the 
statute  makes  a  conspiracy  in  re- 
straint of  trade  criminal  does  not  pre- 
vent proceedings  in  equity  where 
such   conspiracy   works   or   threatens 


CHAP.    XL] 


RIGHTS,    REMEDIES   AND    PROCEDURE 


§  409 


While  the  statute  declares  broadly  that  damages  may  be  re- 
covered for  injuries  sustained  by  reason  of  any  violation  of  its 
provisions/  practically  speaking  a  plaintiff,  in  order  to  state  and 
establish  a  cause  of  action  for  substantial  damages,  must  aver 
and  show : 

(1)  That  the  defendants  have  entered  into  a  combination  or 
conspiracy  to  restrain  or  monopolize  interstate  or  foreign 
commerce.^ 

(2)  That  he  has  been  injured  in  his  business  or  property  by 
reason  of  specific  acts  of  the  defendants  in  pursuance  of  such 
combination  or  conspiracy.^ 


irreparable  injury ;  that  the  statute 
affords  new  remedies  but  does  not 
substitute  them  for  those  previously 
existing. 

And  in  Bigelow  v.  Calumet,  etc. 
Mining  Co.,  15.5  Fed.  869  (1907),  it 
was  held  that  a  person  claiming  to  be 
injured  by  a  ^•iolat^on  of  the  federal 
statute  could,  where  the  court  had 
juri.sdiction  by  reason  of  diversity  of 
citizensliip,  sue  for  injunctive  relief  — 
that  wliile  the  statute  might  not 
afford  such  relief  in  an  action  based 
strictly  upon  it,  it  was  not  the  inten- 
tion of  the  statute  to  take  auay 
existing  remedies. 

*  Thus,  for  example,  it  is  possible 
that  a  single  corporation,  by  monopo- 
lizing interstate  trade  might  inflict 
injuries  for  which  damages  could  be 
recovered  under  the  statute.  But  all 
the  cases  which  have  yet  arisen  vmder 
the  seventh  section  of  the  act  have 
been  cases  of  combinations  or  con- 
spiracies. 

^  In  an  action  for  damages  under 
the  statute  a  complaint  is  demurrable 
which  fails  to  aver  that  the  acts  of  the 
defendants  complained  of  have  some 
connection  with  a  contract  or  com- 
bination in  restraint  of  interstate 
commerce.  Bishop  v.  American  Pre- 
servers Co.,  51  Fed.  272  (1892),  S.  C. 
105  Fed.  845(1900).  See  also  Gibbs 
V.  McNeelcy,  102  Fed.  599  (1900),  S. 
C.  107  Fed.   210  (1901),  118  Fed.  120 


(1902) ;  Ellis  v.  Inman,  131  Fed.  182 
(1904). 

A  manufacturer  injured  by  a  com- 
bination of  labor  organizations  in 
restraint  of  interstate  trade  and  com- 
merce may  maintain  an  action  for 
treble  damages  under  the  seventh 
section  of  the  act. 

Loewe  r.  Lawlor,  208  U.  S.  274 
(1908),  (28  Sup.  Ct.  Rep.  301). 

3  Gibbs  V.  McNeeley,  102  Fed.  599 
(1900),  S.  C.  107  Fed.  210  (1901),  118 
Fed.  120  (1902)  ;  Lowry  v.  Tile,  etc. 
Ass'n,  106  Fed.  38  (1900),  (affirming 
98  Fed.  817  (1899)),  S.  C.  mb  nom. 
Montague  v.  Lowry,  115  Fed.  27 
(1902),  193  U.  S.  38  (1904),  (24  Sup. 
Ct.  Rep.  307). 

Rice  V.  Standard  Oil  Co.,  134  Fed. 
465  (1905):  "It  is  apparent  that 
mere  proof  that  the  defendant  has 
entered  into  a  contract  or  engaged  in 
a  combination  or  conspiracy  in  re- 
straint of  trade  or  commerce  among 
the  several  States  will  not  be  suffi- 
cient to  support  a  cause  of  action 
under  the  .seventh  section,  for  there 
must,  in  addition  thereto,  be  proof 
that  the  plaintiff  has,  by  reason 
thereof,  sustained  damage.  In  his 
declaration,  therefore,  the  plaintiff 
must  aver  not  only  facts  showing  such 
a  contract  or  combination  or  con- 
spiracy as  is  declared  by  tlie  act  to  be 
unlawful,  but  facts  showing  that  by 
reason  of  such  vmlawful  thing  he  has 


/  00 


409 


INTERCOllPORATE    RELATIONS 


[part  V 


(3)  That   the   injury  has  involved   actual,  and   not   merely 
speculative,  damage  to  his  business  or  property/ 


been  injured  in  his  business  or 
property. " 

Section  seven  of  tlie  act  does  not 
authorize  an  action  against  an  al- 
leged trust  or  combination,  by  one 
who  was  a  party  to  its  organization 
and  a  stockholder  therein,  to  recover 
damages  resulting  from  the  enforce- 
ment by  defendant  of  rights  given  it 
by  the  alleged  unlawful  agreement. 
Bishop  V.  American  Preservers  Co., 
105  Fed.  845  (1900),  S.  C.  51  Fed.  272 
(1892). 

'  In  Lowry  v.  Tile,  etc.  Ass'n,  106 
Fed.  46  (1900),  affirmed  sub  nom. 
Montague  v.  Lowry,  115  Fed.  27 
(1902),  193  U.  S.  38  (1904),  (24  Sup. 
Ct.  Rep.  307)  —  an  action  for  the  re- 
covery of  damages  under  the  seventh 
section  —  Judge  Morrow  charged  the 
jury  as  follows:  "Your  verdict  will 
be  limited  to  the  actual  damages 
which  the  evidence  shows  the  plain- 
tiffs have  sustained  by  reason  of  the 
acts  of  the  defendants  in  \'iolation  of 
the  act  of  Congress.  The  sole  ques- 
tion, then,  as  to  damages,  in  this  case, 
relates  to  an  injury  which  the  plain- 
tiffs may  have  sustained  in  their  busi- 
ness by  reason  of  the  a.ssociation  in 
question.  It  is  not  enough,  in  an 
action  of  this  kind,  wliich  is  one  at 
law,  for  the  plaintiffs  to  establish  the 
existence  of  ah  association  which 
comes  within  the  inhibition  of  the  act 
of  Congress.  Plaintiffs  must  go  still 
further,  and  the  burden  of  proof  is 
upon  them  to  show  some  real  and 
actual  damage  to  their  business  by 
reason  of  such  an  association.  .  .  . 
Mere  speculation  as  to  the  possible 
profits  of  a  mercantile  business,  in 
the  absence  of  evidence  directed  to 
such  conditions,  cannot  be  indulged 
in  by  the  jury  for  purposes  of  finding 
a  verdict  in  damages.  The  damages 
which  the  law  contemplates,  and 
which   the   act   of   Congress   pro\'ides 

756 


for,  must  be  reasonable  damages  as- 
certainable upon  the  evidence  pre- 
sented in  the  case.  There  must  be 
facts,  transactions,  actual  evidence  of 
some  material  and  pertinent  char- 
acter, relating  to  a  business  from 
which  the  jurj^  can  ascertain  with 
reasonable  certainty  that  damage  has 
actually  been  worked  to  such  busi- 
ness, before  any  verdict  in  damages 
can  be  returned,  other  than  nominal 
damages." 

In  Whitwell  v.  Continental  To- 
bacco Co.,  125  Fed.  454  (1903),  where 
the  claim  for  damages  was  based  upon 
the  defendant's  refusal  to  sell  goods 
to  the  plaintiff,  the  Court  said  :  "There 
is  another  reason  why  the  complaint 
in  this  action  fails  to  state  facts  suf- 
ficient to  constitute  a  cause  of  action. 
The  sole  cause  of  the  damages  claimed 
in  it  is  shown  to  be  the  refusal  of  the 
defendants  to  sell  their  goods  to  the 
plaintiff  at  prices  which  would  enable 
him  to  resell  them  with  a  profit. 
Now,  no  act  of  omission  of  a  party  is 
actionable,  no  act  or  omission  of  a 
person  causes  legal  injury  to  another, 
unless  it  is  either  a  breach  of  contract 
with,  or  a  duty  to,  him.  The  dam- 
ages from  other  acts  of  omission  form 
a  part  of  that  damnum  absque  injuria 
for  which  no  action  can  be  main- 
tained or  recovery  had  in  the  courts. 
The  defendants  had  not  agreed  to  sell 
their  goods  to  tlie  plaintiff  at  prices 
which  would  make  their  purchase 
profitable  to  him,  so  that  the  dam- 
ages he  suffered  did  not  result  from 
any  breach  of  any  contract  with  him. 
They  were  not  caused  by  the  breach 
of  any  legal  dutj'  to  the  plaintiff,  for 
the  defendants  owed  him  no  duty  to 
sell  their  products  to  him  at  any 
price  —  much  less,  at  prices  so  low 
that  he  could  reaUze  a  profit  by  sell- 
ing them  again  to  others.  The  com- 
plaint,  therefore,    fails   to   show  that 


CHAP.    Xl] 


RIGHTS,    REMEDIES    AND    PROCEDURE 


§  409 


The  fact  that  the  injuries  sustained  l)y  a  viohition  of  the 
statute  are  suffered  wholly  within  a  single  State  in  no  way 
prevents  the  recovery  of  damages  therefor.  Damage  must 
nearly  always  be  "in  property,  that  is,  in  the  money  of  the 
plaintiff,  which  is  owned  within  some  particular  State."  ^ 


any  legal  injury  or  actionable  damages 
were  inflicted  upon  the  plaintiff  by 
the  acts  of  the  defendants." 

Where  a  city  brought  suit  for 
the  recovery  of  damages  under  the 
seventh  section  of  the  act  upon  the 
ground  that  it  had  been  compelled  by 
an  unlawful  combination  to  pay  more 
for  articles  purchased  than  they  were 
reasonably  worth,  the  Supreme  Court 
of  the  United  States  (Chattanooga 
Foundry,  etc.  Works  v.  City  of  At- 
lanta, 203  U.  S.  390,  396  (27  Sup.  Ct. 
Rep.  6.5),  affirming  127  Fed.  23  (1903), 
101  Fed.  900  (1900)),  said  :  "The  facts 
gave  rise  to  a  cause  of  action  under 
the  act  of  Congress.  The  city  was  a  per- 
son within  the  meaning  of  section  7,  by 
the  express  provision  of  section  8.  It 
was  injured  in  its  property,  at  least,  if 
not  in  its  business  of  furnishing  water, 
by  being  led  to  pay  more  than  the 
worth  of  the  pipe.  A  person  whose 
property  is  diminished  by  a  payment 
of  money  wrongfully  induced  is 
injured  in  his  property.  The  transac- 
tion which  did  the  wrong  was  a  trans- 
action between  parties  in  different 
States,  if  that  be  material.  The  fact 
that  the  defendant  and  others  had 
combined  with  the  sellen  led  to  the 
excessive  charge,  which  the  seller 
made  in  the  interest  of  the  trust  by 
arrangement  with  its  members,  and 
which  the  buyer  was  induced  to  pay 
by  the  semblance  of  competition,  also 
arranged  by  the  members  of  the  trust. 
One  object  of  the  combination  was 
to  prevent  other  producers  than  the 
Anniston  Pipe  and  Fountlry  Company, 
the  seller,  from  competing  in  sales 
to  the  plaintiff.  There  can  be  no 
doubt  that  Congress  had  ])owct  to 
give  an   action    for    damages    to    an 


individual  who  suffers  by  breach  of 
law." 

General  allegations  in  a  declara- 
tion ba-sed  upon  the  statute  showing 
that  as  a  result  of  the  combination 
complained  of  the  plaintiff  has  lost 
customers  and  has  been  prevented 
from  making  a  profit  in  its  legitimate 
business,  as  had  been  the  ca-se  before 
the  combination,  are  suflJicient. 

Wheoler-Stenzel  Co.  v.  National 
Window  Glass  Jobbers'  Ass'n,  1.52 
Fed.  864  (1907). 

Where  foreign  ship-owners  formed  a 
combination  and  grantetl  rebates  to 
parties  who  used  their  ves.sels  exclu- 
sively in  shipping  from  an  American 
port,  and  the  plaintiffs  made  ship- 
ments but  lost  their  right  to  the  re- 
bates under  the  arrangement  by  ship- 
ping by  other  lines,  it  was  held,  in  an 
action  again.st  the  combination  to 
recover  damages  under  the  seventh 
section,  that  the  plaintiffs' substantial 
claim  grew  out  of  the  withhoUling  of 
the  rebates  which  was  not  an  item 
of  damage  growing  proximately  out  of 
the  combination  and  that  they  were 
not  entitled  to  recover. 

Thomsen  v.  Union  Castle  Mail  S. 
S.  Co.,  149  Fed.  933  (1907).  The 
writ  of  error  in  this  case  to  the  U.  S. 
Circuit  Court  of  Appeals  has  not  yet 
been  passed  upon. 

For  complaint  describing  an  un- 
lawful combination  of  hnnber  dealers 
and  manufacturers  and  stating  a 
cause  of  action  for  the  recoverj'  of 
damages  under  the  .seventh  section  of 
the  act,  see  Ellis  v.  Inman,  131  Feil. 
182  (1904). 

'  Chattanooga  Foundry,  etc.  Works 
V.  City  of  .\tlanta,  203  V.  S.  300.  307 
(1906),  (27  Sup.  Ct.  Rep.  65),  affirm- 

757 


§   411  INTERCORPORATE    RELATIONS  [PART    V 

The  recovery  of  treble  damages  under  the  seventh  section 
must  be  by  direct  action  and  not  by  way  of  set-off  in  an  action 
for  the  price  of  goods  sold  by  the  alleged  unlawful  combina- 
tion.^ 

Upon  the  trial  of  an  action  for  the  recovery  of  threefold  dam- 
ages, the  jury  assess  the  actual  damages  sustained,  and  the  court, 
in  entering  the  judgment  upon  theverdict,  trebles  the  amount.^ 

The  declaration  in  an  action  for  the  recovery  of  damages  must 
state  the  substantial  facts  relied  upon  to  establish  a  violation 
of  the  act.  It  is  not  sufficient  to  follow  the  language  of  the 
statute.^ 

§  410.  Limitations  of  Actions.  —  The  right  of  action  for  the 
recovery  of  treble  damages  under  the  seventh  section  of  the 
statute  is  granted  as  a  remedy  for  a  private  wrong  and  is  com- 
pensatory in  its  purpose  and  effect  —  the  damages  allowed  in 
excess  of  those  actually  sustained  being  regarded  as  exemplary. 
An  action  based  upon  the  statute,  therefore,  being  remedial 
rather  than  penal  in  its  nature,  is  governed  as  to  limitation  by 
the  statutes  of  the  State  where  it  is  brought  and  not  by  the 
federal  statute^  prescribing  a  limitation  of  five  years  for  a  "suit 
or  prosecution  for  any  penalty  or  forfeiture,  pecuniary  or  other- 
wise, accruing  under  the  laws  of  the  United  States."  ^ 

§  411.  Effect  of  VoluntaFy  Dissolution  of  Combination  pend- 
ing Proceedings.  —  The  equitable  remedy  afforded  the  govern- 
ment to  restrain  combinations  in  violation  of  the  statute  is  for 
the  protection  of  the  rights  of  the  public,  and  the  relief  granted 
should  be  adequate  to  the  occasion.  The  mere  dissolution  of 
the  unlawful  combination  may  not  be  the  most  important  part 


ing  127  Fed.  23  (1903),  101  Fed.  900  Fed.      23      (1903),      101      Fed.      900 

(1900).  (1900). 

1  Connolly    v.    Union    Sewer    Pipe  The  fact  that  no  federal  statute  is 

Co.,  184  U.  S.  540  (1902),  (22  Sup.  Ct.  applicable  leaves  the  matter  of  limi- 

Rep.  431).  tation  to  local  law  (U.  S.  Rev.  Stat., 

*  Lowry  v.  Tile,  etc.  Ass'n,  106  §  721),  and  in  the  above  case  it  was 
Fed.  46  (1900).  held  that  the  ten  year  Umitation  of 

3  Cilley  V.  United  Shoe  Mach.  Co.,  the    Tennessee    Code    for    all    actions 

152  Fed.  726  (1907).  not  expressly  pro^^ded  for  controlled 

*  U.  S.  Rev.  Stat.,  §  1047.  an  action  under  the  seventh  section 

*  Chattanooga  Foundry,  etc.  Works  of  the  statute,  rather  thati  the  three 
V.  City  of  Atlanta,  203  U.  S.  390  (1906),  year  Umitation  for  injuries  to  real  or 
(27    Sup.  Gt.  Rep.  65),  affirming  127  personal  property. 

758 


CHAP.    XL] 


RIGHTS,    REMEDIES    AND    PROCEDURE 


§  412 


of  the  litigation.  The  essential  question  is  the  validity  of  the 
agreement,  and  the  injunction  prayed  for  may  properly  go  so 
far  as  to  enjoin  the  execution  of  similar  agreements  in  the  future. 

In  such  a  case,  the  dissolution  of  an  unlawful  a.ssociation,  after 
judgment  and  pending  appeal,  does  not  deprive  the  appellate 
court  of  jurisdiction.' 

§  412.  Proof  of  Violation  of  Statute.  Evidence.  —  In  deter- 
mining whether  a  particular  contract  or  combination  comes 
within  the  provisions  of  the  federal  statute,  illegality  is  not  to  be 
presumed  but  must  be  proved.^  It  must  be  shown  that  the 
agreement,  or  the  method  of  doing  business  thereunder,  is  in 
violation  of  the  statute. 

But  where  the  necessary  effect  of  an  agreement,  as  shown  upon 
its  face,  is  to  restrain  interstate  trade  or  commerce,  the  com- 
bination thereunder  is  illegal,  and  the  question  of  the  intent  of 
the  parties,  in  entering  into  it,  is  immaterial.'     But  where  the 


■  United  States  v.  Trans-Missouri 
Freight  Ass'n,  166  U.  S.  304  (1896), 
(17  Sup.  Ct.  Rep.  540)  :  "Although 
the  general  rule  is  that  equity  does 
not  interfere  simply  to  restrain  a  pos- 
sible future  \'iolation  of  law,  yet, 
where  parties  have  entered  into  an 
illegal  agreement  and  are  acting  under 
it,  and  there  is  no  adequate  remedy 
at  law  and  the  jurisdiction  of  the 
court  has  attaclied  by  the  filing  of  a 
bill  to  restrain  such  or  anj'  like  action 
under  a  similar  agreement,  and  a  trial 
has  been  had,  and  judgment  entered, 
the  appellate  jurisdiction  of  the  court 
is  not  ousted  by  a  simple  dissolution 
of  the  association  effected  subse- 
quently to  the  entry  of  judgment  in 
the  suit.  Private  parties  may  settle 
their  controversies  at  any  time,  and 
rights  which  a  plaintiff  may  have  had 
at  the  time  of  the  commencement 
of  the  action  may  terminate  before 
judgment  is  obtained  or  while  the  case 
is  on  appeal,  and  in  any  such  case, 
the  court,  being  informed  of  the  facts, 
■will  proceed  no  further  in  the  action. 
Here,  however,  there  has  been  no  ex- 
tinguishment of  the  rights  (whatever 
they  are)  of  the  public,  the  enforce- 


ment of  which  the  government  has 
endeavored  to  procure  by  a  judgment 
of  a  court  under  the  pro\"isions  of  the 
act  of  Congress  above  cited.  The 
defendants  carmot  foreclose  those 
rights  nor  prevent  the  assertion 
thereof  bj'  the  government,  as  a  sub- 
stantial trustee  for  the  public  under 
the  acts  of  Congress,  by  any  such 
action  as  has  been  taken  in  this  case." 

See  also  United  States  v.  Work- 
ingmen's  Amalgamated  Council,  54 
Fed.  994  (1893). 

*  United  States  v.  Addyston  Pipe, 
etc.  Co.,  78  Fed.  723  (1897),  (reversed 
85  Fed.  271)  (1898),  175  U.  S.  121 
(1899),  (20  Sup.  Ct.  Rep.  9G)  ;  United 
States  I'.  Tran.s-Mis.souri  Freight  .\ss'n, 
58  Fed.  58  (1893),  (reversed  166  U.  S. 
341)  (1897),  (17  Sup.  Ct.  Rep.  540). 
The  reversals  of  the  judgments  of  the 
lower  courts  in  these  cases  in  no  way 
afTects  the  principle  stated  in  the  text. 

^  United  States  v.  Trans-Mi.s.souri 
Freight  Ass'n,  166  U.  S.  341  (1897>, 
(17  Sup.  Ct.  Rep.  540):  ".\lthouKh 
the  case  is  heard  on  bill  and  answer, 
thus  making  it  necessary  to  assume 
the  truth  of  the  allegations  in  the 
answer   which   are   well    pleaded,    yet 

759 


§412 


INTERCORPORATE    RELATIONS 


[part  V 


agreement,  itself,  does  not  establish  the  illegality  of  the  com- 
bination, it  may  be  shown  by  all  the  facts  and  circumstances  of 
the  case;  and  the  practical  working  and  effect  of  the  defendant's 
methods  of  doing  business  may  properly  be  considered.^  In 
such  a  case,  the  objects,  intent  and  purposes  of  the  parties  to 
the  combination  may  be  very  material.^ 

In  Addyston  Pipe,  etc.  Co.  v.  United  States,^  the  Supreme 
Court  of  the  United  States  said:  "It  is  the  effect  of  the  com- 
bination in  limiting  and  restricting  the  right  of  each  of  the  mem- 
bers to  transact  business  in  the  ordinary  way,  as  well  as  its 
effect  upon  the  volume  or  extent  of  the  dealing  in  the  com- 
modity, that  is  regarded.  All  the  facts  and  circumstances  are, 
however,  to  be  considered  in  order  to  determine  the  fundamental 
question  —  whether  the  necessary  effect  of  the  combination  is 
to  restrain  interstate  commerce."  * 


the  legal  effect  of  the  agreement  itself 
cannot  be  altered  by  the  answer,  nor 
can  its  violation  of  law  be  made  valid 
by  allegations  of  good  intention  or  of 
desire  to  simply  maintain  reasonable 
rates;  nor  can  the  plaintiffs'  allega- 
tions as  to  the  intent  with  which  the 
agreement  was  entered  into  be  re- 
garded, as  such  intent  is  denied  on  the 
part  of  the  defendants.  And  if  the 
intent  alleged  in  the  bill  were  a  neces- 
sary fact  to  be  proved  in  order  to 
maintain  the  suit,  the  bill  would  have 
to  be  dismissed.  In  the  view  we 
have  taken  of  the  question,  the  intent 
alleged  by  the  government  is  not 
necessary  to  be  proved.  The  ques- 
tion is  one  of  law  in  regard  to  the 
meaning  and  effect  of  the  agreement 
itself;  namely,  does  the  agreement 
restrain  trade  or  commerce  in  any 
way  so  as  to  be  a  violation  of  the  act  ? 
We  have  no  doubt  that  it  does." 

>  United  States  v.  Hopkins,  82  Fed. 
534  (1897),  {reversed  on  other  grounds, 
171  U.  S.  578  (1898),  (19  Sup.  Ct.  Rep. 
40))  :  "The  first  question,  whether 
there  is  any  combination  in  restraint 
of  trade  or  commerce,  or  a  combina- 
tion to  monopolize  any  part  of  trade 
or  commerce,  on  the  part  of  the  de- 

760 


fendant  association,  is  to  be  deter- 
mined, not  alone  from  what  appears 
upon  the  face  of  its  preamble,  rules 
and  by-laws,  but  from  the  entire  sit- 
uation and  the  practical  working  and 
results  of  the  defendants'  methods  of 
doing  business,  as  disclosed  by  the 
testimony  in  the  case." 

In  United  States  v.  Workingmen's 
Amalgamated  Council,  54  Fed.  994 
(1893),  it  was  held  that  in  order  to 
sustain  the  allegations  of  a  bill  pray- 
ing for  an  injunction  against  a  combi- 
nation in  restraint  of  interstate  com- 
merce, the  complainant  might  offer 
in  evidence  the  official  proclamation 
of  the  various  government  officers, 
and  also  newspaper  reports,  supported 
by  affidavits,  containing  manifestos 
and  declarations  of  the  respondents. 

2  In  United  States  v.  MacAndrews, 
etc.  Co.,  149  Fed.  836  (1907),  it  was 
held  that  a  violation  of  the  statute 
was  shown  where  the  evidence  estab- 
lished the  existence  of  a  combination 
with  intent  to  effect  the  restraint  of 
interstate  commerce. 

^  Addyston  Pipe,  etc.  Co.  v.  United 
States,  175  U.  S.  211  (1899),  (20  Sup. 
Ct.  Rep.  96). 

*  The  facts  stated  or  shown  in  the 


CHAP,  xl]  rights,  remedies  an'd  procedure  §  413 

§  413.  Interpretation  of  Immunity  Proviso.  — The  proviso  in 
the  general  appropriation  act  of  1903,  ah-eady  referred  to/  that 
no  person  shall  be  prosecuted  on  account  of  anything  which  he 
may  testify  to  in  any  proceeding  under  the  federal  anti-trust 
statute,  is  entitled  to  a  sufficiently  broad  interpretation  to  pro- 
tect a  witness  in  disclosures  made  in  pursuance  of  any  judicial 
inquiry  under  the  act.  Accordingly,  it  is  held  that  the  examina- 
tion of  a  witness  before  a  grand  jury  is  a  "proceeding"  within 
the  meaning  of  the  proviso.^ 

The  practical  effect  of  the  provi.so  is  to  take  a  witness  testify- 
ing in  any  proceeding  under  the  federal  statute  out  of  the  opera- 
tion of  the  Fifth  Amendment.^  If  he  cannot  be  prosecuted 
on  account  of  his  testimony,  he  is  not  incriminated  by  his  testi- 
mony. And  notwithstanding  that  the  immunity  may  not  extend 
to  prosecutions  in  a  State  court,  he  cannot  refuse  to  testify. 
In  granting  immunity  "the  only  danger  to  be  considered  is  one 
arising  within  the  same  jurisdiction  and  under  the  same  sov- 
ereignty." * 

The  same  principles  apply  to  written  as  to  oral  testimony. 
A  witness  who  cannot  set  up  the  Fifth  Amendment  as  to  oral 
testimony  on  account  of  the  immunity  granted  by  the  proviso, 
cannot  avail  himself  of  it  to  prevent  the  production  of  books 
and  papers.^ 

The  Fifth  Amendment  is  for  the  personal  protection  of  the 
witness,  and  he  cannot  set  it  up  in  a  proceeding  under  the 
statute  in  behalf  of  a  corporation  of  which  he  ma}'  be  the 
agent  or  representative.  With  respect  to  testimony  concern- 
ing the  affairs  of  his  corporation,  the  immunity  proviso  is 
inapplicable.  If  the  witness  has  no  constitutional  right  to  de- 
cline to  give  such  testimony,  there  is  no  reason  why  he  should 
be  protected  in  giving  it.^ 

recent    important     cases    of     United  ^  Hale    r.    Henkel,    201    U.    S.    43 

States  V.   Mac.Vndrews,   etc.  Co.,   149  (190G),  (20  Sup.  Ct.  Rep.  370). 

Fed.    823,    8.36    (1907),    and    United  ^  xhe  Fiftli  -Vnicndnient  is  printed 

States  V.  Standartl  Oil  Co.,   152  Fed.  in  note  to  §  420,  post. 

292    (1907),    should    be   examined    in  *  Hale    v.    Henkel,    201    U.    S.    43 

considering   the   CNndence   tending   to  (1906),  (26  Sup.  Ct.  Rep.  370). 

establish     combinations     and       con-  *  Hale    v.    Henkel,    201    U.    S.    43 

spiracles     contrary     to      the     federal  (1906),  (26  Sup.  Ct.  Rep.  370). 

statute.  0  In  Hale  v.  Henkel,  201  U.  S.  43, 

1  See  ante,  §  385.  69    (1906),    (26    Sup.  Ct.  Rep.  370), 

761 


§  414  INTERCORPORATE   RELATIONS  [PART   V 

II 

State  Anti-trust  Statutes 


CHAPTER   XLI 


STATE    STATUTES   AND    THEIR    CONSTITUTIONALITY 

§  414.    The  Statutes.      Development  of  State  Legislation. 

§  415.    Sphere  of  State  Legislation.      Operation  of  Commerce  Clause  of  the 

Constitution. 
§  416.    Controlling    Propositions    in    determining    Constitutionality    of    State 

Statutes. 
§  417.    Power  of  State  to  prohibit  Combinations  of  Quasi-public  Corporations. 

Power  over  Property  devoted  to  Public  Uses. 
§  418.    Power  of  State  to  prohibit  Combinations  of  Corporations  in  Exercise  of 

Reserved  Power. 
§  419.    Validity  of  State  Statutes  tested   by  Fourteenth    Amendment  —  (A) 

Right  to  Contract. 
§  420.    Validity  of  State   Statutes  tested   by  Fourteenth    Amendment  —  (B) 

Police  Power  of  the  State. 
§421.    Validity  of  State  Statutes   tested   by  Fourteenth    Anaendment — (C) 

Class  Legislation. 
§  422.    Validity  of  State  Statutes  under  State  Constitutional  Provisions. 
§  423.    State  Courts'   Interpretation  of    State    Statute    followed    by    Federal 

Courts  in  determining  its  Constitutionality. 
§  424.    Who  may  question  Constitutionality  of  Statutes. 

§  414.    The   Statutes.     Development  of   State   Legislation.  — ■ 

A  summary  of  the  State  laws  against  combinations  —  commonly 

the    Supreme    Court    of    the    United  mony,  even  though  he  were  the  agent 

States   said:    "But   it   is   further   in-  of   such   person.     A   privilege   so   ex- 

sisted  that  while  the  immunity  statute  tensive  might  be  used  to  put  a  stop  to 

may  protect  individual  witnesses,   it  the    examination    of    every    witness 

would  not  protect  the  corporation  of  who  was  called  upon  to  testify  before 

which   appellant   was   the   agent   and  the   grand   jury   with   regard   to    the 

representative.     This  is  true,  but  the  doings   or    business   of   his   principal, 

answer  is  that  it  was  not  designed  to  whether  such  principal  were  an  indi- 

do  so.     The  right  of    a  person  under  vidual  or  a  corporation.     The   ques- 

the  Fifth  Amendment  to  refuse  to  in-  tion     whether     a     corporation     is     a 

criminate  himself  is  purely  a  personal  'person'  within   the  meaning  of  this 

privilege     of     the     witness.     It     was  Amendment    really    does    not    arise, 

never    intended    to    permit    him    to  except,  perhaps,  where  a  corporation 

plead  the  fact  that  some  third  person  is  called  upon  to  answer  a  bill  of  dis- 

might   be   incriminated   by  his  testi-  covery,  since  it  can  only  be  heard  by 

762 


CHAP.  XLl]      STATE    STATUTES    AND   THEIR   CONSTITUTIONALITY        §   414 

called    "anti-trust"     acts  —  is     printed     in     the     subjoined 
note.* 


oral  evidence,  in  the  person  of  some 
one  of  it3  agents  or  employes.  The 
Amendment  is  limited  to  a  person 
who  shall  be  compelled  in  any  crimi- 
nal case  to  be  a  witness  against  him- 
self, and  if  he  cannot  set  up  the  privi- 
lege of  a  third  person,  he  certainly 
cannot  set  up  the  privalege  of  a  cor- 
poration. As  the  combination  or 
conspiracies  provided  against  by  the 
Sherman  Anti-Trust  Act  can  ordi- 
narily be  proved  only  by  the  testi- 
mony of  parties  thereto,  in  the  person 
of  their  agents  or  employes,  the  privi- 
lege claimed  would  practically  nullify 
the  whole  act  of  Congress.  Of  what 
use  would  it  be  for  the  legislature  to 
declare  these  combinations  unlawful 
if  the  judicial  power  may  close  the 
door  of  access  to  every  available 
source  of  information  upon  the  sub- 
ject? Indeed,  so  strict  is  the  rule 
that  the  privilege  is  a  personal  one 
that  it  has  been  held  in  some  cases 
that  counsel  will  not  be  allowed  to 
make  the  objection." 

See  also  McAlister  v.  Henkel,  201 
U.  S.  90  (1906),  (26  Sup.  Ct.  Rep. 
385). 

*  Alabama.  Crim.  Code  1907,  ch. 
273,  §  7579  :  "Any  person  or  corpora- 
tion, who  engages  or  agrees  with  other 
persons  or  corporations,  or  enters  into, 
directly  or  indirectly,  any  eombina- 
tion,  pool,  trust,  or  confederation,  to 
regulate  or  fix  the  price  of  any  article 
or  commodity  to  be  sold  or  produced 
within  this  State;  or  any  person  or 
corporation  who  enters  into,  becomes 
a  member  of,  or  party  to,  any  pool, 
agreement,  combination,  or  confedera- 
tion to  fix  or  limit  the  quantity  of  any 
article  or  commodity  to  be  produced, 
manufactured,  mineil,  or  sold  in  this 
State,  must,  on  conviction,  be  fined 
not  less  than  five  hundred  nor  more 
than  two  thousand  dollars." 

76.      §7580:      "Any   corporation 


chartered  under  the  laws  of  this  State, 
or  any  officer,  stockholder,  agent,  or 
employee  of  any  such  coriX)ration, 
which  enters  into  any  combination 
with  any  other  corporation  or  person 
with  the  intent  to  place  the  manage- 
ment or  control  of  any  such  corpora- 
tion in  the  hands  of  another  corpora- 
tion or  person,  and  thereby  limit  or  fix 
the  price,  or  restrict  or  diminish  the 
production,  manufacture,  sale,  u.se, 
or  consumption  of  any  article  of  com- 
merce, must,  on  conviction,  be  fined 
not  less  than  five  hundred  nor  more 
than  two  thousand  dollars." 

Arkansas.  Const.  Art.  II.  §  19: 
"Perpetuities  and  monopolies  are  con- 
trary to  the  genius  of  a  republic,  and 
shall  not  be  allowed.  ..." 

Acts  of  1005.  Act  1,  §  1  :  "Any 
corporation  organized  under  the  laws 
of  this  or  any  other  State,  or  country, 
and  transacting  or  conducting  any 
kind  of  business  in  this  State,  or  any 
partnership  or  individual,  or  other 
association  or  persons  whatsoever, 
who  are  now,  or  shall  hereafter  create, 
enter  into,  become  a  member  of,  or  a 
party  to,  any  pool,  trust,  agreement, 
combination,  confederation  or  under- 
standing, whether  the  .satne  is  made 
in  this  State  or  elsewhere,  with  any 
other  corporation,  partnership,  indi- 
vidual, or  any  other  person  or  a-sso- 
ciation  of  persons,  to  regulate  or  fix 
either  in  this  State  or  elsewliore  tlie 
price  of  any  article  of  niaiuifacture, 
mechanism,  merchandise,  commodity, 
convenience,  repair,  any  product  of 
mining,  or  any  article  or  thing  what- 
soever, or  tlie  price  or  premium  to  be 
paid  for  insuring  property  against 
loss  or  damage  by  fire,  lightning  or 
tornado,  or  to  maintain  said  price 
wiien  so  regulated  or  fixed,  or  who  are 
now,  or  shall  hereafter  enter  into, 
become  a  member  of,  or  a  party  to 
any  pool,  agreement,  contract,  com- 

763 


414 


INTERCORPORATE    RELATIONS 


[part  V 


These  statutes  have  followed  as  the  inevitable  result  of  the 
working  of  the  laws  of  trade  in  the  face  of  an  adverse  public 


bination,  association  or  confedera- 
tion, whether  made  in  this  State  or 
elsewhere,  to  fix  or  Umit  in  this  State  or 
elsewhere,  the  amount  or  quantity  of 
any  article  of  manufacture,  mechan- 
ism, merchandise,  commodity,  con- 
venience, repair,  any  product  of  min- 
ing, or  any  article  or  thing  whatso- 
ever, or  the  price  or  premium  to  be 
paid  for  insuring  property  against 
loss  or  damage  by  fire,  lightning, 
storm,  cyclone,  tornado  or  any  other 
kind  of  policy  issued  by  any  corpora- 
tion, partnership,  individual  or  asso- 
ciation of  persons  aforesaid,  shall 
be  deemed  and  adjudged  guilty  of  a 
conspiracy  to  defraud  and  be  sub- 
ject to  the  penalties  as  provided  by 
this  act." 

§  5  :  "A  monopoly  is  any  union  or 
combination  or  consolidation  or  affilia- 
tion of  capital,  credit,  property,  assets, 
trade,  customs,  skill  or  acts  of  any 
other  valuable  thing  or  possession, 
by  or  between  persons,  firms  or  cor- 
porations, whereby  any  one  of  the 
purposes  or  objects  mentioned  in  this 
act  is  accomplished  or  sought  to  be 
accomplished,  or  w'hereby  any  one  or 
more  of  said  purposes  are  promoted 
or  attempted  to  be  executed  or  carried 
out,  or  whereby  the  several  results 
described  herein  are  reasonably  cal- 
culated to  be  produced ;  and  a  mo- 
nopoly, as  thus  defined  and  contem- 
plated, includes  not  merely  such  com- 
bination by  and  between  two  or 
more  persons,  firms  and  corporations, 
acting  for  themselves,  but  is  especially 
defined  and  intended  to  include  all 
aggregations,  amalgamations  affilia- 
tions, consolidations,  or  incorpora- 
tions of  capital,  skill,  credit,  assets, 
property,  custom,  trade,  or  other 
valuable  thing  or  possession  whether 
effected  by  the  ordinary  methods  of 
partnership  or  by  actual  union  under 
the   legal   form   of  a   corporation,   or 

764 


any  incorporated  body  resulting  from 
the  union  of  one  or  more  distinct 
firms  or  corporations,  or  by  the  pur- 
chase, acquisition  or  control  of  shares 
or  certificates  of  stocks  or  bonds,  or 
other  corporate  property  or  fran- 
chises, and  all  partnerships  or  cor- 
porations that  have  been  or  may  be 
created  by  the  consolidation  or  amal- 
gamation of  the  separate  capital, 
stocks,  bonds,  assets,  credit,  property, 
customs,  trade,  corporate  or  firm 
belongings  of  two  or  more  firms  or 
corporations  or  companies,  are  es- 
pecially declared  to  constitute  mo- 
nopolies within  the  meaning  of  this 
act  if  so  created  or  entered  into  for 
any  one  or  more  of  the  purposes 
named  in  this  act ;  and  a  monopoly, 
as  thus  defined  in  this  section,  is 
hereby  declared  to  be  unlawful  and 
against  public  policy,  and  any  and 
all  persons,  firms,  corporations,  or 
associations  of  persons  engaged 
therein,  shall  be  deemed  and  adjudged 
to  be  guilty  of  a  conspiracy  to  de- 
fraud, and  shall  be  subject  to  the 
penalties  prescribed  in  this  act. 

§  6  :  "If  any  person,  persons,  com- 
pany, partnership,  association,  cor- 
poration or  agent  engaged  in  the 
manufacture  or  sale  of  any  article  of 
commerce  or  consumption  produced, 
manufactured  or  mined  in  this  State, 
or  elsewhere,  shall,  ■with  the  intent  and 
purpose  of  dri\ing  out  competition, 
or  for  the  purpose  of  financially  in- 
juring competitors,  sell  within  the 
State  at  less  than  cost  of  manufacture 
or  production,  or  sell  in  such  a  way, 
or  give  away  in  this  State,  their  pro- 
ductions for  the  purpose  of  dri\ing  out 
competition,  or  financially  injuring 
competitors  engaged  in  similar  busi- 
ness, said  person  or  persons,  company, 
partnership,  association,  corporation, 
or  agent  resorting  to  this  method  of 
securing     a     monopoly    within     this 


CHAP.  XLl]      STATE   STATUTES    AND   THEIR    CONSTITUTIONALITY       §   414 


policy.     As  pointed  out  in  the  preliminary  part  of  this  treatise, 
the  modern  tendency  of  business  is  toward  combination  —  the 


State  in  such  business  shall  be 
deemed  guilty  of  a  conspiracy  to 
form  or  secure  a  trust  or  monopoly  in 
restraint  of  trade,  and  on  con\iction 
thereof  shall  be  subjected  to  the 
penalties  of  this  act." 

The  other  sections  of  the  act  re- 
late to  penalties,  remedies  and  pro- 
cedure. For  penalties,  see  post, 
§§  447,  448. 

Ccdtfomia.  "CartwTight  Anti- 
Trust  Bill,"  approved  March  23,  1907  : 

§  1.  "A  trust  is  a  combination  of 
capital,  skill  or  acts  by  two  or  more 
persons,  firms,  partnerships,  corpora- 
tions or  associations  of  persons,  or  of 
any  two  or  more  of  them  for  either, 
any  or  all  of  the  followng   purposes : 

1.  To  create  or  carry  out  restric- 
tions in  trade  or  commerce. 

2.  To  limit  or  reduce  the  produc- 
tion, or  increase  or  reduce  the  price  of 
merchandise  or  of  any  commodity. 

3.  To  prevent  competition  in 
manufacturing,  making,  transporta- 
tion, sale  or  purcha.se  of  merchan- 
dise, produce  or  any  commodit}^ 

4.  To  fix  at  any  standard  or  figure, 
whereby  its  price  to  the  public  or  con- 
sumer shall  be  in  any  manner  con- 
trolled or  established,  any  article  or 
commodity  of  merchandise,  produce 
or  commerce  intended  for  sale,  barter, 
use  or  consumption  in  this  State. 

5.  To  make  or  enter  into  or  exe- 
cute or  carry  out  any  contracts,  obli- 
gations or  agreements  of  any  kind  or 
description,  by  which  they  shall  biml 
or  have  bound  themselves  not  to  sell, 
dispose  of  or  transport  any  article 
or  any  commodity  or  any  article  of 
trade,  use,  merchandise,  commerce  or 
consumption  below  a  common  stand- 
ard figure,  or  fixed  value,  or  by  which 
they  shall  agree  in  any  manner  to  keep 
the  price  of  such  article,  commodity 
or  transportation  at  a  fixed  or  gradu- 
ated figure,  or  by  which  they  shall  in 


any  manner  estabUsh  or  settle  the 
price  of  any  article,  commodity  or 
transportation  between  them  or  them- 
selves and  others,  so  as  to  directly  or 
indirectly  preclude  a  free  and  unre- 
stricted competition  among  them- 
selves, or  any  purchasers  or  consumers 
in  the  sale  or  transportation  of  any 
such  article  or  commodity,  or  by 
which  they  shall  agree  to  pool,  com- 
bine or  directly  or  indirectly  unite 
any  interests  that  they  may  have 
connected  with  the  sale  or  trans- 
portation of  any  such  article  or  com- 
modity, that  its  price  might  in  any 
manner  be  affected.  Every  .such  trust 
as  is  defined  herein  is  declared  to  be 
unlawful,  against  pubhc  policy,  and 
void."  * 

The  remaining  sections  of  the  bill 
relate  to  remedies,  penalties  and 
procedure.  For  penalties,  see  post, 
§447. 

Florida.  Laws  1897,  ch.  4534,  re- 
lates only  to  combinations  to  ob- 
struct the  sale  of  meat  or  edible  live 
stock  in  the  State.  For  penalties 
see  post,  §§  446,  448. 

Georgia.  Constitutional  pro\'i.''ion 
(Art.  IV.  §  2,  par.  4)  against  agree- 
ments for  prevention  of  competition 
appears  ante,  §  32  n. 

The  Georgia  anti-trust  act  of 
December  23,  189G  (Suj^p.  to  Code 
1901,  §  G467),  was  held  to  be  uncon- 
stitutional b}'  the  Supreme  Court  of 
that  State  in  Brown  i'.  Jacobs'  Phar- 
macy Co.,  115  Ga.  429  (1902),  (41  S. 
K.  liep.  553,  90  Am.  St.  Rep.  126, 
57  L.  R.  A.  547). 

For  consideration  of  the  constitu- 
tional question  involved,  see  post, 
§421. 

Illinois.  Meyer's  111.  Stat.  1S9S, 
ch.  140  6  (.\ct  of  June  11,  1891.  a.s 
amended  by  Laws  1897,  p.  298)  : 
(1)  "If  any  corjwration  organized 
under  the  laws  of  this  or  any  other 

765 


§414 


INTERCORPORATE    RELATIONS 


[part  V 


unification  of  interests  and  concentration  of  control.     During 
the  past  twenty  years  —  especially  during  the  past  decade  — 


State  or  country,  for  transacting  or 
conducting  any  kind  of  business  in 
this  State,  or  any  partnership  or  indi- 
vidual or  other  association  of  persons 
whatsoever,  shall  create,  enter  into, 
become  a  member  of  or  a  party  to 
any  pool,  trust,  agreement,  combina- 
tion, confederation  or  understanding 
with  any  other  corporation,  partner- 
ship, individual  or  any  other  person 
or  association  of  persons,  to  regulate 
or  fix  the  price  of  any  article  of  mer- 
chandise or  commodity,  or  shall  enter 
into,  become  a  member  of  or  a  party 
to  any  pool,  agreement,  contract, 
combination  or  confederation  to  fix 
or  limit  the  amount  or  quantity  of 
any  article,  commodity  or  merchan- 
dise to  be  manufactured,  min?d,  pro- 
duced or  sold  in  this  State,  such  cor- 
poration, partnership  or  individual 
or  other  association  of  persons  shall 
be  deemed  and  adjudged  guilty  of  a 
conspiracy  to  defraud,  and  be  subject 
to  indictment  and  punishment  as  pro- 
vided in  this  act:  Provided,  however, 
That  in  the  mining,  manufacture  or 
production  of  articles  of  merchandise, 
the  cost  of  which  is  mainly  made  up 
of  wages,  it  shall  not  be  unlawful  for 
persons,  firms  or  corporations  doing 
business  in  this  State  to  enter  into 
joint  arrangements  of  any  sort,  the 
principal  object  or  effect  of  which  is 
to  maintain  or  increase  wages. 

(2)  "It  shall  not  be  lawful  for  any 
corporation  to  issue  or  to  own  trust 
certificates,  or  for  any  corporation, 
agent,  officer  or  employees,  or  the 
directors  or  stockholders  of  any  cor- 
poration, to  enter  into  any  combina- 
tion, contract  or  agreement  with  any 
person  or  persons,  corporation  or 
corporations,  or  with  any  stockholder 
or  director  thereof,  the  purpose  and 
effect  of  which  combination,  contract 
or  agreement  shall  be  to  place  the 
management  or  control  of  such  com- 

766 


bination  or  combinations,  or  the  manu- 
factured product  thereof,  in  the  hands 
of  any  trustee  or  trustees,  with  the 
intent  to  limit  or  fix  the  price  or  lessen 
the  production  and  sale  of  any  article 
of  commerce,  use  or  consumption,  or 
to  prevent,  restrict  or  diminish  the 
manufacture  or  output  of  any  such 
article." 

(3)  All  contracts  or  agreements  in 
violation  of  any  provision  of  this  act 
are  absolutely  void. 

For  provision  that  act  may  be 
pleaded  as  a  defence  see  post,  §  445. 

For  penalties  against  corporations 
and  individuals,  see  post,  §§  446,  448. 

The  later  Illinois  anti-trust  act  of 
June  20,  1893  (Starr  and  Curtis  Ann. 
Stat.  ch.  38,  par.  109),  has  been  de- 
clared unconstitutional  by  the  Su- 
preme Court  of  the  United  States. 
See  post,  §  421.  The  proviso  in  the 
Act  of  1891,  with  respect  to  com- 
binations regarding  wages  has  also 
been  declared  unconstitutional  by  the 
Illinois  Supreme  Court.  See  post,  § 
421. 

Indiana.  Laws  1907,  ch.  243,  §  1 : 
"That  every  scheme,  design,  under- 
standing, contract,  combination  in 
the  form  of  a  trust  or  otherwise,  or 
conspiracy  in  restraint  of  trade,  or 
commerce,  or  to  create  or  carry  out 
restrictions  in  trade  or  commerce,  or 
to  deny  or  refuse  to  any  person  or  per- 
sons full  participation,  on  equal  terms 
with  others,  in  any  telegraphic  .service 
transmitting  matter  prepared  or  in- 
tended for  public  use,  or  to  limit  or 
reduce  the  production,  or  increase 
or  reduce  the  price  of  merchandise 
or  any  commodity,  natural  or  ar- 
tificial, or  to  prevent  competition 
in  manufacturing,  within  or  without 
this  State,  is  hereby  declared  to  be 
illegal,  but  none  of  the  provisions  of 
this  act  shall  be  construed  to  apply  to 
[or]  repeal,  modify  or    limit,  or  make 


CHAP.  XLl]      STATE    STATUTES   AND   THEIR   CONSTITUTIONALITY       §   414 

the  great  producing  industries  of  the  country-  have  come  under 
the  control  of  a  comparatively  few    corporations  with    vast 


unlawful  any  of  the  powers,  rights  or 
privileges  now  existing  or  conferred 
by  law  upon  any  person,  copart- 
nership, association  or  corporation. 
Every  person  who  shall  make  any  such 
contract  or  engage  in  any  such  com- 
bination or  conspiracy,  or  enter  into 
any  such  scheme,  design  or  under- 
standing, or  do  within  this  State  any 
act  in  furtherance  of  anysuch  contract, 
combination,  conspiracy,  scheme, 
design  or  understanding,  entered  into 
without  this  State,  shall  be  deemed 
guilty  of  a  misdemeanor,  and  on  con- 
viction thereof  shall  be  fined  in  any 
sum  not  exceeding  five  thousand  dol- 
lars, to  which  may  be  added  imprison- 
ment in  the  county  jail  or  workhouse 
for  a  term  not  exceeding  one  year  in 
the  discretion  of  the  court  or  jury 
trying  the  cause :  Provided,  however, 
That  it  shall  be  a  good  defence  to  any 
action  growing  out  of  any  violation 
of  the  provisions  of  this  act  or  any 
other  act  or  common  law  relating  to 
the  subject-matter  of  this  Act  if  the 
defendant  shall  plead  and  by  a  fair 
preponderance  of  the  evndence  prove 
that  such  violation  is  not  in  restraint 
of  trade  or  commerce  or  does  not  re- 
strict trade  or  commerce  or  limit  or 
reduce  the  production  or  increase 
or  reduce  the  price  of  merchandise  or 
any  commodity  natural  or  artificial 
or  prevent  competition  in  manufac- 
turing. 

§  2.  "  Every  person  who  shall  mo- 
nopolize or  attempt  to  monopolize 
or  combine  or  conspire  with  any  other 
person  or  persons  to  monopolize  any 
part  of  the  trade  or  commerce  within 
this  State,  shall  be  deemed  guilty  of 
a  misdemeanor,  and  on  conviction 
thereof  shall  be  fined  in  any  sum  not 
exceeding  five  thousand  dollars,  to 
which  may  be  adiled  imprisonment  in 
the  county  jail  or  workhouse  for  a 
term  not  exceeding  one  year  in  the 


discretion  of  the  court  or  jury  trjing 
the  cause." 

§  12.  "The  pro\'isions  of  this  act 
shall  be  held  cumulative  of  or  sup- 
plemental to  each  other,  and  of  all 
other  laws  in  any  way  affecting  them, 
or  any  matter  which  in  any  manner 
is  the  subject  of  this  act  in  this  State, 
and  cumulative  of  and  supplemental 
to  the  common  law  of  this  State  rela- 
tive thereto,  or  to  any  thereof." 

The  other  provisions  of  the  act 
relate  to  combinations  to  prevent 
competition  for  public  contracts, 
remedies  and  procedure. 

For  other  Indiana  anti-trust  stat- 
utes, sec  Horner's  Anno.  Stat.  1901, 
§§  75.54,  7556,  7557  (.\ct  of  March  5, 
1897) ;  §  7559  a  (Act  of  March  3, 
1889),  and  §  7559/  (Act  of  March  8, 
1901). 

Iowa.  Code  1897,  §5060  :  "  .\ny  cor- 
poration organizeil  under  the  laws  of 
this  or  any  other  State  or  country  for 
transacting  or  conducting  any  kind 
of  business  in  this  State,  or  any  part- 
nership, association  or  indi\-iilual, 
creating,  entering  into  or  becoming 
a  member  of  or  a  party  to  any  pool, 
trust,  agreement,  contract,  combina- 
tion, confederation  or  imdorstantling 
with  any  other  corporation,  part- 
ncr.ship,  as.sociation  or  individual, 
to  regulate  or  fix  the  price  of  any 
article  of  merchandi.se  or  commodity, 
or  to  fix  or  limit  the  amount  or  (|uan- 
tity  of  any  article,  commodity  or  mer- 
chantli.se  to  be  manufactured,  mined, 
produced  or  sold  in  this  State,  shall 
be  guilty  of  a  conspiracy." 

Kansas.  Rev.  Stat.  1899,  ch. 
113a  (Act  of  1897):  "A  trust  is  a 
combination  of  capital,  skill  or  acts, 
by  two  or  more  persons,  firms,  cor- 
porations, or  associations  of  persons, 
or  cither  two  or  more  of  them,  for 
either,  any  or  all  of  the  following 
purposes : 

767 


§414 


INTERCORPORATE    RELATIONS 


[part  V 


capital  and  almost  unlimited  resources.  And  one  of  the  ob- 
jects —  perhaps  the  primary  object  —  of  these  combinations 
has  been  the  elimination  of  competition. 


"First.  To  create  or  carry  out  re- 
strictions in  trade  or  commerce  or 
aids  to  commerce,  or  to  carry  out  re- 
strictions in  the  full  and  free  pursuit 
of  any  business  authorized  or  per- 
mitted by  the  laws  of  this  State. 

"Second.  To  increase  or  reduce 
the  price  of  merchandise,  produce  or 
commodities,  or  to  control  the  cost  of 
rates  of  insurance. 

"Third.  To  prevent  competition 
in  the  manufacture,  making,  trans- 
portation, sale  or  purchase  of  mer- 
chandise, produce  or  commodities,  or 
to  prevent  competition  in  aids  to 
commerce. 

"Fourth.  To  fix  any  standard  or 
figure,  whereby  its  price  to  the  public 
shall  be,  in  any  manner,  controlled  or 
established,  any  article  or  commodity 
of  merchandise,  produce  or  commerce 
intended  for  sale,  use  or  consumption 
in  this  State. 

"Fifth.  To  make  or  enter  into,  or 
to  execute  or  carry  out,  any  contract, 
obligation  or  agreement  of  any  kind 
or  description  by  which  they  shall 
bind  or  have  to  bind  themselves  not  to 
sell,  manufacture,  dispose  of  or  trans- 
port any  article  or  commodity,  or 
articles  of  trade,  use,  merchandise, 
commerce  or  consumption  below  a 
common  standard  figure  or  by  which 
they  shall  agree  in  any  manner  to  keep 
the  price  of  such  article,  commodity, 
or  transportation  at  a  fixed  or  graded 
figure,  or  by  which  they  shall  in  any 
manner  establish  or  settle  the  price 
of  any  article  or  commodity  or  trans- 
portation between  them  or  them- 
selves and  others,  to  preclude  a  free 
and  unrestricted  competition  among 
themselves  or  others  in  transportation, 
sale  or  manufacture  of  any  such  arti- 
cle or  commodity,  or  by  which  they 
shall  agree  to  pool,  combine  or  unite 
any  interest  they  may  have  in  con- 

768 


nection  with  the  manufacture,  sale 
or  transportation  of  any  such  article 
or  commodity,  that  its  price  may  in 
any  manner  be  affected.  And  any 
such  combinations  are  hereby  de- 
clared to  be  against  public  policy,  un- 
lawful and  void." 

For  provision  that  act  may  be 
pleaded  as  defence  see  post,  §  445. 

For  penalties  against  corpora- 
tions and  individuals  see  post,  §§  446, 
447,  448. 

For  another  Kansas  anti-trust 
statute,  see  Gen.    Stat.    1899,    §  2377. 

Kentucky.  Const.  §  198:  "It  shall 
be  the  duty  of  the  General  A.ssembly, 
from  time  to  time,  as  necessity  may 
require,  to  enact  such  laws  as  may  be 
necessary  to  prevent  all  trusts,  pools, 
combinations  or  other  organizations, 
from  combining  to  depreciate  below 
its  real  value  any  article,  or  to  enhance 
the  cost  of  any  article  above  its  real 
value." 

Carroll's  Stat.  1903,  ch.  101,  §  3915 
(Act  of  1890)  :  "If  any  corporation 
under  the  laws  of  Kentucky,  or  under 
the  laws  of  any  other  State  or  country, 
for  transacting  or  conducting  any 
kind  of  business  in  this  State,  or  any 
partnership,  company,  firm  or  indi- 
vidual, or  other  association  of  persons, 
shall  create,  establish,  organize  or 
enter  into,  or  become  a  member  of,  or 
a  party  to,  or  in  any  way  interested  in, 
any  pool,  trust,  combine,  agreement, 
confederation  or  understanding  with 
any  other  corporation,  partnersliip, 
indiN^dual  or  person,  or  association  of 
persons,  for  the  purpose  of  regulating 
or  controlling  or  fixing  the  price  of  any 
merchandise,  manufactured  articles  or 
property  of  any  kind,  or  shall  enter 
into,  become  a  member  of,  or  party  to, 
or  in  any  way  interested  in,  a  pool, 
agreement,  contract,  understanding, 
combination  or  confederation,  ha\'ing 


CHAP.  XLl]      STATE    STATUTES   AND   THEIR    CONSTITUTIONALITY       §  414 

Yet  neither  the  courts,  the  legislatures  nor  the  people  in 
general  have  ever  relaxed  in  their  belief  that  "  competition  is  the 


for  its  object  the  fixing,  or  in  any  way 
limiting,  the  amount  or  quantity  of 
any  article  of  property,  commodity 
or  merchandise  to  be  produced  or 
manufactured,  mined,  bought  or  sold, 
shall  be  deemed  guilty  of  the  crime  of 
conspiracy."  The  act  contains  pro- 
visions similar  to  those  of  the  Illinois 
statute,  supra,  concerning  trust  cer- 
tificates and  trustees,  and  the  in- 
validity of  contracts.  For  pro- 
vision that  act  may  be  pleaded  as  a 
defence,  see  post,  §  445.  For  penalties 
against  corporations  and  individuals 
see  post,  §§446,  448. 

Louisiana.  Const.  Art.  CXC  :  "It 
shall  be  unlawful  for  persons  or  cor- 
porations, or  their  legal  representa- 
tives, to  combine  or  conspire  together, 
or  to  unite  or  pool  their  interests,  for 
the  purpose  of  forcing  up  or  down  the 
price  of  any  agricultural  product  or 
article  of  necessity  for  speculative 
purposes;  and  the  legislature  shall 
pass  laws  to  suppress  it." 

Const,  and  Rev.  Laws  (Wolff)  1904, 
p.  1804:  "After  the  passage  of  this 
act,  it  shall  be  unlawful  for  any  indi- 
vidual, firm,  company,  corporation 
or  association  to  enter  into,  continue 
or  maintain  any  combination,  agree- 
ment or  arrangement  of  any  kind, 
expressed  or  implied,  with  any  other 
indi\ddual,  firm,  company,  association 
or  corporation  for  any  of  the  following 
purposes  :  First,  to  create  or  carry  out 
restrictions  in  trade.  Second,  to 
limit  or  reduce  the  production,  or  in- 
crease or  reduce  the  price,  of  mer- 
chandise, produce  or  commodities. 
Third,  to  prevent  competition  in 
manufacture,  making,  transportation, 
sale  or  purcha.se  of  merchandise, 
produce,  or  commodities.  Fourth,  to 
fix  at  any  standard  of  figure,  whereby 
its  price  shall  be  in  any  manner  con- 
trolled or  established,  anj'  article  of 
merchandise,    produce,  commodity  or 


commerce  intended  for  consumption 
in  tliis  State.  Fifth,  to  make  or  enter 
into  or  execute  or  carry  out  any  con- 
tract, obligation  or  agreement  of  any 
kind  or  description  by  which  they 
shall  bind  or  have  bound  themselves 
not  to  sell,  dispose  of  or  transport  any 
article  or  commodity,  or  article  of 
trade,  use,  merchandise,  comnierce  or 
consumption  below  a  common  stand- 
ard figure,  or  by  which  they  shall  agree 
in  any  manner  to  keep  the  price  of 
such  article  at  a  fi.xed  or  graduated 
figure,  or  by  which  they  shall,  in  any 
manner,  establish  or  settle  the  price 
of  any  article  or  commodity  or  trans- 
portation between  them,  or  themselves 
and  others,  to  preclude  a  free  and  un- 
restricted competition  among  them- 
selves or  others  in  the  sale  or  trans- 
portation of  any  such  article  or  com- 
modity, or  by  which  they  shall  agree 
to  pool,  combine  or  unite  any  interest 
they  may  have  in  connection  with  the 
sale  or  transportation  of  any  such 
article  or  commodity  that  its  price 
might  in  any  manner  be  affected." 

For  penalties  against  corporations 
and  individuals  see  post,  §§  446, 
448. 

Louisiana  has  also  another  statute 
directed  again.st  combinations  in  re- 
straint of  domestic  trade  and  commerce 
which  is,  apparently,  moilellcd  after 
the  federal  anti-trust  act  (Const,  and 
Rev.  Laws  (Wolff)  1004,  p.  18(W). 

Maine.  Rev.  Stat.,  ch.  47,  §  53  : 
"It  shall  be  unlawful  for  any  firm  or 
incorporated  company,  or  any  num- 
ber of  firms  or  incorporatetl  com- 
panies, or  any  unincorjKjrated  com- 
pany, or  as.sociation  of  jwrsons  or 
stockholders,  organized  for  the  pur- 
pose of  manufacturing,  producing,  re- 
fining or  mining  any  article  or  pro<l- 
uct  which  enters  into  general  use  and 
consumption  by  the  people,  to  form 
or  organize  any  trust,  or  to  enter  into 

769 


§414 


INTERCORPORATE    RKI.ATIONS 


[part  V 


life  of  trade."     Combinations  for  the  purpose  of  stifling  compe- 
tition, as  we  have  seen,  have  always  been  declared  contrary  to 


any  combination  of  firms,  incorpo- 
rated or  unincorporated  companies,  or 
association  of  stockholders,  or  to 
delegate  to  any  one  or  more  board  or 
boards  of  trustees  or  directors  the 
power  to  conduct  and  direct  the  busi- 
ness of  the  whole  number  of  firms, 
corporations,  companies  or  associa- 
tions which  may  have,  or  which  may 
propose  to  form,  a  trust,  combination, 
or  association  inconsistent  with  the 
provisions  of  this  section  and  contrary 
to  public  policy. 

§  54:  "No  certificate  of  stock,  or 
other  evidence  of  interest,  in  any 
trust,  combination  or  association,  as 
named  in  the  preceding  section,  shall 
have  legal  recognition  in  any  court  in 
this  State,  and  any  deed  to  real  estate 
given  by  any  person,  firm  or  corpora- 
tion, for  the  purpose  of  becoming  in- 
terested in  such  trust,  combination  or 
association,  or  any  mortgage  given  by 
the  latter  to  the  seller,  as  well  as  all 
certificates  growing  out  of  such  trans- 
action, shall  be  void. 

§  55:  "Any  firm,  incorporated  or 
unincorporated  company  or  associa- 
tion* of  persons  or  stockholders,  who 
shall  enter  into  or  become  interested 
in  such  trust,  combination  or  associa- 
tion, shall  be  subject  to  a  fine  of  not 
less  than  five,  nor  more  than  ten  thou- 
sand dollars." 

Maryland.  Declaration  of  Rights, 
Art.  XLI :  "Monopolies  are  odious, 
contrary  to  the  spirit  of  free  govern- 
ment and  the  principles  of  commerce, 
and  ought  not  to  be  suffered." 

Michigan.  Public  Act  1899,  No. 
255  defines  a  trust  in  substantially  the 
same  language  as  the  Kansas  statute, 
supra.  It  declares  every  trust,  as  so 
defined,  unlawful,  against  public 
policy,  and  void ;  that  any  violation 
of  the  act  is  "  a  conspiracy  against 
trade,"  and  that  any  person  engaging 
in  such  conspiracy  shall  be  punished 

770 


by  a  fine  or  imprisonment,  or  both. 
Charters  of  domestic  corporations 
violating  the  act  are  subject  to  for- 
feiture, and  foreign  corporations  may 
be  excluded  from  the  State.  The  act 
also  contains  provisions  similar  to 
those  in  the  Illinois  statute  (supra) 
concerning  trust  certificates,  trustees 
and  the  invalidity  of  contracts  in  vio- 
lation of  the  act.  For  further  state- 
ment of  penalties  see  post,  §  446. 

The  Michigan  statute  of  1905  (No. 
329),  supplementing  the  act  of  1899, 
follows:  §  1:  "All  agreements  and 
contracts  by  which  any  person,  co- 
partnership or  corporation  promises 
or  agrees  not  to  engage  in  any  avoca- 
tion, emploj'ment,  pursuit,  trade,  pro- 
fession or  business,  whether  reason- 
able or  unreasonable,  partial  or 
general,  limited  or  unlimited,  are 
hereby  declared  to  be  against  public 
policy   and  illegal   and  void. 

§  2 :  "  All  combinations  of  persons, 
copartnerships,  or  corporations  made 
and  entered  into  for  the  purpose  and 
with  the  intent  of  establishing  and 
maintaining  or  of  attempting  to  estab- 
lish and  maintain  a  monopoly  of  any 
trade,  pursuit,  avocation,  profession 
or  business,  are  hereby  declared  to  be 
against  public  policy  and  illegal  and 
void. 

§3:  "Any  corporation  organized 
under  the  laws  of  this  State  for  the 
purpose  of  establishing  and  main- 
taining, or  attempting  to  establi.sh  or 
maintain,  any  combination  of  per- 
sons, copartnerships  or  corporations 
with  intent  to  establish  and  maintain 
or  of  attempting  to  establish  and  main- 
tain a  monopoly  of  any  trade,  pursuit, 
avocation,  profession  or  business,  is 
hereby  declared  to  be  against  public 
policy  and  illegal  and  void. 

§  4:  "  Any  foreign  corporation  or- 
ganized for  the  purpose  and  with  the 
intent  of  establishing  and  maintaining 


CHAP.  XLl]      STATE    STATUTES    AND   THEIR   CONSTITUTIONALITY        §   414 

public  policy.     But  the  common  law  was  inefficient  in  dealing 
with  combinations.     It  merely  let  the  agreements  alone.     They 


or  of  attempting  to  establish  and 
maintain  a  monopoly  of  any  trade, 
pursuit,  avocation,  profession  or 
business,  is  hereby  prohibited  from 
doing  business  in  this  State,  and  any 
permission  or  authority  heretofore 
obtained  by  any  such  corporation  to 
do  business  in  this  State  is  hereby  de- 
clared to  be  illegal  and  void. 

§  5 :  "  This  act  shall  apply  to  agree- 
ments, contracts  and  combinations 
in  restraint  of  trade  or  commerce  here- 
tofore entered  into  or  made,  and  which 
are  sought  to  be  enforced  or  main- 
tained after  this  act  takes  effect ;  and 
all  contracts  and  agreements  in  viola- 
tion of  this  act  heretofore  made,  ex- 
pressly or  impliedly,  continuing  in 
force  after  this  act  takes  effect,  are 
hereby  declared  to  be  against  public 
policy  and  illegal  and  void. 

§  6:  "  This  act  shall  not  apply  to 
any  contract  mentioned  in  this  act 
nor  in  restraint  of  trade,  where  the 
only  object  of  the  restraint  imposed  by 
the  contract  is  to  protect  the  vendee 
or  transferee  of  a  trade,  pursuit,  avo- 
cation, profession  or  bu.siness,  or  the 
good  will  thereof,  sold  and  transferred 
for  a  valuable  con.sideration  in  good 
faith  and  without  any  intent  to  create, 
build  up,  establi-sh  or  maintain  a 
monopoly." 

Minnesota.  Rev.  Laws,  §  5168 : 
"No  person  or  association  of  persons 
shall  enter  into  any  pool,  trust,  agree- 
ment, or  understanding  whatsoever 
with  any  other  person  or  as.sociation, 
corporation  or  otherwise,  in  restraint 
of  trade,  within  this  State,  or  between 
the  people  of  this  or  any  other  State 
or  country,  or  which  tends  in  any  way 
or  degree  to  limit,  fix,  control,  main- 
tain, or  regulate  the  price  of  anj' 
article  of  trade,  manufacture,  or  use 
bought  and  sold  within  the  State,  or 
which  limits  or  tends  to  limit  the  pro- 
duction of  any  such  article,  or  which 


prevents  or  limits  competition  in  the 
purcha.se  and  sale  thereof,  or  which 
tends  or  is  designed  so  to  do.  Every 
person  violating  any  provision  of  this 
.section,  or  assisting  in  such  \Tolation, 
shall  be  guilty  of  a  felony,  anil  ujx)n 
conviction  thereof  shall  be  punished 
by  a  fine  of  not  less  than  five  hundred 
dollars  nor  more  than  five  thou.sand 
dollars,  or  by  imprisonment  in  the 
State  prison  for  not  less  than  three 
nor  more  than  five  j'ears. " 

For  pro\'ision  concerning  forfeiture 
of  franchises  of  corporations  ^^olating 
statute,  see  post,  §  448. 

Session  Laws  1907,  ch.  252,  pro- 
hibit combinations  with  respect  to  the 
sale  of  grain.  lb.  ch.  269,  prohibit 
unfair  discrimination  and  compe- 
tition in  the  sale  of  petroleum  and  its 
products. 

Mussissippi.  Const.  §198:  "The 
legislature  shall  enact  laws  to  prevent 
all  tru.sts,  combinations,  contracts 
and  agreements  inimical  to  the  public 
welfare." 

Laws  1900,  ch.  88,  §  11  (see  Code 
1906,  §  5002)  :  "A  trust  and  combine 
is  a  combination,  contract,  under- 
standing or  agreement,  expressed  or 
implied,  between  two  or  more  persons, 
corporations,  or  firms  or  a.s.sociation3 
of  per.sons,  or  between  one  or  more  of 
either  with  one  or  more  of  the  others; 
(a)  in  restraint  of  trade ;  (6)  to 
limit,  increa.se  or  reduce  the  price  of  a 
commodity;  (c)  to  limit,  increase  or 
reduce  the  production  or  output  of  a 
commodity ;  (d)  intended  to  hinder 
competition  in  the  production,  im- 
portation, manufacture,  transporta- 
tion, sale  or  purcha.sc  of  a  commotlity  ; 
(r)  to  engross  or  forestall  a  com- 
modity; (/)  to  issue,  own  or  hold 
the  certificates  of  stock  of  any  trust 
or  combine;  (j/)  to  jilace  the  control, 
to  any  extent,  of  business  or  of  the 
products  or  earnings  thereof,   in  the 

771 


414 


INTERCORPORATE   RELATIONS 


[part  V 


were  unlawful  in  the  sense  of  being  unenforceable,  but  they 
were  not  unlawful  in  the  sense  of  affording  a  ground  of  action 


power  of  trustees,  by  whatever  name 
called;  (h)  by  which  any  other  per- 
son than  themselves,  their  proper 
officers,  agents  and  employees  shall, 
or  shall  have  the  power  to,  dictate 
orcontrol  the  management  of  business; 
or  (i)  to  unite  or  pool  interests  in  the 
importation,  manufacture,  produc- 
tion, transportation  or  price  of  a  com- 
modity ;  and  is  inimical  to  the  public 
welfare,  unlawful,  and  a  criminal  con- 
spiracy. 

§2:  "Any  corporations,  domes- 
tic or  foreign,  which  shall  restrain 
or  attempt  to  restrain  the  freedom  of 
trade  or  production ;  or  which  shall 
monopolize  or  attempt  to  monopolize 
the  production,  control  or  sale  of  any 
commodity,  or  the  prosecution,  man- 
agement or  control  of  any  kind,  class 
or  description  of  business;  or  which 
shall  engross  or  forestall  or  attempt 
to  engross  or  forestall  any  commodity ; 
or  which  shall  destroy  competition  in 
the  manufacture  or  sale  of  a  com- 
modity, by  offering  the  same  for  sale 
at  a  price  below  the  normal  cost  of 
production,  shall  be  deemed  a  trust 
and  combine  within  the  meaning  and 
purpose  of  this  Act,  shall  be  liable  to 
all  the  pains,  penalties,  fines,  for- 
feitures, judgments  and  recoveries 
herein  denounced  against  trusts  or 
combines,  and  shall  be  proceeded 
against  in  manner  and  form  pro- 
vided in  this  Act  in  case  of  other  trusts 
and  combines." 

The  act  further  declares  all  con- 
tracts in  violation  of  its  provisions 
void  and  prescribes  penalties  against 
corporations  and  indi\'iduals.  (See 
post,  §  446.)  It  also  provides  that 
no  corporation  shall  purchase  the 
stock  or  the  franchises,  plants,  etc., 
of  any  competing  corporation,  and 
that  corporations  shall  not  engage  in 
business  not  authorized  by  their 
charters. 

772 


Missouri.  Rev.  Stat.  1899,  as 
amended  in  1907,  §8965:  "Any  per- 
son who  shall  create,  enter  into,  be- 
come a  member  of  or  participate  in 
any  pool,  trust,  agreement,  combina- 
tion, confederation  or  understanding 
with  any  person  or  persons  in  restraint 
of  trade  or  competition  in  the  impor- 
tation, transportation,  manufacture, 
purchase  or  sale  of  any  product  or 
commodity  in  this  State,  or  any  article 
or  thing  bought  or  sold  whatsoever, 
shall  be  deemed  and  adjudged  guilty  of 
a  conspiracy  in  restraint  of  trade,  and 
shall  be  punished  as  provided  in  this 
act. 

§  8966 :  "Any  person  who  shall  cre- 
ate, enter  into,  become  a  member  of  or 
participate  in  any  pool,  trust,  agree- 
ment, combination,  confederation 
or  understanding  with  any  other  per- 
son or  persons  to  regulate,  control, 
or  fix  the  price  of  any  article  of  man- 
ufacture, mechanism,  merchandise, 
commodity,  convenience  or  repair,  or 
any  product  of  mining,  or  any  article  or 
thing  whatsoever,  of  any  class  or  kind 
bought  and  sold,  or  the  price  or  pre- 
mium to  be  paid  for  insuring  property 
against  loss  or  damage  bj'  fire,  Ught- 
ning  or  storm,  or  to  maintain  said 
price  when  so  regulated  or  fixed,  or 
shall  enter  into,  become  a  member  of 
or  participate  in  any  pool,  trust,  agree- 
ment, contract,  combination,  con- 
federation or  understanding,  to  fix  or 
limit  the  amount  [or]  quantity  of  any 
article  of  manufacture,  mechanism, 
commodity,  convenience,  repair,  any 
product  of  mining,  or  any  article  or 
thing  whatsoever  of  any  class  or  kind 
bought  and  sold,  or  the  price  or  pre- 
mium to  be  paid  for  insuring  property 
against  loss  or  damage  by  fire,  light- 
ning or  storm,  shall  be  deemed  and 
adjudged  guiltj^  of  a  conspiracy  in 
restraint  of  trade,  and  be  punished 
as  pro\'ided  for  in  this  act. 


CHAP.  XLl]      STATE   STATUTES    AND   THEIR   CONSTITUTIONALITY        §  414 

to  a  person  injured.     A  fortiori  they  were  not  criminal.     The 
federal  anti-trust  statute  went,  as  has  been  shown,  far  beyond 


§  8967 :  "Any  two  or  more  persons 
engaged  in  buying  or  selling  any 
article  of  commerce,  manufacture, 
mechanism,  commodity,  convenience, 
repair,  any  product  of  mining,  or  any 
article  or  thing  of  any  class  or  kind 
whatsoever,  who  shall  create,  enter 
into,  become  members  of  or  partici- 
pate in  any  pool,  trust,  agreement, 
combination,  confederation,  associa- 
tion or  understanding  to  control  or 
limit  the  trade  in  any  such  article  or 
thing,  or  to  limit  competition  in  such 
trade  by  refusing  to  buy  from  or  sell 
to  any  other  person  any  such  article 
or  thing  aforesaid,  for  the  reason  that 
such  other  person  is  not  a  member  of 
or  a  party  to  such  pool,  trust,  com- 
bination, confederation,  association 
or  understanding,  or  shall  boycott  or 
threaten  any  person  from  buying  or 
selling  to  any  other  person  who  is  not 
a  member  of  or  a  party  to  such  pool, 
trust,  agreement,  combination,  con- 
federation, association  or  understand- 
ing in  such  article  or  thing  aforesaid, 
shall  be  deemed  and  adjudged  guilty 
of  a  conspiracy  in  restraint  of  trade,  and 
punished  as  provided  for  in   this  act. 

§  8968:  "All  arrangements,  con- 
tracts, agreements,  combinations  or 
understandings  made,  or  entered  into 
between  any  two  or  more  persons, 
designed  or  made  with  a  view  to 
lessen,  or  which  tend  to  lessen,  lawful 
trade,  or  full  and  free  competition 
in  the  importation,  transportation, 
manufacture  or  sale  in  this  State  of 
any  product,  commodity  or  article, 
or  thing  bought  and  sokl,  of  any  class 
or  kind  whatsoever,  including  the 
price  or  premium  to  be  paid  for  insur- 
ing property  against  loss  or  damage 
by  fire,  liglitning  or  storm,  and  all 
arrangements,  contracts,  agreements, 
combinations  or  understandings 
made  or  entered  into  between  any  two 
or  more  persons  which  are  designed 


or  made  with  a  view  to  increase,  or 
which  tend  to  increase  the  market 
price  of  any  product,  commodity  or 
article  or  thing,  of  any  class  or  kind 
whatsoever  bought  and  sold,  includ- 
ing the  price  or  premium  to  be  paid 
for  insuring  property  against  loss  or 
damage  by  fire,  lightning  or  storm, 
are  hereby  declared  to  be  against 
public  policy,  unlawful  antl  void  ;  -ind 
any  person  or  persons  creating,  enter- 
ing into,  becoming  a  member  of  or 
participating  in  such  arrangements, 
contracts,  agreements,  combinations 
or  understandings  shall  be  deemed 
and  adjudged  guilty  of  a  conspiracy 
in  restraint  of  trade,  and  punished  as 
provided  for  in  this  act." 

The  remaining  provisions  of  the 
statute  relate  to  penalties  against 
corporations  and  indixiduals,  reme- 
dies and  procedure.     See  post,    §  446. 

Montana.  The  anti-trust  statute 
of  this  State  (Penal  Code,  §§  321-32.5) 
was  declared  by  the  Montana  Supreme 
Court  in  1905  to  be  unconstitutional 
(State  V.  Cudahy  Packing  Co.,  33 
Mont.  179  (82  Pac.  Rep.  833)),  and 
no  new  statute  has  been  enacted 
since.  For  consideration  of  the  ques- 
tion of  constitutionaUty,  see  post, 
§421. 

Nebraska.  Cobbey's  Comp.  Stat. 
1907,  §  12028:  "  That  every  contract, 
combination  in  the  form  of  trust  or 
otherwise,  or  conspiracy  in  restraint 
of  trade  or  commerce,  within  this 
State,  is  hereby  declared  to  be  illegal. 
Every  per.son  who  shall  make  any 
such  contract  or  engage  in  any  such 
combination  or  conspiracy,  shall  be 
deemed  guilty  of  a  misdemeanor,  and, 
on  con\-iction  thereof,  shall  be  pun- 
ished by  fine  not  exceeding  five  thou- 
sanil  dollars,  or  by  imprisonment  not 
exceeding  one  year  or  by  both  saiil 
punishments  in  the  discretion  of  the 
court. 

773 


§414 


INTERCORPORATE    RELATIONS 


[part  V 


the  common  law.     It  made  combinations  in  restraint  of  inter- 
state commerce  criminal  and  gave  a  right  of  action  to  persons 


§  12029:  "That  every  person  who 
shall  monopolize,  or  attempt  to  mo- 
nopolize, or  combine  or  conspire  with 
any  other  person  or  persons,  to 
monopolize  any  part  of  the  trade  or 
commerce,  within  this  State,  shall  be 
guilty  of  a  misdemeanor,  and,  on 
con\'iction  thereof,  shall  be  punished 
by  fine  not  exceeding  five  thousand 
dollars,  or  by  imprisonment  not  ex- 
ceeding one  year,  or  by  both  said  pun- 
ishments, in  the  discretion  of  the 
court." 

The  remaining  sections  of  the  act 
relate  to  penalties  against  corpora- 
tions and  indi\iduals,  remedies  and 
procedure.     See  j)ost,  §§  446,  448. 

Nebraska  has  also  a  statute  (Laws 
1907),  to  prevent  unfair  commercial 
discrimination  between  different 
localities. 

The  anti-trust  act  of  1897  was  re- 
pealed by  implication  by  the  fore- 
going statute  except  as  to  the  first 
section  defining  trusts.  State  v. 
Omaha  Elevator  Co.  (Neb.  1906), 
106  N.  W.  Rep.  979. 

New  Hampshire.  Const.  Art.  82 : 
"...  Free  and  fair  competition  in 
the  trades  and  industries  is  an  inherent 
and  essential  right  of  the  people  and 
should  be  protected  against  all  mo- 
nopolies and  conspiracies  which  tend 
to  hinder  or  destroy  it.  The  size  and 
functions  of  all  corporations  should  be 
so  limited  and  regulated  as  to  pro- 
hibit fictitious  capitalization,  and 
provision  should  be  made  for  the 
super\'ision  and  government  thereof: 
—  Therefore,  all  just  power  possessed 
by  the  State  is  hereby  granted  to  the 
general  court  to  enact  laws  to  prevent 
the  operations  within  the  State  of  all 
persons  and  associations,  and  all 
trusts  and  corporations,  foreign  and 
domestic,  and  the  officers  thereof, 
who  endeavor  to  raise  the  price  of  any 
article  of  commerce  or  to  destroj'  free 

774 


and  fair  competition  in  the  trades  and 
industries  through  combination,  con- 
spiracy, monopoly,  or  any  other  un- 
fair means;  to  control  and  regulate 
the  acts  of  all  such  persons,  associa- 
tions, corporations,  trusts,  and  offi- 
cials doing  business  within  the  State; 
to  prevent  fictitious  capitalization; 
and  to  authorize  civil  and  criminal 
proceedings  in  respect  to  all  the 
wrongs  herein  declared  against." 

New  Mexico.  Comp.  Laws  (1897), 
§  1292:  "Every  contract  or  com- 
bination between  indi\'iduals,  asso- 
ciations or  corporations,  having  for 
its  object,  or  wliich  shall  operate,  to 
restrict  trade  or  commerce  or  control 
the  quantity,  price  or  exchange  of  any 
article  of  manufacture  or  product  of 
the  soil  or  mine,  is  hereby  declared  to 
be  illegal.  Every  person,  whether 
as  indi\ddual  or  agent  or  officer  or 
stockholder  of  any  corporation  or 
association,  who  shall  make  any  such 
contract  or  engage  in  any  such  com- 
bination, shall  be  deemed  guilty  of  a 
misdemeanor,  and,  on  conviction 
thereof,  shall  be  punished  by  a  fine 
not  exceeding  one  thousand  dollars 
nor  less  than  one  hundred  dollars, 
and  by  imprisonment  at  hard  labor 
not  exceeding  one  year,  or  until  such 
fine  has  been  paid. 

§  1293.  "Every  person  who  shall 
monopolize  or  attempt  to  monopo- 
lize, or  combine  or  conspire  with  any 
other  person  or  persons  to  monopo- 
lize, any  part  of  the  trade  or  com- 
merce of  this  territory,  shall  be 
deemed  guilty  of  a  misdemeanor  and 
on  con^^ction  thereof  shall  be  pun- 
ished by  "  fine  and  imprisonment. 

The  act  further  pro\ides  that  all 
contracts  in  \'iolation  of  its  pro\isions 
shall  be  void  and  that  purchasers  of 
commodities  from  persons  or  corpora- 
tions violating  the  act  shall  not  be 
liable  therefor. 


CHAP.  XLl]      STATE   STATUTES   AND    THEIR   CONSTITUTIONALITY         §   414 

injured  thereby.      The  State  anti-trust  statutes  followed  the 
federal  statute,  but  were  even  more  drastic.     The  difficulty 


New  York.  Birdseye's  R.  S.  1901, 
p.  2405  (Laws  1899,  ch.  690),  §  1 : 
"  Every  contract,  agreement,  arrange- 
ment or  combination,  whereby  a  mo- 
nopoly in  the  manufacture,  produc- 
tion or  sale  in  this  State  of  any  article 
or  commodity  of  common  use  is  or 
may  be  created,  estabUshed  or  main- 
tained, or  whereby  competition  in 
tliis  State  in  the  supply  or  price  of  any 
such  article  or  commotlity  is  or  may  be 
restrained  or  prevented,  or  whereby, 
for  the  purpose  of  creating,  estab- 
lishing or  maintaining  a  monopoly 
within  this  State  of  the  manufacture, 
production  or  sale  of  any  such  article 
or  commodity,  the  free  pursuit  in  this 
State  of  any  lawful  business,  trade 
or  occupation,  is  or  may  be  restricted 
or  prevented,  is  hereby  declared  to  be 
against  public  policy,  illegal  and 
void. 

§  2:  "Every  person  or  corporation, 
or  any  officer  or  agent  thereof,  who 
shall  make  or  attempt  to  make  or 
enter  into  anj'  such  contract,  agree- 
ment, arrangement  or  combination, 
or  who,  within  this  State,  shall  do  any 
act  pursuant  thereto,  or  in,  toward 
or  for  the  consummation  thereof, 
wherever  the  same  may  have  been 
made,  is  guilty  of  a  misdemeanor,  and 
on  conviction  thereof  shall,  if  a  natu- 
ral person,  be  punished  by  a  fine  not 
exceeding  five  thousand  dollars,  or 
by  imprisonment  for  not  longer  than 
one  year,  or  bj'  both  such  fine  and  im- 
prisonment; and  if  a  corporation,  by 
a  fine  of  not  exceeding  five  thousand 
dollars. 

§  3:  "The  attorney-general  may 
bring  an  action  in  the  name  and  in 
behalf  of  the  people  of  the  State 
against  any  person,  trustee,  director, 
manager,  or  other  officer  or  agent  of  a 
corporation,  or  against  a  corporation, 
foreign  or  domestic,  to  restrain  and 
prevent  the  doing  in  this  State  of  .iny 


act  herein  declared  to  be  illegal,  or  any 
act,  in,  toward  or  for  the  making  or 
consummation  of  any  contract,  agree- 
ment, arrangement  or  combination 
herein  prohibited  wherever  the  same 
may  have  been  made. " 

The  remaining  sections  of  the  act 
relate  to  procedure  in  obtaining  testi- 
mony. 

Another  New  York  statute  (Laws 
1897,  ch.  384;  Stock  Corp.  Law,  §  7) 
is  as  follows:  "No  domestic  stock 
corporation  and  no  foreign  corpora- 
tion doing  bu-siness  in  this  State  shall 
combine  with  any  other  corporation 
or  person  for  the  creation  of  a  mo- 
nopoly or  the  unlawful  restraint  of 
trade  or  for  the  prevention  of  compe- 
tition in  any  necessary  of  life." 

North  Carolina.  Const.  Art.  I. 
§31:  "Perpetuities  and  monopolies 
are  contrary  to  the  genius  of  a  free 
State,  and  ought  not  to  be  allowed." 

Laws  1899,  ch.  666:  "Any  cor- 
poration organized  under  the  laws  of 
this  or  any  other  State  or  country  for 
transacting  or  conducting  any  kind  of 
business  in  this  State,  or  any  partner- 
ship or  individual  or  other  association 
of  persons  whatsoever,  who  shall 
create,  enter  into,  become  a  member 
of,  or  a  party  to,  any  pool,  trust,  agree- 
ment, combination,  confederation  or 
understanding  with  any  other  cor- 
poration, partnership,  indiN-idual  or 
any  other  person  or  a-ssociation  of  f)er- 
sons  to  regulate  or  fix  the  price  of  any 
article  of  mcrchandi.se  or  commodity, 
or  shall  enter  into,  become  a  member 
of,  or  a  party  to,  any  pool,  agreement, 
contract,  combination  or  confedera- 
tion to  fix  the  amount  or  tiuantity  of 
any  article,  commoility  or  merchan- 
dise to  be  manufactured,  mined,  pro- 
duced or  solil  in  this  State,  shall  be 
deemed  and  adjudged  gviilty  of  a  con- 
spiracy to  defraud  anil  be  subject  to 
the  penalties  pro\-ided  in  this  act." 

775 


414 


INTERCORPORATE    RELATIONS 


[part  V 


with  many  of  them,  however,  was  that  they  went  too  far  in 
some  directions  and  not  far  enough  in  others.     Their  exemp- 


For  penalties  against  corporations 
and  individuals,  see  post,  §§  446,  448. 

The  Act  of  March  11,  1907,  "pro- 
hibiting conduct  within  the  State 
of  North  Carolina,  which  interferes 
with  trade  and  commerce "  declares 
the  following  acts  and  things  unlawful 
and  imposes  penalties : 

a.  Sales  on  condition  that  pur- 
chaser shall  not  deal  in  goods  of  com- 
petitors or  trade  rivals  or  sellers. 

6.  Destroying,  injuring  or  at- 
tempting to  destroy  or  injure  op- 
ponent or  business  rival  with  intent 
to  fix  price  where  competition  is 
removed. 

c.  Reduction  of  selling  price  or 
raising  of  buying  price  by  seller  of 
fifty  per  cent  of  any  article  with  in- 
tent to  profit  by  destroying  com- 
petitors. 

d.  Sales  at  place  where  there  is 
competition  at  less  price  than  at 
another  place,  with  intent  to  injure 
business  of  another. 

e.  Agreements  or  understandings 
not  to  buy  or  sell  within  certain  ter- 
ritory with  intent  to  prevent  compe- 
tition in  buying  or  selling. 

North  Dakota.  Const.  Art.  VII. 
§  146:  "Any  combination  between 
individuals,  corporations,  associations, 
or  either,  having  for  its  object  or  effect 
the  controlling  of  the  price  of  any 
product  of  the  soil  or  any  article  of 
manufacture  or  commerce,  or  the 
cost  of  exchange  or  transportation,  is 
prohibited  and  hereby  declared  un- 
lawful and  against  public  policy,  and 
any  and  all  franchises  heretofore 
granted  or  extended,  or  that  may  here- 
after be  granted  or  extended  in  this 
State,  whenever  the  owner  or  owners 
thereof  \'iolate  this  article  shall  be 
deemed  annulled  and  become  void." 

Laws  1907,  ch.  259,  p.  413:  "Any 
corporation  organized  under  the  laws 
of  this  State  or  any  other  State  or 

776 


country  for  transacting  or  conducting 
any  kind  of  business  in  this  State,  or 
any  partnership,  association  or  indi- 
vidual, creating,  entering  into  or 
becoming  a  member  of,  or  a  party  to, 
any  pool,  trust,  agreement,  contract, 
combination,  confederation  or  indi- 
vidual, to  regulate  or  fix  the  price  of 
any  article  of  merchandise,  com- 
modity or  property,  or  to  fix  or  limit 
the  amount  or  quantity  of  any  arti- 
cle, property,  merchandise  or  com- 
modity to  be  manufactured,  mined, 
produced,  exchanged  or  sold  in  this 
State,  shall  be  guilty  of  a  misde- 
meanor." 

The  act  also  defines  pools  and 
trusts ;  provides  for  the  punishment 
of  corporations  and  corporate  officers ; 
declares  contracts  in  violation  of  its 
provisions  void,  and  regulates  pro- 
cedure. 

Laws  1907,  ch.  258,  p.  412:  "Any 
person,  firm  or  corporation,  foreign 
or  domestic,  doing  business  in  the 
State  of  North  Dakota  and  engaged 
in  the  production,  manufacture  or 
distribution  of  any  commodity  in 
general  use,  that  shall  intentionally, 
for  the  purpose  of  destroying  or  pre- 
venting competition,  discriminate 
between  different  sections,  communi- 
ties or  cities  of  this  State  by  selling 
any  such  commodity  at  a  lower  rate 
or  price  in  one  section,  community 
or  city,  or  any  portion  thereof,  than  is 
charged  for  such  commodity  in  any 
other  section,  community  or  city, 
after  equalizing  the  distance  from  the 
point  of  manufacture,  production  or 
distribution  and  freight  rates  there- 
from, or  who  shall  wilfully,  for  the 
purpose  of  such  discrimination  and 
unfair  competition,  refuse  to  sell  any 
commodity  in  general  use,  and  in  the 
manufacture,  production  or  distri- 
bution of  which  such  person,  firm  or 
corporation  may  be  engaged,  to  any 


CHAP.  XLl]      STATE   STATUTES   AND   THEIR    CONSTITUTIONALITY        §   414 

tions  made  them  class  legislation  of  the  most  obvious  char- 
acter, and  they  were  declared  unconstitutional  by  the   courts 


other  person,  firm  or  corporation 
which  may  desire  to  purchase  the 
same  and  who  shall  comply  with  all 
reasonable  regulations  of  such  person, 
firm  or  corporation,  and  who  shall 
tender  paj'inent  thereof,  shall  be 
deemed  guilty  of  a  misdemeanor." 

Another  similar  statute  against  dis- 
criminations is  in  Laws  1907,  ch.  260, 
p.  418. 

Ohio.  Act  of  July  1,  1898,  §  1: 
"A  trust  is  a  combination  of  capital, 
skill  or  acts  by  two  or  more  persons, 
firms,  partnerships,  corporations  or 
association  of  persons,  or  of  any  two 
or  more  of  them  for  either,  any  or 
all  of  the  following  purposes : 

1.  To  create  or  carry  out  restric- 
tions in  trade  or  commerce. 

2.  To  limit  or  reduce  the  produc- 
tion, or  increase,  or  reduce  the  price 
of  merchandise  or  any  commodity. 

3.  To  prevent  competition  in 
manufacturing,  making,  transporta- 
tion, sale  or  purchase  of  merchandise, 
produce  or  any  commoditj'. 

4.  To  fix  at  any  standard  or  figure, 
whereby  its  price  to  the  public  or 
consumer  shall  be  in  any  manner  con- 
trolled or  established,  any  article  or 
commodity  of  merchandise,  produce 
or  commerce  intended  for  sale,  barter, 
u.se  or  consumption  in  this  State. 

5.  To  make  or  enter  into  or  execute 
or  carry  out  any  contracts,  obligations 
or  agreements  of  any  kind  or  descrip- 
tion, by  which  they  shall  bind  or  have 
bound  them.selves  not  to  sell,  dispose 
of  or  transport  any  article  or  any 
commodity  or  any  article  of  trade,  use, 
merchandise,  commerce  or  consump- 
tion below  a  common  standard  figure 
or  fixed  value,  or  by  which  tliey  shall 
agree  in  any  manner  to  keep  the  price 
of  such  article,  commodity  or  trans- 
portation at  a  fixed  or  graduated 
figure,  or  by  which  they  shall  in  any 
manner  establish  or  settle  the  price 


of  an  article,  commodity  or  trans- 
portation between  them  or  them- 
selves and  others,  so  as  to  directly  or 
indirectly  preclude  a  free  and  unre- 
stricted competition  among  them- 
selves, or  any  purchasers  or  consumers 
in  the  sale  or  transportation  of  any 
such  article  or  commodity,  or  by 
which  they  shall  agree  to  pool,  com- 
bine or  directly  or  indirectly  unite  any 
interests  that  they  may  have  con- 
nected with  the  sale  or  transportation 
of  any  such  article  or  commoditj', 
that  its  price  might  in  any  manner 
be  affected.  Every  such  trust  as  is 
defined  herein  is  declared  to  be  unlaw- 
ful, against  public  policy  and  void." 

For  penalties  against  corporations 
and  individuals,  see  post,  §§  446,  448. 

Oklahoma.  Const.  1907,  §  45, 
Art.  IX.  "Until  otherwise  pro\ided 
by  law,  no  person,  firm,  association 
or  corporation  engaged  in  the  pro- 
duction, manufacture,  distribution 
or  sale  of  any  commodity  of  general 
use,  shall,  for  the  purpose  of  creating 
a  monopoly  or  destroying  compe- 
tition in  trade,  discriminate  between 
different  persons,  associations  or  cor- 
porations, or  different  sections,  com- 
munities or  cities  of  the  State,  by 
selling  such  commodity  at  a  lower 
rate  in  one  section,  community  or 
city  than  in  another,  after  making 
due  allowance  for  the  difference,  if 
any,  in  the  grade,  quantity  or  cpiality, 
and  in  the  actual  cost  of  transporta- 
tion from  the  point  of  production  or 
manufacture." 

Rev.  Stat.  ch.  83:  (1)  "If  any  in- 
divitlual,  firm,  partnership,  or  any 
as.sociation  of  persons  whatsoever, 
shall  create,  enter  into,  become  a 
member  of,  or  a  party  to,  any  pool, 
trust,  agreement,  combination  or 
understanding  with  any  other  indi- 
^^dual,  firm,  partnership  or  associa- 
tion of  persons  whatsoever,  to  regulate 

777 


§414 


INTERCORPORATE    RELATIONS 


[part  V 


following  the  lead  of  the  Supreme  Court  of  the  United  States. 
The  more  recent  statutes,  however,  have  been  passed  in  view 


or  fix  the  price  of,  or  prevent  or  re- 
strict the  competition  in  the  sale  of, 
provisions,  feed,  fuel,  lumber  or 
other  building  materials,  articles  of 
merchandise  or  other  commodity, 
[they]  shall  be  deemed  guilty  of  [a] 
misdemeanor,  and  upon  conviction 
thereof  shall  be  fined  not  less  than 
fifty  nor  more  than  five  hundred  dol- 
lars. 

(2)  "It  shall  not  be  lawful  for  any 
corporation  ...  to  enter  into  any  com- 
bination, contract,  trust,  pool  or 
agreement  with  any  other  corporation 
or  corporations,  or  with  any  indi- 
vidual, firm,  partnership  or  associa- 
tion of  persons  whatsoever,  for  the 
purpose  of  regulating  or  fixing  the 
price  of,  or  preventing  or  restricting 
competition  in  the  sale  of  provisions, 
feed,  fuel,  lumber  or  other  building 
materials,  articles  of  merchandise  or 
other  commodity,  including  the  fixing 
of  the  rate  of  interest. " 

For  provision  that  act  may  be 
pleaded  as  a  defence,  see  post,  §  445. 
For  penalties  against  corporations,  see 
post,  §§  446,  448. 

South  Carolina.  Civ.  Code  1902, 
§  2845:  "All  arrangements,  contracts, 
agreements,  trusts  or  combinations 
between  two  or  more  persons  as  indi- 
viduals, firms  or  corporations,  made 
with  a  \'iew  to  lessen,  or  which  tend  to 
lessen,  full  and  free  competition  in  the 
importation  or  sale  of  articles  im- 
ported into  this  State,  or  in  the  manu- 
facture or  sale  of  articles  of  domestic 
growth,  or  of  domestic  raw  material, 
and  all  arrangements,  contracts, 
agreements,  trusts  or  combinations 
between  persons  or  corporations,  de- 
signed or  which  tend  to  advance,  re- 
duce or  control  the  price  or  the  cost 
to  the  producer  or  to  the  consumer  of 
any  such  product  or  article,  and  all 
arrangements,  contracts,  trusts,  syn- 
dicates, associations  or    combinations 

778 


between  two  or  more  persons  as  indi- 
viduals, firms,  corporations,  syndi- 
cates or  associations,  that  may  lessen 
or  affect  in  any  manner  the  full  and 
free  competition  in  any  tariffs,  rates, 
tolls,  premiums  or  prices,  or  seek.s  to 
control  in  any  way  or  manner  such 
tariffs,  rates,  tolls,  premiums  or  prices 
in  any  branch  of  trade,  business  or 
commerce,  are  hereby  declared  to  be 
against  public  policy,  unlawful  and 
void." 

For  penalties  against  corporations 
and  individuals,  see  post,  §§  446,  448. 

South  Dakota.  Const.  Art.  XVII. 
par.  20:  "Monopolies  and  trusts  .shall 
never  be  allowed  in  this  State,  and  no 
incorporated  company,  copartner- 
ship or  a.ssociation  of  persons  in  this 
State  shall,  directly  or  indirectly, 
combine  or  make  any  contract  with 
any  incorporated  company,  foreign 
or  domestic,  through  their  stock- 
holders or  the  trustees  or  assigns  of 
such  stockholders,  or  with  any  co- 
partnership or  association  of  persons, 
or  in  any  manner  whatsoever  to  fix 
the  prices,  limit  the  production  or 
regulate  the  transportation  of  any 
product  or  commodity  so  as  to  pre- 
vent competition  in  such  prices,  pro- 
duction or  transportation,  or  to  es- 
tablish excessive  prices  therefor.  The 
legislature  shall  pass  laws  for  the  en- 
forcement of  this  section  by  adequate 
penalties,  and,  in  the  case  of  incor- 
porated companies,  if  necessary  for 
that  purpose,  may,  as  a  penalty,  de- 
clare the  forfeiture  of  their  franchises. " 

Penal  Code,  1903,  §  770:  "Within 
the  meaning  of  this  act,  a  trust  or  a 
monopoly  is  a  combination  of  capital, 
skill,  or  acts  of  two  or  more  persons, 
firms,  corporations  or  associations  of 
persons,  first,  to  create  or  carry  out 
restrictions  in  trade ;  second,  to  limit 
the  production  or  to  increase  or  re- 
duce the  price  of  commodities;    third. 


CHAP.  XLl]      STATE   STATUTES    AXD    THEIR    COXSTITUTIONALITY        §   414 

of  these  decisions  and  avoid  the  constitutional  objections  at- 
taching to  the  earUer  enactments. 


to  prevent  competition  in  the  manu- 
facture, transportation,  sale  or  pur- 
chase of  merchandise,  produce  or 
commodities ;  fourth,  to  fix  any  stand- 
ard or  figure  whereby  the  price  to  the 
public  shall  be  in  any  manner  estab- 
lished or  controlled. 

§  771 :  "That  it  shall  be  im- 
lawful  for  any  incorporated  company, 
copartnership  or  association  of  per- 
sons in  this  State,  directly  or  other- 
wise, to  fix  prices,  limit  the  production 
or  regulate  the  transportation  of  any 
product  or  commodity  so  as  to  ob- 
struct or  delay  or  prevent  competition 
in  such  production  or  transportation 
or  limit  transportation  of  commodi- 
ties or  to  fix  prices  therefor. 

§  772:  "That  it  shall  be  unlaw- 
ful for  any  incorporated  company, 
copartnership  or  as-sociation  of  per- 
sons in  another  State  to  directly  or 
otherwise  combine  or  make  any  con- 
tract with  any  incorporated  company, 
copartnership,  a.ssociation  or  person 
or  persons  in  this  State  to  combine  or 
make  any  contract  to  fix  prices,  limit 
the  production  of  commodity  or  regu- 
late the  transportation,  directly  or 
other-nise,  of  any  product  or  com- 
modity so  as  to  obstruct  or  prevent 
competition  or  limit  transportation 
or   to   fix  prices   therefor. " 

For  penalties  against  corporations 
and  indi\-iduals,  see  post,  §§  446,  448. 

Tennessee.  Const.  Art.  I.  §  22 : 
"That  perpetuities  and  monopolies 
are  contrarj'  to  the  genius  of  a  free 
State,  and  shall  not  be  allowed." 

Acts  1903,  ch.  140,  §  1:  "From 
and  after  the  passage  of  this  act  all 
arrangements,  contract.s,  agreements, 
trusts  or  combinations  between  per- 
sons or  corporations  made  with  a  \nc\v 
to  lessen,  or  which  tend  to  lessen  full 
and  free  competition  in  the  importa- 
tion or  sale  of  articles  imported  into 
tliis  State,  or  in  the  manufacture  or 


sale  of  articles  of  domestic  growth  or 
of  domestic  raw  material,  and  all 
arrangements,  contracts,  agreements, 
trusts  or  combinations  between  per- 
sons or  corporations  designed,  ipr 
which  tend  to  advance,  reduce  or 
control  the  price  or  the  cost  to  the 
producer  or  the  consumer  of  any 
such  product  or  article,  are  hereby 
declared  to  be  against  public  policy, 
unlawful  and  void." 

§3:  "Any  \'iolation  of  tht  pro- 
visions of  this  act  shall  be  deemed, 
and  is  hereby  declared  to  be  de- 
structive of  full  and  free  competition 
and  a  conspiracy  against  trade,  and 
any  person  or  persons  who  may  en- 
gage in  anj'  such  conspiracy  or  who 
shall,  as  principal,  manager,  director 
or  agent,  or  in  any  other  capacity, 
knowingh'  carry  out  any  of  the  stipu- 
lations, purposes,  prices,  rates  or 
orders  made  in  furtherance  of  such 
conspirac}',  shall,  upon  conviction,  be 
punished  by  a  fine  of  not  less  than 
one  hundred  dollars  nor  more  than 
five  thousand  dollars,  and  bj'  im- 
prisonment in  the  penitentiary'  not 
less  than  one  year  nor  more  than  ten 
years;  or  in  the  judgment  of  the 
court,  by  either  such  fine  or  imprison- 
ment." 

The  remaining  sections  of  the  act 
pro^dde  for  the  forfeiture  of  the  char- 
ters of  domestic  corporations  and  the 
ouster  from  the  State  of  foreign 
corporations,  violating  its  pro\isions, 
remedies  and  procedure.  (See  post, 
§448.) 

Acts  1907,  ch.  36,  p.  126:  "That It 
shall  be  unlawful  for  any  person,  firm 
or  corporation  engaged  in  the  business 
of  manufacturing  in  this  or  any  other 
State  to  give  away,  or  sell  for  a  less 
price  than  the  cost  of  manufacture, 
any  manufactured  article  in  this 
State,  with  the  intent  and  purpose 
of    destrojang    honest    competition." 

779 


§414 


INTERCORPORATE    RELATIONS 


[part  V 


These  statutes,  as  a  general  rule,  declare  contracts  and  com- 
binations in  restraint  of  competition  both  criminal  and  unlaw- 


Texas.  Const.  Art.  I.  §  26 :  "Per- 
petuities and  monopolies  are  contrary 
to  the  genius  of  a  free  government, 
and  shall  never  be  allowed." 

Act  of  March  31,  1903,  as  amended 
in  1907,  §  1:  "That  a  trust  is  a 
combination  of  capital,  skill  or  acts  by 
two  or  more  persons,  firms,  corpora- 
tions or  associations  of  persons,  or 
either  two  or  more  of  them  for  either, 
any  or  all  of  the  following  pur- 
poses : 

1.  To  create  or  which  may  tend  to 
create  or  carry  out  restrictions  in 
trade  or  commerce  or  aids  to  com- 
merce or  in  the  preparation  of  any 
product  for  market  or  transportation, 
or  to  create  or  carry  out  restrictions 
in  the  free  pursuit  of  any  business 
authorized  or  permitted  by  the  laws 
of  this  State. 

2.  To  fix,  maintain,  increase  or 
reduce  the  price  of  merchandise,  prod- 
uce or  commodities,  or  the  cost  of 
insurance,  or  of  the  preparation  of 
any  product  for  market  or  trans- 
portation. 

3.  To  prevent  or  lessen  competi- 
tion in  the  manufacture,  making, 
transportation,  sale  or  purchase  of 
merchandise,  produce  or  commodi- 
ties, or  the  business  of  insurance,  or  to 
prevent  or  lessen  competition  in  aids 
to  commerce,  or  in  the  preparation  of 
any  product  for  market  or  trans- 
portation. 

4.  To  fix  or  maintain  any  standard 
or  figure  whereby  the  price  of  any 
article  or  commodity  of  merchandise, 
produce  or  commerce,  or  the  cost  of 
transportation,  or  insurance,  or  the 
preparation  of  any  product  for  mar- 
ket or  transportation,  shall  be  in  any 
manner  affected,  controlled  or  es- 
tablished. 

5.  To  make,  enter  into,  maintain, 
execute  or  carry  out  any  contract, 
obligation   or     agreement,    by   which 

780 


the  parties  thereto  bind,  or  have 
bound  themselves  not  to  sell,  dispose 
of,  transport  or  to  prepare  for  mar- 
ket or  transportation  any  article  or 
commodity,  or  to  make  any  contract 
of  insurance  at  a  price  below  a  com- 
mon standard  or  figure,  or  by  which 
they  shall  agree  in  any  manner  to 
keep  the  price  of  such  article  or  com- 
modity or  charge  for  transportation 
or  insurance,  or  the  cost  of  the  prepa- 
ration of  any  product  for  market 
or  transportation  at  a  fixed  or  graded 
figure,  or  by  which  they  shall  in  anj' 
manner  affect  or  maintain  the  price 
of  any  commodity  or  article  or  the 
cost  of  transportation  or  insurance 
or  the  cost  of  the  preparation  of  any 
product  for  market  or  transportation 
between  them  or  themselves  and 
others,  to  preclude  a  free  and  unre- 
stricted competition  among  themselves 
or  others  in  the  sale  or  transportation 
of  anj'  such  article  or  commodity  or 
business  of  transportation  or  insur- 
ance or  the  preparation  of  any  product 
for  market  or  transportation,  or  by 
which  they  shall  agree  to  pool,  com- 
bine or  unite  any  interest  they  may 
have  in  connection  with  the  sale  or 
purchase  of  any  article  or  commodity 
or  charge  for  transportation  or  insur- 
ance or  charge  for  the  preparation  of 
any  product  for  market  or  transpor- 
tation whereby  its  price  or  such  charge 
might  be  in  any  manner  affected. 

6.  To  regulate,  fix  or  limit  the 
output  of  an}'  article  or  commodity 
which  may  be  manufactured,  mined, 
produced  or  sold,  or  the  amount  of 
insurance  which  maj'  be  undertaken, 
or  the  amount  of  work  that  may  be 
done  in  the  preparation  of  any  prod- 
uct for  market  or  transportation. 

7.  To  abstain  from  engaging  in  or 
continuing  business  or  from  the  pur- 
chase or  sale  of  merchandise,  produce 
or  commodities  partially  or   entirely 


CHAP.  XLl]      STATE   STATUTES   AND    THEIR    CONSTITUTIONALITY        §   414 

ful.     They  impose  penalties  of  fine  or  imprisonment  upon  indi- 
viduals, and  provide  for  the  forfeiture  of  the  charters  of  domestic 


within  the  State  of  Texas,  or  any  por- 
tion thereof. 

§  2.  That  a  monopoly  is  a  com- 
bination or  consolidation  of  two  or 
more  corporations  when  effected  in 
either  of  the  following  methods  : 

1.  When  the  direction  of  the  affairs 
of  two  or  more  corporations  is  in 
any  manner  brought  under  the  same 
management  or  control  for  the  pur- 
pose of  producing,  or  where  such  com- 
mon management  or  control  tends  to 
create  a  trust  as  defined  in  the  first 
section  of  this  act. 

2.  Where  any  corporation  acquires 
the  shares  or  certificates  of  stock  or 
bonds,  franchise  or  other  rights,  or 
the  physical  properties,  or  any  part 
thereof,  of  any  other  corporation  or 
corporations,  for  the  purpose  of  pre- 
venting or  lessening,  or  where  the 
effect  of  such  acquisition  tends  to 
affect  or  lessen  competition,  whether 
such  acquisition  is  accomplished 
directly  or  through  the  instrumen- 
tality of  trustees  or  otherwise. 

§  3.  That  either  or  any  of  the  fol- 
lowing acts  shall  constitute  a  con- 
spiracy in  restraint  of  trade  : 

1.  Where  any  two  or  more  persons, 
firms,  corporations  or  associations  of 
persons  who  are  engaged  in  buj-ing  or 
selling  any  article  of  merchandise, 
produce  or  any  commodity,  enter 
into  an  agreement  or  understanding  to 
refuse  to  buy  from  or  sell  to  any  other 
person,  firm,  corporation  or  associa- 
tion of  persons  any  article  of  mer- 
chandise, produce  or  commodity. 

2.  Where  any  two  or  more  persons, 
firms,  corporations  or  associations  of 
persons  shall  agree  to  boycott  or 
threaten  to  refuse  to  buy  from  or  sell 
to  any  person,  firm,  corporation  or 
association  of  persons  for  buying  from 
or  selling  to  any  other  person,  firm, 
corporation  or  association  of  per- 
sons. 


§  4.  Any  and  all  trusts,  monopo- 
lies and  conspiracies  in  restraint  of 
trade  as  herein  defined,  are  hereby 
prohibited  and  declared  to  be  illegal." 

The  remaining  sections  of  the  act 
relate  to  penalties  against  corporations 
and  indi\'iduals  and  procedure.  (See 
post,  §§  446,  448.) 

Utah.  Const.  Art.  XII.  §  20 : 
"Any  combination  by  individuals, 
corporations  or  associations,  ha\dng 
for  its  object  or  effect  the  controlling 
of  the  price  of  any  products  of  the  soil, 
or  of  any  article  of  manufacture  or 
commerce,  or  the  cost  of  exchange 
or  transportation,  is  prohibited,  and 
hereby  declared  unlawful,  and  against 
public  policy.  The  legislature  shall 
pass  laws  for  the  enforcement  of  this 
section  by  adequate  penalties,  and  in 
case  of  incorporated  companies,  if 
necessary  for  that  purpose,  it  may  de- 
clare a  forfeiture  of  their  franchises." 

Rev.  Stat.  1898,  §  1752,  (1):  "Any 
combination  by  persons  having  for  its 
object  or  effect  the  controlling  of  the 
prices  of  any  professional  ser\-ices, 
any  products  of  the  soil,  an}'  article  of 
manufacture  or  commerce,  or  the  cost 
of  exchange  or  transjiortation,  is  pro- 
hibited and  declared  unlawful. 

(2)  "Any  person  or  association  of 
persons  who  shall  create,  enter  into, 
become  a  member  of,  a  party  to  any 
pool,  trust,  agreement,  combination, 
confederation  or  understantling  with 
any  other  person  or  persons  to  regu- 
late or  fix  the  price  of  any  article  of 
merchandise  or  commodity ;  or  shall 
enter  into,  become  a  member  of,  or  a 
party  to,  any  pool,  trust,  agreement, 
contract,  combination  or  confedera- 
tion to  fix  or  limit  the  amount  or 
quantity  of  any  article,  commodity 
or  merchandi.se  to  be  manufactured, 
mined,  proiluced  or  sold  in  this  State, 
shall  be  deemed  and  adjuilged  guilty 
of  a  conspiracy  to  defraud,   ami   be 

781 


§414 


INTERCORPORATE    RELATIONS 


[part  V 


corporations,  and  the  ouster  from  the  State  of  foreign  corpora- 
tions, viohiting  their  provisions.  They  also  usually  afford  per- 
sons injured  by  a  combination  a  right  of  action  for  damages. 


subject  to  punishment  as  hereinafter 
provided." 

The  statute  also  contains  pro- 
visions against  trust  certificates  and 
trusts. 

For  penalties  against  corporations 
and  individuals,  see  post,  §§  446,  448. 

Washington.  Const.  Art.  XII.  §  22  : 
"Monopolies  and  trusts  shall  never  be 
allowed  in  this  State,  and  no  incor- 
porated company,  copartnership  or 
association  of  persons  in  this  State 
shall,  directly  or  indirectly,  combine  or 
make  any  contract  with  any  other  in- 
corporated company,  foreign  or  domes- 
tic, through  their  stockholders  or  the 
trustees  or  assignees  of  such  stockhold- 
ers, or  with  any  copartnership  or  asso- 
ciation of  persons,  or  in  any  manner 
whatever,  for  the  purpose  of  fixing  the 
price  or  limiting  the  production  or 
regulating  the  transportation  of  any 
product  or  commodity.  The  legis- 
lature shall  pass  laws  for  the  enforce- 
ment of  this  section  by  adequate 
penalties,  and,  in  case  of  incorporated 
companies,  if  necessary  for  that  pur- 
pose, may  declare  a  forfeiture  of  their 
franchise." 

The  Washington  statute  (Act  of 
March  21,  1895)  is  confined  to  com- 
binations of  commission  merchants. 

Wisconsin.  Stat.  1898,  ch.  86, 
§  1791  /,  as  amended  by  laws  1905, 
ch.  507,  §  7  :  "Any  corporation  organ- 
ized under  the  laws  of  tliis  State  which 
shall  enter  into  any  combination,  con- 
spiracy, trust,  pool,  agreement  or 
contract  intended  to  restrain  or  pre- 
vent competition  in  the  supply  or 
price  of  any  articles  o"-  commodity  in 
general  use  in  this  State,  or  consti- 
tuting a  subject  of  trade  or  commerce 
therein,  or  which  shall  in  any  manner 
control  the  price  of  any  such  article  or 
commodity,  fix  the  price  thereof, 
limit  or  fix  the  amount  or  quantity 

782 


thereof  to  be  manufactured,  mined, 
produced  or  .sold  in  this  State,  or  fix 
any  standard  or  figure  by  which  its 
price  to  the  public  shall  be  in  any 
manner  controlled  or  established, 
shall  upon  proof  thereof,  in  any  court 
of  competent  juri.sdiction,  have  its 
charter  or  authority  to  do  business  in 
this  State  cancelled  and  annulled. 
Every  such  corporation  shall  upon 
fiUng  its  annual  statement  with  the 
Secretary  of  State,  make  and  attach 
thereto  the  afRda\'it  of  its  president, 
secretary  or  general  managing  officer, 
fully  stating  the  facts  in  regard  to  the 
matters  specified  in  this  section." 

lb.  §  1770  g,  as  amended  by  laws 
1905,  ch.  506,  §  2:  "Any  foreign  cor- 
poration which  shall  enter  into  any 
combination,  conspiracy,  trust,  pool, 
agreement  or  contract  intended  to 
restrain  or  prevent  competition  in  the 
supply  or  price  of  any  article  or  com- 
modity in  general  use  in  the  State,  or 
constituting  a  subject  of  trade  or  com- 
merce therein,  or  which  shall  in  any 
manner  control  the  price  of  any  such 
article  or  commodity,  fix  the  price 
thereof,  Umit  or  fix  the  amount  or 
quantity  thereof  to  be  manufactured, 
mined,  produced  or  sold  in  this  State, 
or  fix  any  standard  or  figure  by  which 
its  price  to  the  public  shall  be  in 
any  manner  controlled  or  established, 
shall,  upon  proof  thereof,  in  any  court 
of  competent  jurisdiction,  have  its 
license  or  authority  to  do  business  in 
this  State  cancelled  and  annulled." 

Domestic  corporations  \'iolating 
these  statutes  forfeit  their  charters 
and  foreign  corporations  may  be 
ousted  ^rom  the  State.  (See  post, 
§448.) 

Wyoming.  Const.  Art.  I.  §  30: 
"Perpetuities  and  monopolies  are  con- 
trary to  the  genius  of  a  free  State  and 
shall   not  be   allowed.     Corporations, 


CHAP.  XLl]      STATE    STATUTES   AND   THEIR    CONSTITUTIONALITY        §   415 

In  SO  far  as  combinations  result  from  the  operation  of  eco- 
nomic principles,  it  may  well  be  doubted  whether  they  can  be 
prevented  by  legislation.  As  we  have  noticed,  the  extreme 
development  of  the  idea  of  combination  has  taken  place  with 
stringent  statutes  against  combinations  upon  the  statute  books. 
Still,  many  of  the  evils  of  combinations  — especially  those  pos- 
sessing the  element  of  oppression  —  may  undoubtedly  be 
reached  by  the  present  State  enactments  if  within  their  sphere. 

§  415.  Sphere  of  State  Legislation.  Operation  of  Commerce 
Clause  of  the  Constitution.  —  The  commerce  clause  of  the 
federal  Constitution  ^  confers  upon  Congress  the  power  to  regu- 
late interstate  commerce.  This  power  is  broad  and  compre- 
hensive. Under  it  Congress  has  enacted  the  federal  anti-trust 
statute  which  prohibits  all  combinations  in  restraint  of  com- 
merce among  the  States.  Its  purpose  is  to  permit  such  com- 
merce to  flow  in  its  natural  channels  unrestrained  by  any 
combination  whatsoever.  The  power  of  Congress  and  the 
legislation  thereunder  are  as  exclusive  as  they  are  comprehen- 
sive. The  States  are  wholly  without  power  to  legislate  con- 
cerning combinations  in  restraint  of  interstate  commerce. 

The  sphere  of  State  legislation  concerning  combinations, 
as  compared  with  that  of  federal  legislation,  is  limited.  The 
business  of  the  great  producing  combinations,  outside  the  States 
in  which  their  plants  are  located,  is  carried  on  by  means  of  inter- 
state commerce.  Shipments  beginning  and  ending  within  the 
limits  of  a  single  State  are  inconsiderable  when  measured  against 
the  vast  volume  of  interstate  shipments.  The  effective  regula- 
tion of  combinations  of  railroad  companies  and  of  the  great 
industrial  corporations  cannot  result  from  State  legislation. 
State  anti-trust  statutes  can  only  reach  combinations  tloing  a 
localized  business.  Their  field  of  operation,  although  most 
important,  is  not  broad.^ 

being  creatures  of  the  State,  endowed  influence  productions  or  prices  thereof, 

for  the  public  good  with  a  portion  of  or  in  any  manner  to  interfere  witli  the 

its  sovereign  powers,  must  be  subject  public  good  and  general  welfare." 

to  its  control."  'The  commerce   clause   is  printed 

lb.  Art.  X.  §  8  :    "  There  shall  be  no  in  note  to  §  .370,  ante. 

consolidation   or    combination  of  cor-  2  \y  pointed  out  in  the  con.sidera- 

porations    of    any    kinil    whatever    to  tion  of  the  federal  statute   (see  atUc, 

prevent    competition,    to    control    or  §  393),     the    later    decisions    of    the 

783 


§416 


INTERCORPORATE   RELATIONS 


[part  V 


§  416.  Controlling  Propositions  in  determining  Constitution- 
ality of  State  Statutes.  —  With  the  underlying  principle  estab- 
lished that  the  sphere  of  State  anti-trust  legislation  is  intrastate 


Supreme  Court  of  the  United  States 
seem  to  indicate  that  the  application 
of  the  Knight  decision  (United  States 
V.  E.  C.  Knight  Co.,  156  U.  S.  12 
(1895),  15  Sup.  Ct.  Rep.  249),  will  not 
I  be  extended.  If,  howev-er,  it  should 
!  be  broadly  held  that  the  principles 
of  that  decision  render  the  federal 
statute  inapplicable  to  all  producing 
combinations  which  merely  manu- 
facture and  deliver  their  products  to 
common  carriers,  and  do  not  attempt 
to  directly  control  disposition,  then 
the  great  industrial  corporations  of 
the  country  have  practically  no  con- 
cern with  anti-trust  statutes  —  State 
or  federal  —  unless  perchance  they 
exist  in  the  States  where  their  plants 
are  located  or  in  which  they  obtain 
their  charters.  Under  such  a  con- 
struction of  the  federal  statute  the 
commerce  clause  of  the  Constitution 
would  not  only  fail  as  a  source 
of  federal  power,  but  would  interfere 
vrith  State  legislation. 

This  result  would  follow  from  the 
operation  of  elementary  principles. 
A  corporation  created  by  the  laws  of 
one  State  has  no  absolute  right  to 
transact  a  localized  business  in  an- 
other. Its  privileges  in  other  States 
are  permissive  and  depend  upon 
comity.  A  State  may  exclude  foreign 
corporations  entirely.  It  may  admit 
some  and  exclude  others.  It  may  im- 
pose such  conditions  —  reasonable  or 
unreasonable  —  upon  those  it  admits 
as  it  may  deem  expedient.  State  anti- 
trust acts  apply  to  foreign  as  well  as 
to  domestic  corporations  in  so  far  as 
they  have  plants  or  property  within 
the  State  or  are  transacting  a  business 
not  of  an  interstate  character.  (See 
•post,  §  436.)  But  foreign  corpora- 
tions engaged  in  interstate  commerce 
cannot  be  interfered  ■with  by  State 
legislation.       Under     the     commerce 

784 


clause,  the  Supreme  Court  has  re- 
peatedly held  that  State  laws  impos- 
ing conditions  upon  the  sale  of  goods 
to  be  shipped  into  a  State  are  uncon- 
stitutional as  intrenching  upon  the 
powers  of  Congress.  The  sale  by  a 
foreign  corporation,  by  sample  or 
otherwise,  of  goods  outside  the  State 
and  their  subsequent  .shipment  across 
State  lines  is  interstate  commerce  with 
which  alone  Congress  has  power  to 
deal.  The  consequence  is,  as  pointed 
out  in  the  text,  that  State  anti-trust 
statutes  apply  only  to  corporate  com- 
binations doing  a  localized  business, 
e.g.  insurance  companies  and  corpora- 
tions ha\ing  local  distributing  cen- 
tres. And  any  regulation  of  the  do- 
mestic corporate  combination  must 
prove  ineffective  if  its  competitor  may 
locate  over  the  boundary  line  and 
freely  ship  goods  into  the  State  and  sell 
them  below  cost  for  the  purpose  of 
stifling  local  competition.  How  far 
the  State  anti-discrimination  statutes 
(see  ante,  §  414,  note)  will  meet  the 
latter  practice  remains  to  be  seen. 

Manifestly  no  remedy  for  this  con- 
dition, should  it  arise,  can  be  found 
in  State  legi.slation.  State  statutes 
cannot  affect  interstate  commerce, 
and  that  which  requires  regulation 
is  interstate  commerce.  Moreover, 
whatever  deficiencies  may  exist  in 
the  present  federal  statute,  it  cannot 
be  broadened  by  amendment.  It 
already  prohibits  all  combinations 
in  restraint  of  interstate  commerce. 
Neither  its  terms  nor  its  application 
can  be  extended.  It  reaches  the  con- 
stitutional limit  in  the  regulation  of 
interstate  commerce  through  the 
removal  of  restraint.  But  the  regula- 
tion of  commerce  may  consist  in  the 
imposition  as  well  as  in  the  removal 
of  restraint.  If  the  present  statute 
prove  insufficient,  it  may  be  necessary 


CHAP.  XLlJ      STATE    STATUTES    AND   THEIR   CONSTITUTIONALITY        §   417 

commerce,  the  further  examination  of  the  subject  of  the  con- 
stitutionality of  such  legislation  will  proceed  along  the  lines  of 
the  following  broad  and  controlling  propositions: 

(1)  Quasi-public  corporations,  in  their  relations  with  other 
corporations,  are  subject  to  the  control  of   the  State. 

(2)  Property  devoted  to  public  use  is  subject  to  public  regu- 
lation. 

(3)  Under  its  resented  power,  the  State  has  greater  power 
over  a  corporation  than  over  an  individual. 

(4)  The  right  to  contract  is  a  natural,  but  not  an  absolute,  right. 

(5)  The  police  power  of  the  State  may  be  exercised  for  the  pro- 
motion of  the  public  welfare  —  not  solely  for  the  protection 
of  the  public  health,  morals  and  safety. 

(6)  The  exemption  of  classes  of  persons  and  products  from 
the  operation  of  State  anti-trust  laws  is  in  violation  of  the 
Fourteenth  Amendment  to  the  federal  Constitution. 

(7)  Statutes  which  stand  the  test  of  the  Fourteenth  Amend- 
ment will  stand  the  test  of  any  State  constitutional  provision 
protecting  property  rights,  but  must  conform  to  other  State 
provisions. 

§  417.  Power  of  State  to  prohibit  Combinations  of  Quasi- 
public  Corporations.  Power  over  Property  devoted  to  Public 
Uses.  —  Q'./asi-public  corporations,  in  consideration  of  the 
grant  of  public  franchises,  assume  the  performance  of  public 
duties.  Contracts  with  other  corporations  interfering,  in  any 
degree,  with  the  proper  discharge  of  their  obligations,  are 
against  public  policy. 

The  State  may  make  regulations  for  the  control  and  manage- 
ment of  g?/as/-public  corporations.^  It  may,  by  statute,  pro- 
vide penalties  for  the  execution  of  agreements  inimical  to  public 
policy,  and  may  control  the  relations  between  such  corporations. 
State  laws,  designed  for  the  promotion  of  the  public  interests, 
prohibiting  combinations  of  quasi-public  corporations,  are, 
unquestionably,  constitutional. 

to  place  limitations  upon  interstate  operating  in  States  by  means  of  inter- 
commerce.     And  the  first  step  in  such  state  commerce. 

direction  might  properly  be   to  siii>-  *  See  Georgia,  etc.  Ranking  Co.  v. 

plement  State  legislation  with  respect  Smith,  128  U.  S.  174  (ISSS),  (9  Sup. 

to     foreign     corporate     combinations  Ct.  Rep.  47),  as  an  illustrative  ceise. 

785 


§   417  INTERCORPORATE   RELATIONS  [PART   V 

But  the  power  of  the  State  is  broader  than  its  I'ight  to  regu- 
late quasi-public  corporations.  It  is  not  dependent  upon  what 
may  be  termed  the  contractual  obligations  of  those  cor- 
porations —  assumed  in  consideration  of  public  grants,  —  but 
may  grow  out  of  the  nature  of  the  business  of  any  corporation 
—  ^uasi-public  or  private — or  individual.  Whenever  the 
nature  of  a  business  implies  a  public  duty,  the  State  has  power 
to  see  that  the  duty  is  performed.  In  the  leading  case  of  Munn 
V.  Illinois,^  the  Supreme  Court  of  the  United  States,  in  declaring 
constitutional  a  law  regulating  charges  at  grain  elevators,  said: 
"Property  does  become  clothed  with  a  public  interest  when 
used  in  a  manner  to  make  it  of  public  consequence  and  affect 
the  community  at  large.  When,  therefore,  one  devotes  his 
property  to  a  use  in  which  the  public  have  an  interest,  he,  in 
effect,  grants  to  the  public  an  interest  in  that  use  and  must  sub- 
mit to  be  controlled  by  the  public  for  the  common  good  to  the 
extent  of  the  interest  he  has  thus  created.  He  may  withdraw 
his  grant  by  discontinuing  the  use,  but  so  long  as  he  maintains 
the  use,  he  must  submit  to  the  control." 

This  power  of  the  State  to  exercise  control  over  property  de- 
voted to  a  public  use  is  analogous  to  its  police  power,  but  may  be 
more  precisely  defined  as  its  power,  as  trustee  for  the  public,  to 
enforce  trusts  attaching  to  property  or  business  for  the  public 
benefit. 


'Munn   V.    Illinois,    94   U.    S.    113  his  property  to  a  use  in  which  the  pub- 

(1876).     Mr.   Chief  Justice  Waite,  in  lie  has  an  interest,  he,  in  effect,  grants 

his    opinion,    said    (p.    125)  :     "This  to  the  public  an  interest  in  that  use, 

brings  us  to  inquire  as  to  the  principles  and  must  submit  to  be  controlled  by 

upon  which  this  power  of  regulation  the  public   for  the  common  good,   to 

rests,  in  order  that  we  may  determine  the  extent  of  the  interest  he  has  thus 

what  is  within  and  what  is   without  created.      He  may  withdraw  his  grant 

its  operative  effect.     Looking  then  to  by  discontinuing  the  use;    but  so  long 

the  common  law  from  whence  came  as  he  maintains  the  use,  he  must  sub- 

the  right  which  the  Constitution  pro-  mit  to  the  control   ...   (p.  130).     But 

tects,  we  find  that  when  private  prop-  we  need  not  go  further.      Enough  has 

erty  is  'affected  with  a  public  interest  already  been  said  to  show  that,  when 

it  ceases  to  be  juris  prtvati  only.'  .   .   .  property  is  donated  to  a  public  use,  it 

Propertj'^  does    become    clothed   with  is  subject   to  public  regulation." 

a    public    interest    when    used    in    a  This  doctrine  was  reaffirmed  by  the 

manner   to   make  it  of   public   conse-  Supreme  Court  in  Budd  r.  New  York, 

quence  and  affect  the  community  at  143  U.  S.  517  (1892),  (12  Sup.  Ct.  Rep. 

large.     When,  therefore,  one  devotes  468). 

786    • 


CHAP.  XLl]      STATE   STATUTES    AND   THEIR   CONSTITUTIONALITY        §   418 

The  question  is  entitled  to  serious  consideration  whether  the 
exercise  of  this  power  may  not  afford  an  effective  remedy  for 
some  of  the  evils  of  the  combination.  When  a  corporate  com- 
bination obtains  substantial  control  of  the  market  for  a  neces- 
sar}'  of  life,  its  business  —  much  more  than  that  of  a  company 
operating  a  grain  elevator  —  is  "  clothed  with  a  public  interest." 
Its  property  is  "used  in  a  manner  to  make  it  of  public  conse- 
quence and  affects  the  community  at  large."  Upon  the  prin- 
ciples of  Munn  v.  Illinois,  it  would  seem  that  the  State  might 
regulate  the  charges  of  such  combinations  —  within  reasonable 
limits  —  and  exercise  supervisoiy  control  over  their  manage- 
ment.^ 

The  corporate  combination,  when  of  controlling  power,  might 
well  be  subjected  to  the  rules  governing  guasi-public  corpora- 
tions. Its  efficiency  lies  in  its  corporate  character.  In  con- 
sideration of  the  grant  of  powers,  why  should  it  not  assume  the 
same  obligations  to  the  public  in  their  exercise  that  the  quasi- 
public  corporation  assumes  in  consideration  of  the  grant  of 
franchises  ? 

§  41 S.  Power  of  State  to  prohibit  Combinations  of  Corpora- 
tions in  Exercise  of  Reserved  Power.  — Corporations  are  the 
creations  of  the  State,  endowed  with  such  faculties  as  it  bestows 
and  subject  to  such  conditions  as  it  imposes.  Where  power  is 
reserved  to  modify  their  charters,  the  reservation  is  a  part  of  the 


>  The  language  of  an  old  English  of  them,  and  he  have  a  monopoly  in 
case  is  singularly  applicable.  In  Aid-  them  for  that  purpose,  if  he  will  take 
nutt  V.  IngUs,  12  East  527  (1810),  it  the  benefit  of  that  monopoly,  he  must, 
appeared  that  the  London  Dock  Co.  as  an  equivalent,  perform  the  duty 
had  acquired  ^^rtual  control  of  the  attached  to  it  on  reasonable  terms 
warehouses  for  the  reception  of  wines  ...  (p.  539).  It  is  enough  that 
from  importers,  and  the  cjuestion  was  there  exists  in  the  place  and  for  the 
whether  it  could  charge  arbitrary  comraodit}'-  in  question,  a  \'irtual  mo- 
rates  for  storage  or  was  obliged  to  nopoly  of  the  warehousing  for  this  pur- 
accept  reasonable  compensation.  pose  on  which  the  principles  of  law 
Lord  Ellcnborough  said  (p.  547) :  attach  as  laid  down  by  Lord  Hale 
"There  is  no  doubt  that  the  general  in  the  passage  referred  to  [When  pri- 
principle  is  favored,  both  in  law  and  vate  property  is 'affected  with  a  public 
justice,  that  every  man  maj^  fix  what  interest  it  ceases  to  be  juris  priiniC 
prices  he  plea.ses  upon  his  own  prop-  only.'  ' De  Portibiis  ^ fart's,'  1  Harg. 
erty  or  the  u.se  of  it ;  but  if,  for  a  par-  Law  Tracts,  78]  which  includes  the 
ticular  jMirpose,  the  public  have  aright  good  sense  as  well  as  the  law  of  the 
to  resort  to  his  premises  and  make  use  subject." 

787 


§419 


INTERCORPORATE    RELATIONS 


[part  V 


contract  between  the  corporation  and  the  State,  and  a  legiti- 
mate exercise  of  the  power  in  no  way  impairs  the  obligation  of 
the  contract.^ 

The  power  of  the  State,  under  its  reservation,  to  regulate  the 
contracts  of  corporations,  and  to  control  their  relations  with 
other  corporations,  is  greater  than  its  power  over  individuals. 
An  act  may  be  unconstitutional  as  to  natural  persons  and  con- 
stitutional as  to  corporations.^ 

It  may  be  conceded  that  the  legislature,  under  its  right  to 
amend,  cannot  take  away  from  corporations  the  right  to  con- 
tract, or  affect  vested  rights.  But  the  State  may,  by  laws  having 
a  prospective  application,  regulate  the  right  to  contract,  and 
may  prohibit  combinations  when  prejudicial  to  the  public  inter- 
est. The  determination  of  the  question,  what  combinations  are 
prejudicial,  is  within  the  province  of  the  legislature,  and  only 
in  the  case  of  gross  perversion  of  power  could  the  courts  inter- 
vene.^ 

§  419.  Validity  of  State  Statutes  tested  by  Fourteenth  Amend- 
ment —  (A)  Right  to  Contract.  —  The  test  of  the  constitution- 


'  St.  Louis,  etc.  R.  Co.  v.  Paul,  173 
U.  S.  408  (1898),  (19  Sup.  Ct.  Rep. 
419). 

In  Shaffer  v.  Union  Mining  Co.,  55 
Md.  74  (1880),  the  Supreme  Court  of 
Maryland  said:  "The  acceptance  by 
the  corporation  of  a  charter,  with  the 
reservation  of  the  right  to  alter  and 
amend,  made  that  provision  a  part  of 
the  contract,  which,  as  between  the 
legislature  and  it  as  a  private  corpora- 
tion, it  must  be  understood  to  be.  A 
corporation  has  no  inherent  or  natural 
rights,  like  a  citizen.  It  has  no  rights 
but  those  which  are  expressly  con- 
ferred upoh  it,  or  are  necessarily  in- 
ferable from  the  powers  actually 
granted,  or  such  as  may  be  indispen- 
sable to  the  exercise  of  such  as  may  be 
granted.  A  private  corporation  is 
only  a  5MOsz-indi\'idual,  the  pure  crea- 
tion of  the  legislative  will,  with  just 
such  powers  as  are  conferred  expressly 
or  by  necessary  limitation,  and  no 
others." 

788 


Compare  BracevTlle  Coal  Co.  v. 
People,  147  111.  66  (1893),  (35  N.  E. 
Rep.  62,  37  Am.  St.  Rep.  206,  22 
L.  R.  A.  340). 

2  In  Leep  v.  St.  Louis,  etc.  R.  Co., 
68  Ark.  407  (1894),  (25  S..W.  Rep.  75, 
23  L.  R.  A.  264),  an  act  was  held 
unconstitutional  as  affecting  natural 
persons,  but  constitutional  as  to  cor- 
porations, as  an  exercise  of  a  reserved 
power  "to  alter,  revoke  and  annul 
any  charter  of  incorporation. " 

The  Court  conceded  that  the  legis- 
lature, under  its  reserved  power,  could 
not  take  from  corporations  the  right 
to  contract,  but  held  that  it  could 
regulate  that  right  when  demanded 
by  the  public  interest,  although  not  to 
such  an  extent  as  to  render  the  cor- 
poration unable  to  fulfil  the  purposes 
of  its  organization. 

^  See  United  States  v.  Joint  Traffic 
Ass'n,  171  U.  S.  566  (1898),  (19  Sup. 
Ct.  Rep.  25). 


CHAP.  XLl]     STATE   STATUTES   AND   THEIR   CONSTITUTIONALITY         §   419 

ality  of  any  State  anti-trust  statute  may  properly  be  the  Four- 
teenth Amendment  to  the  Constitution  of  the  United  States. 
It  broadly  guarantees  the  right  of  property.  A  statute  against 
combinations  which  does  not  contravene  its  provisions  does  not 
conflict  with  any  provision  of  any  State  constitution  protecting 
property  rights.* 

The  Fourteenth  Amendment  provides  that  "no  State  shall 
make  or  enforce  any  law  which  shall  abridge  the  privileges  or 
immunities  of  citizens  of  the  United  States;  nor  shall  any  State 
deprive  any  person  of  life,  liberty  or  property, 'without  due 
process  of  law,  nor  deny  to  any  person  within  its  jurisdiction  the 
equal  protection  of  the  laws." 

The  right  of  property  secured  by  the  Amendment  necessarily 
includes  the  right  to  contract,  for  it  is  only  by  the  exercise  of 
that  right  that  a  person  can  lawfully  acquire  property  by  his 
own  exertion.  The  right  to  contract  cannot  be  taken  away 
without  "due  process  of  law."  ^ 


'  But  State  anti-trust  statutes  may 
contain  provisions  in  conflict  with 
other  sections  of  State  constitutions. 
See  post,  §  422 :  "  Validity  of  State 
Statutes  under  State  Constitutional 
provisions. " 

'  Leep  V.  St.  Louis,  etc.  R.  Co.,  58 
Ark.  407  (1894),  (25  S.  W.  Rep.  75, 
23  L.  R.  A.  264). 

Ritchie  V.  People,  155  111.  98  (1895), 
(40  N.  E.  Rep.  454,  46  Am.  St.  Rep. 
315,  29  L.  R.  A.  79)  :  "This  right  to 
contract  which  is  thus  included  in 
the  fundamental  rights  of  liberty  and 
property  cannot  be  taken  away  with- 
out 'due  process  of  law.'  " 

Connnonwealth  v.  Perrj',  155  Mass. 
117  (1891),  (28  N.  E.  Rep.  1126,  31 
Am.  St.  Rep.  533,  14  L.  R.  A.  325) : 
"The  right  to  acquire,  possess  and 
protect  propertj'  includes  the  right 
to  make  reasonable  contracts,  which 
shall  be  under  the  protection  of  the 
law. " 

In  re  Grice,  79  Fed.  627  (1897): 
"One  of  the  most  sacred  rights  of  lib- 
erty is  the  right  to  contract.  All  of  the 
rights  of  contract  which  are  necessary 


for  the  carrying  on  of  ordinary  busi- 
ness affairs  are  protected  by  the  Con- 
stitution and  are  not  capable  of  being 
restrained  by  legislative  action." 

"The  third  absolute  right,  inherent 
in  every  Englishman,  is  that  of  prop>- 
erty,  which  consists  in  the  free  use, 
enjoyment  and  disposal  of  all  his 
acquisitions,  without  any  control  or 
diminution,  save  onlj'  by  the  laws  of 
the  land."     1  Black.  Com.  138. 

State  V.  Smiley,  65  Kan.  240, 
243  (1902),  (69  Pac.  Rep.  199,  67 
L.  R.  A.  903),  affirmed  196  U.  S.  447 
(1905),  (25  Sup.  Ct.  Rep.  289)  :  "The 
above  statute  is  assailed  with  great 
vehemence  by  counsel  for  appellant. 
Their  contention  is  that  it  imposes 
such  limitations  upon  freedom  of  con- 
tract as  to  constitute  a  deprivation 
of  the  right  of  property,  contrary 
to  the  guaranty  of  the  Fourteenth 
Amendment  to  the  federal  Constitu- 
tion. They  say  that,  instead  of  being 
what  it  purports,  an  act  to  prevent 
unreasonable  restrictions  upon  trade, 
it  is  itself  such  restriction,  and  is  there- 
fore   \nolative    of    the    fundamental 

789 


§419 


INTERCORPORATE    RELATIONS 


[part  V 


The  right  to  contract,  however,  is  not  an  absolute  right,  but 
may  be  subjected  to  restraints  demanded  by  the  welfare  of  the 
State.'  The  Fourteenth  Amendment  does  not  conflict  with  the 
exercise  of  the  State's  police  power.^  As  said  by  Mr.  Justice 
Field  in  Barbier  v.  Connolly:^  "Neither  the  amendment  — 
broad  and  comprehensive  as  it  is  —  nor  any  other  amendment 
was  designed  to  interfere  with  the  power  of  the  State,  sometimes 
called  its  police  power,  to  prescribe  regulations  to  promote  the 
health,  peace,  morals,  education  and  good  order  of  the  people, 
and  to  legislate  so  as  to  increase  the  industries  of  the  State, 
develop  its  resources  and  add  to  its  wealth  and  prosperity." 

The  question,  therefore,  whether  a  State  statute  regulating 
the  right  to  combine  *  —  a  form  of  the  right  to  contract  — 


right  to  acquire  property  by  lawful 
contract." 

See  also  State  v.  Associated  Press, 
159  Mo.  410  (1900),  (60  S.  W.  Rep.  91, 
51  L.  R.  A.  151). 

>  In  Frisbie  v.  United  States,  157 
U.  S.  165  (1895),  (15  Sup.  Ct.  Rep. 
586),  Mr.  Justice  Brewer  said  :  "While 
it  may  be  conceded  that,  generally 
speaking,  among  the  inalienable  rights 
of  the  citizen  is  that  of  the  liberty  of 
contract,  yet  such  liberty  is  not  abso- 
lute and  universal.  It  is  within  the 
undoubted  power  of  government  to  re- 
strain some  indi\dduals  from  all  con- 
tracts, as  well  as  all  indi'viduals  from 
some  contracts.  It  may  deny  to  all 
the  right  to  contract  for  the  purchase 
or  sale  of  lottery  tickets ;  to  the  minor, 
the  right  to  assume  any  obligations, 
except  for  the  necessaries  of  existence ; 
to  the  common  carrier,  the  power  to 
make  any  contract  releasing  himself 
from  negligence,  and,  indeed,  may 
restrain  all  engaged  in  any  employ- 
ment from  any  contract  in  the  course 
of  that  employment  which  is  against 
public  policy." 

See  also  Knox\nlle  Iron  Co.  v.  Har- 
bison, 183  U.  S.  20  (1901);  St.  Louis, 
etc.  R.  Co.  V.  Paul,  173  U.  S.  408 
(1898),  (19  Sup.  Ct.  Rep.  419) ;  Orient 
Ins.  Co.  V.  Daggs,  172  U.  S.  565  (1898), 

790 


(19  Sup.  Ct.  Rep.  281);  Hooper  v. 
CaUfornia,  155  U.  S.  658  (1895),  (15 
Sup.  Ct.  Rep.  207) ;  Leep  v.  St.  Louis, 
etc.  R.  Co.,  58  Ark.  407  (1894),  (25  S. 
W.  Rep.  75). 

2  Davds  V.  Massachusetts,  167  U.  S. 
43  (1897),  (17  Sup.  Ct.  Rep.  731); 
.Tones  v.  Brim,  165  U.  S.  180  (1897), 
(17  Sup.  Ct.  Rep.  282);  Covington, 
etc.  Turnpike  Co.  v.  Sandford,  164 
U.  S.  592  (1896), -(17  Sup.  Ct.  Rep. 
198);  Giozza  v.  Tiernan,  148 
U.  S.  657  (1893),  (13  Sup.  Ct.  Rep. 
721);  Mugler  v.  Kansas,  123  U.  S. 
623  (1887),  (8  Sup.  Ct.  Rep.  273;) 
Barbier  v.  Connolly, .  113  U.  S.  27 
(1885),  (5  Sup.  Ct.  Rep.  357). 

3  Barbier  v.  Connolly,  113  U.  S.  31 
(1885),  (5  Sup.  Ct.  Rep.  357). 

*  "A  man  has  a  constitutional  right 
to  buy  anything,  or  any  quantity,  pro- 
vided he  use  only  fair  means,  and  set 
his  own  price  on  it,  or  refuse  to  sell  it 
at  all.  And  what  one  man  maj^  do 
as  an  individual,  two  or  more  may  do 
when  combined  as  partners.  Com- 
bination for  business  purposes  is  legal. 
Combinations  are  beneficial  as  weU  as 
injurious,  according  to  the  motives  or 
aims  with  which  they  are  formed.  It 
is  therefore  impossible  to  prohibit  all 
combinations.  The  prohibition  must 
rest  upon  the  objectionable  character 


CHAP.  XLl]      STATE   STATUTES   AND   THEIR   CONSTITUTIONALITY        §   420 

contravenes  the  provisions  of  the  Fourteenth  Amendment 
guaranteeing  the  right  of  property,  depends  upon  whether  it 
was  enacted  in  the  legitimate  exercise  of  the  poHce  power  of  the 
State. 

§  420.  Validity  of  State  Statutes  tested  by  Fourteenth  Amend- 
ment —  (B)  Police  Power  of  the  State.  — ^  The  pohce  power  of 
the  State  may  be  broadly  defined  as  that  inherent  and  plenary 
power  which  enables  it  to  interdict  that  which  is  prejudicial  to 
the  welfare  of  society.  It  has  been  aptly  termed  "the  law  of 
overruling  necessity."  * 


of  the  objects  of  the  combination." 
Tiedeman  Liin.  PoUce  Power,  244. 

But  compare  this  language  with 
the  decision  in  Bailey  v.  Master 
Plumbers'  Ass'n,  103  Tenn.  99  (1899), 
(52  S.  W.  Rep.  853,  46  L.  R.  A.  561), 
where  it  was  held  that  the  legal  right 
of  an  individual  plumber  to  purchase 
supplies  from  any  dealer  he  pleases 
will  not  justify  a  by-law  of  an  associa- 
tion of  plumbers  which  permits  mem- 
bers to  make  purchases  only  from  such 
dealers  as  will  .sell  to  members  ex- 
clusively, the  individual  right  being 
radically  different  from  the  combined 
action. 

It  is  clear  that  persons  cannot 
always  combine  to  do  that  which 
individually  they  may  have  the  right 
to  do.  The  act  of  combining  in 
itself  may  be  against  public  policy  or 
be  prohibited  by  statute. 

*  Town  of  Lakeview  v.  Rose  Hill 
Cemetery  Co.,  70  111.  191  (1873),  (22 
Am.  Rep.  71). 

The  police  power  of  the  State  ex- 
tends not  only  over  matters  relating 
to  the  health,  morals  and  safety  of  the 
public,  but  over  whatever  relates  to 
the  public  comfort  and  convenience. 
Lake  Shore,  etc.  R.  Co.  v.  Ohio,  173 
U.  S.  285  (1899),  (19  Sup.  Ct.  Rep. 
465). 

"The  police  of  a  State,  in  a  com- 
prehensive sense,  embraces  its  whole 
system  of  internal  regulation  by  which 
the  State  seeks  not  only  to  preserve 


the  public  order  and  to  prevent  of- 
fences against  the  State,  but  also  to 
establish,  for  the  intercourse  of  citi- 
zens with  citizens,  those  rules  of  good 
manners  and  good  neighborhood 
which  are  calculated  to  prevent  a  con- 
flict of  rights,  and  to  insure  to  each 
the  uninterrupted  enjoyment  of  his 
own  so  far  as  reasonably  consistent 
with  a  like  enjoyment  of  rights  by 
others."  Cooley's  Const.  Lim.  (4th 
ed.)  713. 

Thorpe  v.  Rutland,  etc.  R.  Co.,  27 
Vt.  149  (1855),  (62  Am.  Dec.  625) 
(Redfield,  C.  J.)  :  "The  police  power 
of  the  State  extends  to  the  protection 
of  the  lives,  limbs,  health,  comfort 
and  quiet  of  all  persons,  and  the  pro- 
tection of  all  property  within  the 
State. " 

Commonwealth  v.  Alger,  7  Cush. 
(Mass.)  84  (1851),  (Shaw,  C.  J.)  :  "The 
power  we  allude  to  is  rather  the  police 
power ;  the  power  vested  in  the  legis- 
lature by  the  Constitution  to  make, 
ordain  and  establish  all  manner  of 
wholesome  and  reasonable  laws,  stat- 
utes and  ordinances,  either  with 
penalties  or  without,  not  repugnant 
to  the  Constitution  as  they  shall  judge 
to  be  for  the  good  and  welfare  of  the 
Commonwealth  and  of  the  subjects 
of  the  same." 

New  Orleans  Gas  Light  Co.  v.  Hart, 
40  La.  Ann.  474  (1888),  (4  So.  Rep. 
215,  8  Am.  St.  Rep.  544):  "Police 
power  is  the  right  of  the  State  func- 

791 


§420 


INTERCORPORATE    RELATIONS 


[part  V 


The  State,  in  the  exercise  of  its  police  power,  may  enact  "all 
such  laws  not  in  plain  conflict  with  some  provision  of  the  State 
or  federal  Constitutions  as  may  rightfully  be  deemed  necessary 
or  expedient  for  the  safety,  health,  morals,  comfort  and  welfare 
of  the  people."  ^ 

Laws  against  combinations  for  the  purpose  of  restricting  pro- 
duction, maintaining  prices  or  suppressing  competition,  have 
a  relation  to  the  end  of  all  police  regulations  —  the  comfort, 
welfare  or  safety  of  society.^  The  preservation  of  competition 
is  clearly  within  the  police  power  of  the  State. 


tionaries  to  prescribe  regulations  for 
the  good  order,  peace,  protection, 
comfort  and  convenience  of  the  com- 
munity which  do  not  encroach  on  the 
like  power  vested  in  Congress  by  the 
federal  Constitution." 

Mayor,  etc.  of  New  York  v.  Miln, 
11  Pet.  (U.  S.)  139  (1837):  "Every 
law  comes  within  this  description  [a 
police  regulation]  which  concerns  the 
welfare  of  the  whole  people  of  the 
State,  or  any  indiWdual  within  it, 
whether  it  relates  to  their  rights  or 
their  duties;  whether  it  respects 
them  as  men  or  citizens  of  the  State, 
whether  in  their  public  or  private  rela- 
tions; whether  it  relates  to  the  rights 
of  persons  or  of  property  of  the  whole 
people  of  the  State,  or  of  any  indi- 
vidual within  it;  and  whose  opera- 
tion is  within  the  territorial  limits  of 
the  State,  and  upon  the  persons  and 
things  within  its  jurisdiction." 

*  In  Knox\ille  Iron  Co.  v.  Harbison, 
183  U.  S.  20  (1901),  the  Supreme 
Court  of  the  United  States  quotes 
with  approval  the  extract  in  the  text 
from  the  decision  of  the  Supreme 
Court  of  Tennessee  in  the  same  case, 
sub  nom.  Harbison  v.  Knoxville  Iron 
Co.,  103  Tenn.  421  (1900),  (53  S.  W. 
Rep.  955). 

Lochner  v.  New  York,  198  U.  S. 
53  (1905),  (25  Sup.  Ct.  Rep.  539)  : 
"These  powers,  broadly  stated,  and 
without  any  attempt  at  a  more  spe- 
cific  limitation,  relate  to   the   safety, 

792 


health,  morals  and  general  welfare  of 
the  public." 

Commonwealth  v.  Strauss,  191 
Mass.  550  (1906),  (78  N.  E.  Rep.  136) : 
"There  is  no  doubt  that  the  statute 
before  us  puts  a  limitation  upon  the 
general  right  to  make  contracts.  The 
contention  of  the  Commonwealth  is 
that  this  limitation  is  valid  as  an  ex- 
ercise of  the  police  power.  The  nature 
of  the  police  power  and  its  extent,  as 
applied  to  conceivable  cases,  carmot 
easily  be  stated  with  exactness.  It 
includes  the  right  to  legislate  in  the 
interest  of  the  public  health,  the  pub- 
lic safety  and  the  public  morals.  If 
the  power  is  to  be  held  within  the 
limits  of  the  field  thus  defined,  the 
words  should  be  interpreted  broadly 
and  liberally.  If  we  are  to  include  in 
the  definition,  as  many  judges  have 
done,  the  right  to  legislate  for  the  pub- 
lic welfare,  this  term  should  be  de- 
fined with  some  strictness,  so  as  not 
to  include  everything  that  may  be 
enacted  on  grounds  of  mere  ex- 
pediency." 

2  Ritchie  v.  People,  155  111.  98 
(1895),  (40  N.  E.  Rep.  454,  46  Am. 
St.  Rep.  315,  29  L.  R.  A.  79)  :  "The 
police  power  of  the  State  is  that  power 
which  enablec  it  to  promote  the  health, 
comfort,  safetj'  and  welfare  of  soci- 
ety. It  is  very  broad  and  far-reaching, 
but  it  is  not  without  its  limitations. 
Legislative  acts  passed  in  pursu- 
ance   of   it    must  not    be    in    conflict 


CHAP.  XLl]      STATE    STATUTES    AND   THEIR   CONSTITUTIONALITY        §  420 

In  the  absence  of  statutory  provisions,  the  law  leaves  com- 
binations inimical  to  public  policy  as  it  finds  them,  and  contents 
itself  with  declining  to  recognize  or  enforce  their  agreements. 
Statutes  reenforcing  the  common  law,  defining  the  rules  of 
public  policy  and  making  criminal  combinations  contrary 
thereto  are,  undoubtedly,  valid. 

The  power  of  police,  however,  is  not  confined  to  providing 
additional  penalties  for  entering  into  combinations  previously 
unlawful.  Statutes  having  for  their  object  the  preservation  of 
competition  and  prohibiting  all  agreements  or  combinations, 
directly  restraining  or  tending  to  directly  restrain  it  in  any 
degree,  are  undoubtedly  constitutional,  although  they  go  much 
further  than  the  common  law.*     The  wisdom  or  policy  of  their 


with  the  Constitution,  and  must  have 
some  relation  to  the  ends  sought  to  be 
accomplished,  —  that  is  to  say,  to  the 
comfort,  welfare  or  safety  of  society. " 

It  is  within  the  police  power  of 
the  legislature  to  determine  what  mo- 
nqpolies  are  contrary  to  the  general 
welfare. 

In  re  Opinion  of  the  Justices,  193 
Mass.  605  (1907),  (81  N.  E.  Rep.  142). 

State  V.  Missouri,  etc.  R.  Co. 
(Tex.  1906),  91  S.  W.  Rep.  214, 
219  :  "  But  it  is  said  that  this  interpre- 
tation of  the  statute  would  render  it 
unconstitutional,  as  impairing  the  ob- 
ligation of  a  valid  contract.  .  .  .  The 
same  power  which  may,  upon  suffi- 
cient occasion,  destroy  other  property 
of  the  citizen  to  secure  the  general 
welfare,  may,  to  the  same  end,  de- 
stroy the  binding  obligation  of  con- 
tracts. The  constitutional  inhibition 
against  the  impairment  of  the  obliga- 
tion of  contracts  is  not  a  limitation 
upon  the  police  power  when  exercised 
within  its  legitimate  sphere,  and  there- 
fore the  mere  objection  that  an  exer- 
cise of  that  power  impairs  the  obliga- 
tion of  a  contract  <loes  not  reach  the 
true  question,  which  is  whether  or  not 
the  attempted  exercise  is  within  the 
scope  of  the  power  exerci-scd." 

'  At  the  time  of  the  first  edition 


of  this  treatise  the  broad  question 
whether  the  State  anti-trust  statutes 
take  away  the  property  rights  guar- 
anteed by  the  P^ourteenth  Amend- 
ment had  not  been  passed  upon  by  the 
Supreme  Court  of  the  United  States. 
But  since  then  the  Kansas  and  Texas 
statutes  have  been  before  the  Court; 
their  constitutionality  has  been  ques- 
tioned upon  broad  grounds,  and 
they  have  been  declared  to  be  con- 
stitutional. 

Smiley  v.  Kansas,  196  U.  S.  447 
(1905),  (25  Sup.  Ct.  Rep.  289);  Jack 
V.  Kansas,  199  U.  S.  372  (1905),  (26 
Sup.  Ct.  Rep.  73);  National  Cotton 
Oil  Co.  V.  Texas,  197  U.  S.  115  (1905), 
(25  Sup.  Ct.  Rep.  379). 

In  the  Smiletf  case  the  Court  .said 
(p.  456)  :  "Undoubtedly  tlicre  is  a 
certain  freedom  of  contract  which 
cannot  be  destroyed  by  legislative 
enactment.  In  pursuance  of  that 
freedom,  parties  may  seek  to  further 
their  business  interests,  and  it  may 
not  always  be  easy  to  draw  the  line 
between  those  contracts  which  are 
beyond  the  reach  of  the  police  power 
and  those  which  are  subject  to  pro- 
hibition or  restraint.  But  a  secret 
arrangement,  by  which,  under  penal- 
ties, an  apparently  existing  comjie- 
tition  among  all  the  dealers  in  a  com- 

793 


§420 


INTERCORPORATE   RELATIONS 


[part  V 


munity  in  one  of  the  necessaries  of 
life  is  substantially  destroyed,  with- 
out any  merging  of  interests  through 
partnership  or  incorporation,  is  one 
to  which  the  police  power  extends." 

In  the  Texas  case  the  Court  said 
(p.  129)  :  "It  is  certainly  the  concep- 
tion of  a  large  body  of  public  opinion 
that  the  control  of  prices  through 
combinations  tends  to  restraint  of 
trade  and  to  monopoly,  and  is  evil. 
The  foundations  of  the  belief  we  are 
not  called  upon  to  discuss,  nor  does 
our  purpose  require  us  to  distinguish 
between  the  kinds  of  combinations 
or  the  degrees  of  monopoly.  It  is 
enough  to  say  that  the  idea  of  mo- 
nopoly is  not  now  confined  to  a  grant 
of  pri\'ileges.  It  is  understood  to 
include  'conditions  produced  by  the 
acts  of  mere  individuals.'  Its  domi- 
nant thought  now  is,  to  quote  another, 
'the  notion  of  exclusivene.ss  or  unity' ; 
in  other  words,  the  suppression  of 
competition  bj'  the  unification  of  in- 
terests or  management,  or  it  may  be 
through  agreement  and  concert  of 
action.  And  the  purpose  is  so  defi- 
nitely the  control  of  prices  that  mo- 
nopoly has  been  defined  to  be  '  unified 
tactics  with  regard  to  prices.'  It  is 
the  power  to  control  prices  which 
makes  the  inducement  of  combina- 
tions and  their  profit.  It  is  such 
power  that  makes  it  the  concern  of  the 
law  to  prohibit  or  limit  them.  And 
this  concern  and  the  policy  based 
upon  it  has  not  only  expression  in  the 
Texas  statutes;  it  has  expression  in 
the  statutes  of  other  States  and  is  a 
well-known  national  enactment.  Ac- 
cording to  them,  competition,  not 
combination,  should  be  the  law  of 
trade.  If  there  is  evil  in  this,  it  is 
accepted  as  less  than  that  which  may 
result  from  the  unification  of  interest, 
and  the  power  such  unification  gives. 
And  that  legislatures  may  so  ordain, 
this  Court  has  decided.  ...  It 
follows  that  the  statutes  of  Texas  do 
not  deprive  the  oil  company  of  its 
property  without  due  process  of  law." 

794 


The  following  decisions  of  State 
courts  sustain  the  constitutionaUty  of 
the  anti-trust  statutes  of  their  re- 
spective States: 

Kansas.  The  anti-trust  statute  of 
this  State  does  not  conflict  with  the 
guaranty  of  the  right  to  acquire  prop- 
erty by  lawful  contract  .secured  by  the 
federal  Constitution  and  is  a  valid  ex- 
ercise of  legislative  power. 

State  V.  Smiley,  65  Kan.  240  (1902), 
(69  Pac.  Rep.  199),  affirmed  196  U.  S. 
447  (1905),  (25  Sup.  Ct.  Rep.  289). 

State  V.  Jack,  69  Kan.  387  (1904), 
(76  Pac.  Rep.  917),  affirmed  199  U.  S. 
372  (1905),  (26  Sup.  Ct.  Rep.  73): 
"The  anti-trust  law  is  a  valid  exercise 
of  legislative  power,  and  is  not,  as 
claimed  by  appellant,  \-iolative  of  the 
Fourteenth  Amendment  of  the  federal 
constitution." 

Michigan.  The  statute  of  this 
State,  declaring  void  all  contracts 
designed  in  any  manner  to  prevent  or 
restrict  free  competition  with  respect 
to  agricultural  commodities,  is  con- 
stitutional. Bingham  v.  Brands,  119 
Mich.  255  (1899),  (77  N.  W.  Rep.  940). 

The  Michigan  anti-trust  statute  of 
1899,  pro\'iding  for  the  revocation  of 
the  certificate  of  anj'^  foreign  corpora- 
tion \'iolating  its  pro\-isions,  is  not  in 
confhct  with  the  clause  of  the  Four- 
teenth Amendment  providing  that  no 
State  shall  enforce  any  law  which 
shall  abridge  the  privileges  or  im- 
munities of  citizens  of  the  United 
States. 

Attorney-General  v.  A.  Booth  & 
Co.,  143  Mich.  89  (1905),  (106  X.  W. 
Rep.  868. 

Missouri.  State  v.  Firemen's  Fund 
Ins.  Co.,  152  Mo.  46  (1899),  (52  S. 
W.  Rep.  595,  45  L.  R.  A.  363) :  "There 
is  no  such  thing  in  civilized  society 
as  unrestrained  power  to  contract. 
Every  man  surrenders  some  of  his 
individual  rights  when  he  associates 
with  or  becomes  a  part  of  any  society 
or  government,  and  the  power  of  the 
government  to  legislate  is  complete, 
so  that  while  according  to  every  man 


CHAP.  XLl]      STATE    STATUTES   AND   THEIR   CONSTITUTIONALITY        §  420 


the  fullest  possible  liberty  to  do  what 
he  pleases  with  his  own,  he  must  not 
interfere  with  the  similar  right  of 
others.  This  principle  underlies  and 
runs  through  all  government  and  so- 
cieties, and  it  is  the  corner-stone  of  the 
police  power  of  the  State." 

Ohio.  State  v.  Buckeye  Pipe  Line 
Co.,  61  Ohio  State  St.  547  (1900),  (50 
N.  E.  Rep.  464,  78  Am.  St.  Rep.  743)  : 
"The  definite  proposition  of  counsel 
upon  this  point  is  that  although  the 
act  is  an  exercise  of  legislative  power, 
it  transcends  the  provisions  of  the 
State  and  federal  constitutions  which 
render  in\-iolable  the  rights  of  liberty 
and  property,  which  include  the  right 
to  make  contracts.  It  would  be 
diflScult  to  place  too  high  an  estimate 
upon  these  guaranties,  and  include 
the  right  to  make  contracts.  But  it 
is  settled  that  these  guaranties  are 
themselves  limited  by  the  public  wel- 
fare or  the  exercise  of  the  police  power. 
Although  that  power  may  not  be  con- 
clusively defined,  its  nature  and  at- 
tributes have  been  the  subject  of  much 
investigation.  In  all  considerate  dis- 
cussions of  the  subject  it  is  conceded 
that,  in  the  exercise  of  this  power,  the 
legislature  can  prohibit  only  those  uses 
of  property  which  are  hurtful  to  the 
public,  and  the  inhibited  use  must 
be  hurtful  in  a  legal  sense.  That  con- 
tracts like  these  are  hurtful  in  that 
sense  has  been  held  in  more  cases  than 
it  would  be  practicable  to  cite." 

South  Carolina.  The  anti-trust 
statute  of  this  State  (Qvil  Code,  1902, 
§  2845)  is  a  legitimate  exercise  of 
the  police  power  of  the  State  and  is 
not  in  \aolation  of  the  Fourteenth 
Amendment  to  the  federal  Constitu- 
tion. 

State  V.  Virginia-Carolina  Chemical 
Co.,  71  S.  C.  544  (1905),  (51  S.  E.  Rep. 
455). 

Tennessee.  State  r".  Schlitz  Brew- 
ing Co.,  104  Tenn.  715  (1900),  (.59  S. 
W.  Rep.  10.39,  78  Am.  St.  Rep.  941): 
"The  right  of  contract  is  confessedly 
an  inherent  part  of  both  the  right  of 


'liberty,'  and  the  right  of  'property,' 
and  deprivation  of  it  is  therefore 
equally  forbidden  by  that  provision, 
but  none  of  them  are  unrestricted 
rights.  All  are  subject  to  the  law's 
control,  and  may  be  abridged  or 
even  destroyed  within  constitutional 
bounds." 

The  statute  sustained  in  this  case 
was  the  Tennessee  act  of  1897,  which 
was  also  declared  to  be  constitutional 
in  Bailey  v.  Master  Plumbers'  Ass'n, 
103  Tenn.  99  (1899),  (52  S.  W.  Rep. 
853,  46  L.  R.  A.  501).  This  statute, 
however,  contained  a  provision  ex- 
empting from  its  pro\'isions  agricul- 
tural products  and  live  stock,  and  was 
undoubtedly  unconstitutional  for  that 
reason.  The  Tennessee  anti-trust  act 
of  1903  omitted  this  exemption  and 
was  held  to  be  valid  and  constitu- 
tional in  State  v.  Witherspoon,  115 
Tenn.  138  (1906),  (90  S.  W.  Rep. 
852). 

Texas.  Waters-Pierce  Co.  v.  State, 
19  Tex.  Civ.  App.  1  (1898),  (44  S.  W. 
Rep.  940)  :  "  By  adequate  laws,  look- 
ing to  the  suppres.sion  of  evil,  the 
State,  through  the  exercise  of  its  po- 
lice power,  must  necessarily  restrain 
the  unbridled  license  of  the  citizen  in 
his  conduct  and  use  of  property,  and 
restraints  in  this  way  have  never  been 
held  to  illegally  impair  his  liberty. 
.  .  .  The  objection  to  the  statutes, 
that  they  deprive  the  owner  of  his 
property  without  due  process  of  law, 
is  equally  untenable.  It  was  not  the 
design  of  the  Fourteenth  Amendment 
of  the  Constitution  of  the  United 
States  to  interfere  with  a  just  and 
proper  exercise  of  the  police  power  by 
the  States.  ...  If  legislative  au- 
thority exists  to  restrain  the  conduct 
of  owners  in  a  particular  waj'  in  the 
use  of  property,  deemed  injurious  to 
the  public  welfare,  and  the  legislature 
ha\-ing  acted  in  the  manner  recjuired, 
in  passing  laws,  due  process  of  law 
exists,  in  so  far  as  it  is  necessary  to 
find  legal  authority  for  prohibiting 
the     act.     Legal     restraint     imposed 

795 


§420 


INTERCORPORATE   RELATIONS 


[part  V 


provisions  is  a  matter  for  legislative  determination.*  But  any 
statute  which,  under  the  guise  of  preserving  competition, 
takes  away  the  right  to  contract  entirely,  or  prohibits  acts  or 
agreements  which  can  have  no  direct  effect  upon  competition, 
is  undoubtedly  unconstitutional.^ 

Applying  these  principles  to  the  existing  State  legislation 
against  combinations,  it  may  be  broadly  stated  —  without 
analyzing  the  statutes  —  that  such  legislation  has  been  enacted 
in  the  legitimate  exercise  of  the  police  power  of  the  State  and 
does  not  unduly  infringe  upon  the  rights  of  property,  including 
the  right  to  contract,  guaranteed  by  the  Fourteenth  Amend- 


upon  the  use  of  property  does  not 
deprive  the  owner  of  it  without  due 
process  of  law." 

In  State  v.  Missouri,  etc.  R.  Co. 
(Tex.  1906),  91  S.  W.  Rep.  214, 
it  was  held  that  the  Texas  act  of 
1903  making  trusts  unlawful  and  ap- 
plying to  combinations  formed  prior 
to  its  enactment  but  carr3ang  on  busi- 
ness afterwards  was  not  unconstitu- 
tional as  impairing  the  obligation  of 
contracts. 

See  also  Houck  v.  Anheuser-Busch 
Brewing  Ass'n,  88  Tex.  184  (1894), 
(30  S.  W.  Rep.  869) ;  Texas  Brewing 
Co.  V.  Anderson  (Tex.  Civ.  App.  1897), 
40  S.  W.  Rep.  737;  Texas  Brewing 
Co.  V.  Durram  (Tex.  1898),  46  S.  W. 
Rep.  880. 

'  Waters-Pierce  Co.  v.  State,  19 
Tex.  Civ.  App.  1  (1898),  (44  S.  W. 
Rep.  940)  :  "When  it  is  once  admitted 
that  a  matter  is  a  subject  of  police 
supervision,  the  expediency  and  wis- 
dom of  the  means  resorted  to  are  sub- 
jects solely  confided  to  the  legislative 
department  of  the  State,  subject, 
however,  to  limitations  imposed  by 
the  organic  law  of  the  nation." 

^  In  In  re  Grice,  79  Fed.  627  (1897), 
Judge  Swayne  held  the  Texas  anti- 
trust act  unconstitutional  upon  the 
ground,  anaong  others,  that  it  abridged 
the  liberty  of  contract.  The  judge 
said,  in  his  opinion  :  "The  act  also  pro- 
hibits  combinations  which  create  or 

796 


carry  out  restrictions  in  trade.  It 
has  never  been  held  that  all  restric- 
tions in  trade  were  illegal  or  contrary 
to  public  policy.  The  rule  is  well  set- 
tled that  when  a  contract  is  publicly 
oppressive,  and  the  restrictions  broader 
than  necessary  for  the  legitimate  pro- 
tection of  the  other  party  to  be  bene- 
fited by  the  contract,  then  the  con- 
tract is  void ;  otherwise  it  is  legal. 
The  fault  of  the  act  in  regard  to  re- 
straint of  trade  is  the  same  in  regard 
to  competition.  It  makes  no  dis- 
tinction between  legal  and  illegal  com- 
binations and  agreements  which  pre- 
vent competition.  Those  which  have 
always  been  held  legal,  and  which 
have  always  been  an  easential  part  of 
the  liberty  of  the  citizen,  are  made 
criminal,  equally  with  those  which 
the  law  has  always  condemned." 

But  in  \'iew  of  later  decisions  of  the 
Supreme  Court  tliis  decision  cannot 
be  regarded  as  of  authority. 

In  Niagara  Fire  Ins.  Co.  v.  Cornell, 
110  Fed.  817  (1901),  it  was  held  that 
the  Nebraska  anti-trust  statute  was 
unconstitutional,  because  it  deprived 
persons  of  the  Uberty  to  make  and 
enforce  contracts.  The  reasoning  of 
the  Court  is,  however,  inconclusive. 

And  see  Cleland  v.  Anderson,  66 
Neb.  252  (1902),  (92  N.  W.  Rep.  306), 
where  this  statute  was  held  to  be  con- 
stitutional. 


CHAP.  XLl]      STATE   STATUTES   AND   THEIR   CONSTITUTICfNALITY        §   421 

ment.  And  the  same  conclusion  may  be  reached  upon  authority 
as  well  as  upon  principle,  for,  as  already  pointed  out,  the  Su- 
preme Court  of  the  United  States  has  sustained  the  constitu- 
tionality of  two  of  the  most  sweeping  of  the  State  statutes  — 
those  of  Kansas  and  Texas.' 

As  a  guide  for  determining  the  constitutionality  of  any  State 
anti-trust  statute,  resort  may  properly  be  had  to  the  federal 
statute  and  to  the  decisions  of  the  Supreme  Court  of  the  United 
States  construing  it.  The  power  of  Congress  under  the  Fifth 
Amendment  to  regulate  the  right  to  contract  is  the  same  as  that 
of  a  State  under  the  Fourteenth  Amendment.^  A  State  statute 
which  goes  no  further  than  the  federal  statute  may  safely  be  re- 
garded as  constitutional.^ 

§  421.    Validity  of  State  Statutes  tested  by  Fourteenth  Amend- 


>  See  a  preceding  note  to  this  sec- 
tion. 

^  Fifth  Amendment:  "No  person 
shall  be  compelled  in  any  criminal 
case  to  be  a  witness  against  himself 
nor  be  deprived  of  life,  liberty,  or 
property,  without  due  process  of  law; 
nor  shall  private  property  be  taken 
for  public  use,  without  just  com- 
pensation." 

Fourteenth  Amendment:  "Nor  shall 
any  State  deprive  any  person  of  life, 
liberty,  or  property  without  due  pro- 
cess of  law." 

^  In  Carrol  v.  Greenwich  Ins.  Co., 
199  U.  S.  401  (1905),  (26  Sup.  Ct. 
Rep.  66),  the  Supreme  Court  of  the 
United  States  said:  "While  we  need 
not  affirm  that  in  no  instance  could  a 
distinction  be  taken,  ordinarily,  if  an 
act  of  Congress  is  valid  under  the 
Fifth  Amendment,  it  would  be  hard 
to  say  that  a  State  law  in  like  terms 
was  void  under  the  Fourteenth.  It 
is  true  that  by  the  provision  in  the 
body  of  the  instrument  Congress  has 
power  to  regulate  commerce,  and  that 
the  act  of  Congress  referreil  to  in  the 
cases  cited  was  passed  in  pursuance 
of  that  power.  Hut  even  if  the  Fifth 
Amendment  were  read  as  contempo- 
raneous with  the  original  constitution, 


the  power  given  in  the  commerce 
clause  would  not  be  taken  to  override 
it  so  far  as  the  Fifth  Amendment  pro- 
tects fundamental  personal  rights. 
It  is  only  on  the  ground  that  the  right 
to  combine  at  will  is  a  fundamental 
personal  right  that  it  can  be  held  to  be 
protected  by  the  Fourteenth  Amend- 
ment from  any  abridgment  by  the 
State.  .  .  .  Many  State  laws  which 
limit  the  freedom  of  contract  have 
been  sustained  bj'  this  Court,  and 
therefore  an  objection  to  this  law  on 
the  general  ground  that  it  limits  that 
freedom  cannot  be  upheld.  There  is 
no  greater  sanctity  in  the  right  to 
combine  than  in  the  right  to  make 
other  contracts.  Indeed,  Mr.  Dicey, 
in  his  recent  work  on  Law  and  Public 
Opinion  in  England  during  the  Nine- 
teenth Century,  indicated  that  it  is 
out  of  the  very  right  to  make  what 
contracts  one  chooses,  so  strenuously 
advocated  by  Hentham,  that  combi- 
nations have  arisen  which  restrict  the 
very  freedom  that  Hentham  .sought  to 
attain,  and  which  even  might  menace 
the  authority  of  the  State.  If,  then, 
the  statute  before  us  is  to  be  over- 
thrown, more  special  reasons  must 
be  assigned." 

797 


§   421  INTERCORPORATE   RELATIONS  [PART   V 

ment  —  (C)  Class  Legislation.  — The  Fourteenth  Amendment,  in 
its  concluding  chiuse,  provides  that  no  State  shall  "  deny  to  any 
person  within  its  jurisdiction  the  equal  protection  of  the  laws." 

This  provision  operates  against  arbitrary  class  legislation. 
State  legislatures,  in  the  exercise  of  the  police  power,  may  enact 
laws  applying  to  particular  classes  of  persons,  where  the  nature 
of  their  business  or  occupation  is  such  that  its  regulation  is 
necessary  for  the  protection  of  the  public.  The  nature  of  the 
occupation  is  the  controlling  factor.  Any  classification,  how- 
ever, must  rest  upon  a  reasonable  basis. ^  A  statute  which  arbi- 
trarily classifies  denies  the  equal  protection  of  the  laws  to  those 
against  whom  it  discriminates. 

In  prescribing  regulations  for  the  conduct  of  domestic  trade, 
the  legislature  cannot  exempt  from  their  operation  persons  en- 
gaged in  a  particular  branch  of  industry.  A  statute  distinguish- 
ing between  producers  and  dealers  —  declaring  that  the  former 
may  combine  and  that  the  latter  may  not  —  is  unconstitutional. 

Upon  these  principles,  anti-trust  statutes  containing  a  pro- 
vision that  they  "shall  not  apply  to  agricultural  products  or 
live  stock  while  in  the  hands  of  the  producer  or  raiser"  — or  a 
similar  provision  —  are  clearly  invalid,  and  have  been  declared 
unconstitutional  by  the  courts.^     As  such  a  provision  is,  essen- 

1  In  People  v.  Butler  St.  Foundry,  With  respect  to  the  constitution- 
etc.  Co.,  201  111.  236  (1903),  (66  N.  E.  ality  of  the  lUinois  act  of  1891  as 
Rep.  349),  it  was  held  that  the  ex-  amended,  see  People  v.  Butler  St 
emption  of  corporations  organized  un-  Foundry,  etc.  Co.,  201  111.  236  (1903), 
der  the  building,  loan  and  homestead  (66  N.  E.  Rep.  349). 

association  laws  from  the  operation  of  Michigan:     The     constitutionality 

the  Illinois  anti-trust  statute  did  not  of  the  anti-trust  statute  of  this  State 

render  the  act  unconstitutional,   such  was  considered  but  not  determined  in 

corporations  differing  essentially  from  Merz    Capsule    Co.    v.    United    States 

those  formed  for  pecuniary  profit.  Capsule  Co.,  67  Fed.  414  (1895). 

2  Georgia:  The  act  of  December  23,  Montana:  The  provision  in  the  anti- 
1906,  containing  the  exemption  stated  trust  statute  of  this  State  (Penal  Code, 
in  the  text,  was  held  to  be  unconsti-  §§  321-325),  that  it  shall  not  apply 
tutional  by  reason  thereof  in  Brown  to  "persons  engaged  in  horticulture 
V.  Jacobs'  Pharmacy,  115  Ga.  429  or  agriculture  with  a  view  of  enhanc- 
(1902),  (41  S.  E.  Hep.  553).  ing the  price  of  their  products"  renders 

Illinois:   The  act  of  June  20,  1893,  the  statute  unconstitutional,  as  denj'- 

containing   this    exemption,    was    de-  ing  the  equal  protection  of  the  laws, 
clared  to  be  unconstitutional  as  class  State   v.  Cudahy   Packing  Co.,   33 

legislation  in  Connolly  v.  Union  Sewer  Mont.  179  (1905),  (82  Pac.  Rep.  833). 
Pipe  Co.,   184  U.   S.  540    (1902),   (22  Tennessee:    The   act   of   April   30, 

Sup.  Ct.  Rep.  431).  1897  (Laws,  1897,    ch.  94),  contain- 

798 


CHAP.  XLl]      STATE    STATUTES   AND   THEIR   CONSTITUTIONALITY        §  421 

tially,  a  condition  to  the  operation  of  the  statute  as  a  whole,  its 
presence  renders  the  entire  statute  unconstitutional.  The  con- 
dition could  not  be  stricken  out  without  rendering  the  statute 
operative  against  the  very  persons  the  legislature  desired  to 
exempt.' 


ing  this  exemption,  was  held  by  the 
Supreme  Court  of  Tennessee,  in  State 
V.  Schlitz  Brew-ing  Co.,  104  Tenn.  715 
(1900),  (59  S.  W.  Rep.  1033),  to  be 
constitutional  upon  the  ground  that 
the  exemption  was  natural  and  rea- 
sonable. But  this  decision  was  ren- 
dered before  that  of  the  Supreme 
Court  of  the  United  States  in  Connolly 
V.  Union  Sewer  Pipe  Co.,  supra,  and 
the  unconstitutionality  of  the  act 
was  practically  admitted  in  State  v. 
Witherspoon,  115  Tenn.  138  (1906), 
(90  S.  W.  Rep.  852).  The  Tennessee 
act  of  1903  (see  ante,  §  414,  note)  does 
not  contain  the  exemption. 

Texas:  The  act  of  1889,  as 
amended  in  1895,  was  held  to  be  con- 
stitutional in  Waters-Pierce  Oil  Co.  v. 
State,  19  Tex.  Civ.  App.  1  (1898), 
(44  S.  W.  Rep.  943).  In  State  v. 
Shippers'  Compress,  etc.  Co.  (Tex. 
av.  App.  1902),  67  S.  W.  Rep. 
1049,  however,  the  Texas  Court  of 
Civil  Appeals,  following  the  decision 
in  Connolly  v.  Union  Sewer  Pipe  Co., 
supra,  declared  the  Texas  anti-trust 
statutes  of  1895  and  1899  wholly  un- 
constitutional. But  when  the  case 
came  to  the  Texas  Supreme  Court 
(95  Tex.  603  (1902),  (69  S.  W.  Rep. 
58)),  that  Court  held  that  while  the 
statutes  were  unconstitutional  in 
some  respects,  so  much  of  them  as 
authorized  the  forfeiture  of  the  char- 
ters of  domestic  corporations  and  the 
revocation  of  the  Ucenses  of  foreign 
corporations  for  violation  of  their 
provisions,  was  vaUd.  See  also  Na- 
tional Cotton  Oil  Co.  V.  State  (Tex. 
Ov.  App.  1903),  72  S.  W.  Rep.  615. 
And  in  State  v.  Laredo  Ice  Co.,  96 
Tex.  461  (1903),  (73  S.  W.  Rep. 
951),  it  was  held  that  the  provision  of 


the  act  of  1899  that  its  proNasions 
should  be  cumulative  of  all  the  anti- 
trust statutes  of  the  State,  did  not 
incorporate  in  it  the  exemption  clause 
of  the  act  of  1895  and,  consequently, 
that  it  was  constitutional. 

The  present  Texas  anti-trust  stat- 
ute (see  ante,  §  414,  note)  contains  no 
'  such  exemption. 

1  Connolly  v.  Union  Sewer  Pipe  Co., 
184  U.  S.  540  (1902),  (22  Sup.  Ct.  Rep. 
431),  affirming  99  Fed.  354  (1900). 
In  the  latter  decision  Judge  Kohlsaat 
said:  "It  is  urged  that,  granting  the 
unconstitutionality  of  said  ninth 
clause,  yet  it  may  be  declared  void 
without  affecting  the  validitj'  of  the 
remaining  clauses  of  said  act.  If 
this  were  so,  then  by  declaring  said 
clause  void,  the  courts  would  make 
the  act  binding  upon  those  classes  of 
persons  within  the  State  which  the 
legislature  had  especially  exempted 
from  its  pro\'isions.  This  would  be 
judicial  legislation  of  the  most  flagrant 
character.  In  my  opinion,  the  said 
clause  nine  taints  the  whole  act,  and 
renders  it  all  void." 

See  also  State  v.  Cudahy  Packing 
Co.,  33  Mont.  179  (1905),  (82  Pac. 
Rep.  833),  where  the  same  conclusion 
was  reached  with  respect  to  the  effect 
of  the  exemption  in  the  Montana  anti- 
trust statute.     ■ 

In  People  v.  Butler  Steel  Foimdry, 
etc.  Co.,  201  111.  236  (1903),  (66  N.  E. 
Rep.  349),  however,  it  was  held  that 
the  amendment  of  1897,  which  ex- 
empted from  the  pro\isions  of  the 
Illinois  trust  act  of  1891  combinations 
of  producers,  while  itself  unconstitu- 
tional, did  not  render  the  original  act 
void,  being  the  separate  and  distinct 
act    of    a    different    legislature.     See 

799 


§  421  INTERCORPORATE    RELATIONS  [PART   V 

These  principles  are  very  clearly  stated  by  Mr.  Justice  Harlan 
in  Connolly  v.  Union  Sewer  Pipe  Company,^  holding  an  Illinois 
statute  unconstitutional  as  class  legislation:  "We  have  seen 
that  under  that  statute  all  except  producers  of  agricultural  com- 
modities and  raisers  of  live  stock,  who  combine  their  capital, 
skill  or  acts  for  any  of  the  purposes  named  in  the  act  may  be 
punished  as  criminals,  while  agriculturists  and  live-stock  raisers, 
in  respect  of  their  products  or  live  stock  in  hand,  are  exempted 
from  the  operation  of  the  statute,  and  may  combine  and  do  that 
which,  if  done  by  others,  would  be  a  crime  against  the  State. 
The  statute  so  provides,  notwithstanding  persons  engaged  in 
trade  or  in  the  sale  of  merchandise  or  commodities,  within  the 
limits  of  a  State,  and  agriculturists  and  raisers  of  live  stock,  are 
all  in  the  same  general  class,  that  is,  they  are  all  alike  engaged 
in  domestic  trade,  which  is,  of  right,  open  to  all,  subject  to  such 
regulations  applicable  alike  to  all  in  like  conditions,  as  the  State 
may  legally  prescribe.  ...  If  combinations  of  capital,  skill 
or  acts,  in  respect  of  the  sale  or  purchase  of  goods,  merchandise 
or  commodities,  whereby  such  combinations  may,  for  their  bene- 
fit exclusively,  control  or  establish  prices,  are  hurtful  to  the 
public  interests  and  should  be  suppressed,  it  is  impossible  to 
perceive  why  like  combinations  in  respect  of  agricultural  prod- 
ucts and  live  stock  are  not  also  hurtful.  ...  To  declare  that 
some  of  the  class  engaged  in  domestic  trade  or  commerce  shall 
be  deemed  criminals  if  they  violate  the  regulations  prescribed 
by  the  State  for  the  purpose  of  protecting  the  pubhc  against 
illegal  combinations  formed  to  destroy  competition  and  to  con- 
trol prices,  and  that  others  of  the  same  class  shall  not  be  bound 
to  regard  those  regulations,  but  may  combine  their  capital, 
skill  or  acts,  to  destroy  competition,  and  to  control  prices  for 
their  special  benefit,  is  so  manifestly  a  denial  of  the  equal  pro- 
tection of  the  laws  that  further  argument  .  .  .  [is]  unnecessaiy. 
.  .  .  Looking  at  all  the  sections  together,  w-e  must  hold  that 
the  legislature  would  not  have  entered  upon  the  polic}^  indicated 
by  the  statute  unless  agriculturists  and  live-stock  dealers  were 

also  State  v.  Shippers'  Compress,  etc.  '  Connolly    v.    Union    Sewer    Pipe 

Co.,95Tex.  603(1902),(69S.  W.  Rep.  Co.,    184  U.' S.   540   (1902),  (22  Sup. 

58);   National  Cotton  Oil  Co.  V.    State  Ct.  Rep.  431). 
(Tex.  Qv.  App.  1903),  72  S.  W.  Rep. 

800 


CHAP.  XLl]      STATE   STATUTES   AND  THEIR   CONSTITUTIONALITY        §  421 


excluded  from  its  operation,  and  were  thereby  protected  from 
prosecution.  The  result  is  that  the  statute  must  be  regarded 
as  an  entirety,  and  in  that  view  it  must  be  adjudged  to  be  un- 
constitutional, as  denying  the  equal  protection  of  the  laws  to 
those  within  its  jurisdiction  who  are  not  embraced  by  the  ninth 
section." 

Nebraska  and  Illinois  anti-trust  statutes^  have  also  been  held 
to  be  unconstitutional,^  upon  theground  that,  by  excepting  labor 
organizations  from  their  provisions,  they  denied  the  equal  pro- 
tection of  the  laws  to  persons  not  members  of  such  organizations. 

1  Section  9  of  the  Nebraska  act  of 
April  8, 1897,  reads  as  follows  :  "Noth- 
ing herein  contained  shall  be  con- 
strued to  prevent  any  assemblies  or 
associations  of  laboring  men  from  pass- 
ing and  adopting  such  regulations  as 
they  may  think  proper  in  reference  to 
wages  and  the  compensation  of  labor. " 

The  pro\iso  added  bj^  the  amend- 
ment of  1897  to  the  Illinois  anti-trust 
statute  of  1891  follows:  "Pro\aded, 
however,  that  in  the  mining,  manu- 
facture, or  production  of  articles  of 
merchandise,  the  cost  of  which  is 
mainly  made  up  of  wages,  it  shall  not 
be  unlawful  for  persons,  firms  and  cor- 
porations doing  business  in  this  State 
to  enter  into  joint  arrangement  of  any 
sort,  the  principal  object  or  effect  of 
which  is  to  maintain  or  increase  wages. " 

2  Niagara  Fire  Ins.  Co.- v.  Cornell, 
110  Fed.  825  (1901)  :  "The  statute 
expressly  excepts  from  its  pro\dsions 
assemblies  or  associations  of  laboring 
men.  By  saying  that  a.ssociations  of 
laboring  men  are  exempt  from  the 
provisions  of  the  statute,  it  is  thereby 
stated,  in  meaning,  that  unorganized 
labor  must  pay  the  penalties  of  a  crimi- 
nal statute  for  an  act  done  by  a  mem- 
ber of  an  organization,  and  by  him 
done  with  impunity.  On  one  side,  by 
this  legislation,  we  have  organized 
labor.  Those  men  are  not  amenable 
to  the  statute.  On  the  other  side  we 
have  men  who  do  not  belong  to  organ- 
ized labor,  —  farmers,  merchants,  pro- 
fessional men,  laborers,  as  well  as  all 


others.  They  are  amenable,  and  by 
this  statute  that  is  called  'equal  pro- 
tection.'    I  do  not  believe  it." 

This  decision,  however,  was  not 
followed  by  the  Supreme  Court  of  Ne- 
braska in  Cleland  v.  Anderson,  66  Neb. 
252  (1902),  (92  N.  W.  Rep.  306).  The 
Court  said:  "The  section  in  question 
[exempting  labor  organizations  for 
raising  wages  from  operation  of  act] 
is  inserted  rather  out  of  abundance 
of  caution,  to  prevent  judicial  exten- 
sion of  the  terms  of  the  act  beyond 
its  scope  and  purpose,  than  to  grant  a 
pri\dlege  or  immunity  to  persons  who 
would  otherwise  fall  within  its  terms. 
The  distinction  between  goods  and 
merchandise  produced  by  skill  and 
labor,  and  the  skill  and  labor  which 
produce  them,  is  manifest  and  reason- 
able. The  statute  does  not  say  that 
laborers  who  have  goods,  wares  or 
merchandise,  the  produce  of  labor,  for 
sale,  may  combine  to  advance  or  con- 
trol the  price,  but  only  that  the  law 
designed  to  prevent  combinations  in 
restraint  of  trade  in  such  articles,  when 
produced,  shall  not  be  construed  to 
affect  organizations  formed  to  regu- 
late the  wages  of  compensation  of  the 
labor  and  skill  which  produce  them." 

The  amendment  of  1897  to  the 
Illinois  act  of  1891,  exempting  from 
its  proNasions  combinations  for  rais- 
ing or  maintaining  wages,  was  declareil 
to  be  unconstitutional  in  People  v. 
Butler  St.  Foundry,  etc.  Co.,  201  III. 
236  (1903),  (66  N.  E.  Rep.  349). 

801 


§422 


INTERCORPORATE    RELATIONS 


[part  V 


The  recent  State  anti-trust  acts  omit  all  these  exemptions, 
and  they  have  been  eliminated  by  amendment  from  several 
of  the  earlier  statutes.  With  few  exceptions,  the  present 
anti-trust  statutes  are  not  open  to  the  objection  that  they 
constitute  class  legislation. 

§  422.  Validity  of  State  Statutes  under  State  Constitutional 
Provisions.  —  The  section  of  the  Illinois  anti-trust  statute  ^ 
requiring  corporations,  under  penalties,  to  answer  upon  oath 
inquiries  from  the  Secretary  of  State  as  to  whether  they  are 
violating  the  provisions  of  such  statute,  and  providing  that  no 
one  shall  be  subject  to  criminal  prosecution  by  reason  of  any- 
thing truthfully  so  declared,  is  not  unconstitutional  as  involving 
an  assumption  of  judicial  powers  by  the  legislature.^  Nor  is 
it  in  conflict  with  the  constitutional  provision  that  "no  person 
shall  be  compelled  in  any  criminal  case  to  give  evidence  against 
himself."  ^  The  immunity  afforded  by  the  statute  is  a  full  pro- 
tection against  prosecution.* 


That  the  provision  of  the  Michigan 
anti-trust  act  of  1889,  that  it  sliould 
not  apply  to  "the  services  of  laborers 
or  artisans  who  are  formed  into  so- 
cieties or  organizations  for  the  benefit 
and  protection  of  their  members," 
rendered  the  act  unconstitutional, 
see  Da\ds  v.  Booth,  131  Fed.  31  (1904). 
The  Michigan  act  of  1899  omitted  this 
provision. 

1  Act  of  1891  as  amended  in  1893 
(Hurd's  Illinois  Rev.  St.  1899,  p. 
616). 

^  People  V.  Butler  St.  Foundry,  etc. 
Co.,  201  111.  236  (1903),  (66  N.  E.  Rep. 
349).  In  this  case  the  Court  said 
(p.  255) :  "  It  is  said  that  the  amend- 
ment of  1893  is  unconstitutional  in 
this:  that  it  is  an  attempt  upon  the 
part  of  the  legislature  to  exercise 
judicial  power.  .  .  .  These  objec- 
tions, in  our  opinion,  are  without  force. 
The  statute  in  apt  terms  provides 
that  the  affidavit  shall  be  filed  in 
reply  to  the  letter  of  inquiry.  If  the 
legislature  may  require  the  affidavit 
to  be  filed,  as  we  think  it  may,  we 
can  see  no  valid  reason  why  it  may 

802 


not  provide  that  a  failure  in  that 
regard  shall  subject  the  offending 
party  to  a  penalty  to  be  adjudged 
against  it  by  the  courts,  without  it 
being  said  that  the  legislature  has 
exceeded  its  jurisdiction  by  exer- 
cising judicial  power." 

3  Illinois  Const.  Art.  2,  §  10. 

*  People  V.  Butler  St.  Foundry,  etc. 
Co.,  201  111.  236  (1903),  (66  N.E.  Rep. 
349),  where  the  Court  also  said  (p. 
247):  "If  the  statute  be  confined  to 
its  legitimate  constitutional  scope 
its  proper  construction  only  requires 
the  affidavit  to  state  whether  or  not 
the  corporation  upon  whose  behalf 
it  is  made  had  violated  the  statute 
by  performing  some  one  or  more  of 
the  acts  therein  prohibited  within 
the  State  of  Illinois,  and  would  not 
include,  but  would  exclude,  all  acts 
which  would  connect  it  with  any 
trust,  pool,  combination,  etc.,  formed 
outside  of  the  State,  and  which  would 
violate  the  anti-trust  statute  of  the 
United  States.  .  .  .  We  conclude, 
therefore,  that  the  officer  niaking  the 
affidavit,     and     the     corporation     ia 


CHAP.  XLl]      STATE    STATUTES    AND    THEIR    CONSTITUTIONALITY        §   422 


On  the  other  hand,  it  was  held  that  a  section  of  the  Missouri 
statute  of  1889  simihir  to  that  of  the  IlUnois  statute  was  uncon- 
stitutional as  being  in  conflict  with  the  provision  against  self 
incrimination.^  But  this  statute  contained  no  immunity  pro- 
vision, and  the  unconstitutionality  of  the  particular  section 
was  later  held  not  to  affect  the  validity  of  the  statute  as  a 
whole.^ 


whose  behalf  the  same  is  made,  are 
fully  protected  by  the  statutory  im- 
munity from  a  prosecution  by  any 
other  State  or  by  the  federal  authori- 
ties. ...  As  a  corporation  exists 
or  does  business  in  this  State  only  by 
virtue  of  a  charter  granted  to  it  by 
the  State  or  by  the  permission  of  the 
State,  we  see  no  valid  reason  why  it 
may  not  require  a  corporation  exist- 
ing or  doing  business  in  this  State  to 
file  the  affidavit  provided  by  the 
statute,  even  though  it  is  provided 
that  individuals,  when  acting  alone 
or  in  partnership  with  others,  are 
exempted  from  so  doing.  The  object 
of  the  statute  of  1891  as  amended,  is 
twofold :  to  prohibit  trusts,  pools 
and  combines  for  the  purpose  of 
limiting  production  and  fixing  the 
prices  of  commodities  within  the 
State,  and  to  hav^e  supervision  and 
control  over  corporations  created  or 
doing  business  in  this  State  for  the 
purpose  of  determining  whether  they 
are  members  of  trusts,  pools  and 
combines.  The  placing  of  corpora- 
tions in  a  class  by  themselves  and 
requiring  them  to  file  the  anti-trust 
affidavit,  leaving  individuals  and 
partnerships  simply  liable  to  the 
penalties  provided  for  by  the  act,  is 
not  an  illegal  or  arbitrary  classifica- 
tion, any  more  than  is  the  require- 
ment that  State  banking  institutions 
shall  file  reports  with  the  auditor 
of  State  or  insurance  companies 
with  the  insurance  department  of 
the  State." 

And  in  State  v.  Jack,  GO  Kan.  .387 
(1904),  (76  Pac.  Rep.  911),  affirmed 
199  U.   S.  372   (1905),    (26  Sup.   Ct. 


Rep.  73),  the  Supreme  Court  of 
Kansas  said  of  a  similar  provision : 
"Section  10  of  the  act  contemplates 
a  proceeding  or  investigation  before 
the  district  court  or  district  judge  to 
inquire  if  there  has  been  ■violation  of 
that  law.  The  record  discloses  the 
examination  of  appellant  upon  the 
inquiry  to  have  been  confined  to  its 
legitimate  scope.  Within  the  scope 
of  the  inquiry,  the  immunitj-  afforded 
appellant  by  section  10  was  coexten- 
sive with  the  constitutional  privilege 
invoked  for  his  protection.  The  possi- 
bility that  his  answers  to  the  inquiries 
might  disclose  violations  of  the  federal 
anti-trust  law,  and  the  evidence  thus 
giv^en  be  used  against  him  in  a 
criminal  prosecution  for  a  violation 
of  that  law,  was  not  a  real  and  prob- 
able danger  of  criminal  prosecution 
within  the  constitutional  privilege 
that  no  person  shall  be  a  witness 
against  himself." 

In  this  connection  it  should  be 
noted  thiit  it  has  been  held  that  a 
similar  provision  in  an  Arkansas 
statute  created  no  offence  antl  that 
the  mere  failure  to  file  the  affidavit 
did  not  constitute  a  violation  of  the 
statute. 

State  V.  International  Harvester 
Co.,  79  Ark.  517  (1906),  (96  S.  W. 
Rep.  119). 

See  also  In  re  Bell,  69  Kan.  855 
(1904),  76  Pac.  Rep.   1129. 

'  State  V.  Simmons  Hardware  Co., 
109  Mo.  118  (1891),  (18  S.  W.  Rep. 
1125). 

*  Finck  V.  Schneider  Granite  Co., 
187  Mo.  244  (1905),  (86  S.  W.  Rep. 
213,  106  .Vm.  St.    Rep.  452). 

803 


§   422  LNTEKCORPORATE    RELATIONS  [PART   V 

The  Texas  anti-trust  law  *  is  not  in  conflict  with  the  constitu- 
tional provision  of  that  State  that  excessive  fines  shall  not  be 
imposed,^  there  being  a  wide  range  between  the  maximum  and 
minimum  penalties  and  the  latter  not  being  excessive.  In  so 
holding  the  Supreme  Court  of  Texas  said:  "Prescribing  fines 
and  other  punishments  which  may  be  imposed  upon  violators  of 
the  law  is  a  matter  peculiarly  within  the  power  and  discretion 
of  the  legislature,  and  the  courts  have  no  right  to  control  or 
restrain  that  discretion,  except  in  extraordinary  cases,  where  it 
becomes  so  manifestly  violative  of  the  constitutional  inhibition 
as  to  shock  the  sense  of  mankind."  ^ 

The  Ohio  anti-trust  statute  *  was  held  by  a  lower  court  of 
that  State  to  be  unconstitutional  as  interfering  with  "the 
inalienable  right  of  enjoying  liberty  and  acquiring  property 
guaranteed  by  section  1  of  the  bill  of  rights  of  the  constitu- 
tion." ^  Upon  appeal  to  the  Supreme  Court,  however,  the 
act  was  declared  to  be  constitutional.^ 

The  provision  of  the  Kentucky  constitution,''  requiring  the 
legislature  to  enact  laws  to  prevent  trusts  and  combinations, 
is  not  a  grant  of  power  and  does  not  impliedly  prohibit  the  legis- 
lature from  going  beyond  the  duty  enjoined.     Consequently,  a 

'  Acts  1899,  ch.  146,  p.  246.  tively  such  contracts  and  transactions 

^  Art.  1,  §  13.                   -  as     were    previously     unlawful,     but 

^  State  IK  Laredo  Ice  Co.,  96  Tex.  which    could    be    so    adjudged    only 

461  (1903),  (73  S.  W.  Rep.  951).  when  the  aid  of  the  courts  was  in- 

The    Texas    anti-trust    statute    of  voked     for     their     enforcement.      It 

1903    imposing    a    penalty    for    each  must  be  obviously  unavailing  to  urge 

day's  offence  of  carrying  on  a   trust  the    constitutionally    protected    right 

is  not  unconstitutional  as  impairing  to  make  contracts  with  reference  to 

the  obligation  of  contracts  although  one's   property   and    his    faculties   as 

applying    to    trusts    formed    before,  an  objection  to  a  statute  which  does 

but  carried  on  after,  its  enactment.  not    prohibit    or    restrain    the    power 

State    V.    Missouri,   etc.    R.  Co.,  99  of   making    such    contracts.     Exami- 

Tex.  516  (1906),  (91  S.  W.  Rep.  214).  nation  of  the  various  cases  cited  in  the 

*  Act    of    1898,    called    the    Valen-  briefs   shows   that   legislation   having 

tine   Anti-trust    Act,    93    Ohio   Laws,  the  same  object  as  this  and   making 

143.  similar,  if  not  identical,   prohibitions 

^  Gage  V.  State,  24  Ohio  C.  C.  724  has  been  quite  generally  sustained  as 

(1904).  a  valid  exercise  of  legislative  power." 

^  State     V.     Gage,      72     Ohio     St.  See  also   State  v.   Jacobs,   7   Ohio 

210   (1905),    (73    N.    E.  Rep.    1078).  N.  P.  261  (1899). 

"  Within    the     limits    of    the  present  '  Kentucky,    Const.     §    198.     This 

case,  it  is  obvious  that  the  effect  of  provision   is   printed   in   the   note   to 

the    statute    is    to    prohibit    affirma-  §  414,  ante. 

804 


CHAP.  XLl]      STATE   STATUTES   AND    THEIR    CONSTITUTIONALITY         §    423 

more  rigorous  anti-trust  statute  *  than  the  constitution  requires 
is  vaUd.^ 

The  Arkansas  constitution  forbids  unreasonable  searches  and 
seizures  of  persons,  papers  and  effects.^  The  anti-trust  statute 
of  the  State  authorizes  orders  requiring,  under  penalty  of  a 
default  judgment  against  the  corporation  sued  for  violating 
the  act,  non-resident  officers  of  such  corporation  to  appear  and 
testify  before  a  commission  and  to  produce  books  and  papers. 
It  is  held  that  the  provisions  of  the  statute  are  not  in  conflict 
with  the  constitutional  provision  in  so  far  as  they  authorize  a 
reasonable  order  for  the  production  of  the  papers  of  a  corpora- 
tion over  which  the  State  has  control.^  It  is  also  held  that  the 
provisions  of  such  statute  authorizing  the  recovery  of  penalties 
from  foreign  corporations  violating  its  provisions  are  not  in 
conflict  with  the  Arkansas  constitutional  provision^  that  no 
person  shall  be  held  to  answer  a  criminal  charge  unless  upon 
the  indictment  of  a  grand  jur^^^ 

§  423.  State  Courts'  Interpretation  of  State  Statute  followed 
by  Federal  Courts  in  determining  its  Constitutionality.  —  The 
decision  of  the  highest  court  of  a  State  that  a  State  statute 
does  not  contravene  a  State  constitutional  provision  is,  mani- 
festly, binding  upon  the  federal  courts.'' 

But  the  controlling  effect  of  a  local  construction  of  a  local 
law  is  not  confined  to  cases  where  the  statute  is  tested  by  the 
State  constitution.  Where  the  courts  of  a  State  have  declared 
what  a  State  statute  means  their  interpretation  will  be  fol- 
lowed by  the  federal  courts  where  the  claim  is  made  that  it  is 
in  conflict  with  the  federal  constitution.*      In  Smileij  v.  Kan- 


^  Kentuckij,  Stat.  §  3915. 

*  Commonwealth  v.  Bavarian  Brew- 
ing Co.,  112  Ky.  925  (1902),  (23  Ky. 
Law  Rep.  2334,  66  S.  W.  Rep.  1016). 

^  Arkansas,  Const.  Art.  2,  §  15. 

*  Hammond  Packing  Co.  v.  State, 
81  Ark.  519  (1907),  (100  S.  W.  Rep. 
407). 

'  Arkansas,  Const.  Art.  2,  §  8. 

*  Hammond  Parking  Co.  i'.  State, 
81  Ark.  519  (1907),  100  S.  W.  Rep.  407. 

^  Jack  V.  Kansas,  199  U.  S.  372 
(1905),   (26  Sup.  Ct.  Rep.  73). 


8  Smiley  v.  Kansas,  196  U.  S.  447 
(1905),  (25  Sup.  Ct.  Rep.  289) ;  Jack 
V.  Kansas,  199  U.  S.  372  (1905), 
(26  Sup.  Ct.  Rep.  73);  National 
Cotton  Oil  Co.  V.  Texas,  197  U.  S.  115 
(1905),  (25  Sup.  Ct.  Rep.  379). 

In  the  last  case  the  Supreme  Court 
said  (p.  130):  "There  are  cases  in 
which  we  determine  for  ourselves 
the  meaning  of  a  State  law,  but  this 
is  not  one  of  them.  The  contention 
of  the  company  is  that  the  statutes 
of  the  State  discriminate  against  it; 

805 


§   424  INTERCOUPOUATE    RELATIONS  [PART   V 

sas^  Mr.  Justice  Brewer  said:  "  It  may  be  conceded  for  the  pur- 
poses of  this  case  that  the  language  of  the  first  section  is  broad 
enough  to  include  acts  beyond  the  police  power  of  the  State 
and  the  punishment  of  which  would  unduly  infringe  upon  the 
freedom  of  contract.  At  any  rate  we  shall  not  attempt  to 
enter  into  any  consideration  of  that  question.  The  Supreme 
Court  of  the  State  held  that  the  acts  charged  and  proved 
against  the  defendant  were  clearly  within  the  terms  of  the 
statute,  as  well  as  within  the  police  power  of  the  State;  and 
that  the  statute  could  be  sustained  as  a  prohibition  of  those  acts 
irrespective  of  the  question  whether  its  language  was  broad 
enough  to  include  acts  and  conduct  which  the  legislature  could 
not  rightfully  restrain.  It  is  well  settled  that  in  cases  of  this 
kind  the  interpretation  placed  by  the  highest  court  of  the 
State  upon  its  statutes  is  conclusive  here.  We  accept  the  con- 
struction given  to  a  State  statute  by  that  court." 

§  424.  Who  may  question  Constitutionality  of  Statutes.  — 
It  is  held  that  objections  to  the  constitutionality  of  an  anti- 
trust statute,  as  infringing  the  rights  guaranteed  by  the  Four- 
teenth Amendment,  can  only  be  made  by  a  person  against 
whom  such  statute  is  sought  to  be  enforced.  Thus  the  Supreme 
Court  of  the  United  States  has  quoted  with  approval  this  lan- 
guage of  the  Kansas  Supreme  Court :^  ''He  [the  defendant] 
cannot  be  heard  to  object  to  the  statute  merely  because  it 
operates  oppressively  upon  others.     The  hurt  must  be  to  him- 

in   other    words,    deny    it    the    equal  ^  Smiley  v.  Kansas,  196  U.  S.  456 

protection  of  the  law,  by  forbidding  (1905),  (25  Sup.  Ct.  Rep.  289).     The 

it    from    doing    what    they     permit  quotation  is  frona  the  decision  of  the 

others  to  do  in  similar  circumstances  Kansas    Court    in    the    same    case : 

—  punish  its  acts  and  exempt  from  65  Kan.    240    (1902),    (69   Pac.    Rep. 

punishment  the  same  acts  when  done  199,  67  L.  R.  A.  903). 
by    others.      But    the    courts    of    the  And  in  the  Winnebago,  205  U.  S. 

State  are  the  tribunals  appointed  to  360   (1907),   (27  Sup.   Ct.   Rep.   509), 

administer   the   statutes   and   impose  the  Supreme  Court  again  said:    "In 

their    penalties    and    to    do    so    they  a  case  from  a  State  court  this  court 

must  necessarily  interpret  them.     In  does  not  listen  to  objections  of  those 

other  words,  they  are  the  tribunals  to  who    do    not    come    within   the   class 

declare  the  meaning  of  the  statutes,  whose  constitutional  rights  are  alleged 

and  if  in  declaring  it  they  make  the  to  be  infringed,  or  hold  a  law  uncon- 

statutes  discriminatory,  then  may  the  stitutional,     because,     as     against    a 

statutes  become  unconstitutional."  class   making   no   complaint,   the  law 

1  Smiley  v.    Kansas,  196  U    S.  447  might  be  so  held." 
(1905),  (25  Sup.  Ct.  Rep.  289). 

806 


CHAP.  XLl]  CONSTRUCTION    AND   APPLICATION  §    425 

self.  The  case,  under  appellant's  contention  as  to  this  point, 
is  not  a  case  of  favoritism  in  the  law.  It  is  not  a  case  of  exclu- 
sion of  classes  who  ought  to  have  been  included,  the  leaving  out 
of  which  constitutes  a  denial  of  the  equal  protection  of  the 
law,  but  it  is  the  opposite  of  that.  It  is  a  case  of  the  inclu- 
sion of  those  who  ought  to  have  been  excluded.  Hence,  unless 
appellant  can  show  that  he  himself  has  been  wrongfully  included 
in  the  terms  of  the  law,  he  can  have  no  just  ground  of  complaint. 
This  is  fundamental  and  decisively  settled." 


CHAPTER  XLII 


CONSTRUCTION    AND    APPLICATION    OP     STATE     ANTI-TRUST 

STATUTES 

§  425.    Definitioris. 

§  426.    Statutes  not  Regulations  of  Interstate  Commerce. 

§  427.    Rule  of  Construction. 

§  428.    Form  of  Combination  Immaterial.     Application  of  Statutes  to  Holding 

and  Purchasing  Corporations. 
§  429.    Objects  and  Tendencies  of  Combination  as  determining  Application  of 

Statutes. 
§  430.    Extent  of  Combination  as  determining  Application  of  Statutes. 
§  431.    Application  of  Statutes  to  Ancillary  Contracts  in  Restraint  of  Trade. 
§  432.    Application  of  Statutes  to  Agency  and  Other  E.xclusive  and  Restrictive 

Contracts.     Sales  and  Leases. 
§  433.    Application  of  Statutes  to  Particular  Associations  of  Manufacturers  and 

Dealers. 
§  434.    Application  of  Statutes  to  Combinations  under  Patents  and  Copyrights. 
§  435.    Application  of  Statutes  to  Insurance  Combinations. 
§  436.    Application  of  Statutes  to  Foreign  Corporations  doing  Local  Business. 
§  437.    Statutes  have  no  Extraterritorial  Force. 

§  438.    Application  of  Statutes  to  Agreements  of  Qwnsi-public  Corporations. 
§  439.    Effect  of  Statutes  upon  Exercise  of  Statutory  .\uthority  to  consolidate 

or  holil  Stock. 
§  440.    Statutes  Inapplicable  to  Contracts  with  State. 

§  441.    Statutes  Inapplicable  where  Other  Statutes  eliminate  Competition. 
§  442.    Statutes  tlo  not  supersede  Common  Law. 

§  443.    Statutes  not  Retroactive,  but  apply  to  Continuing  Combinations. 
§  444.    Construction  and  Application  of  Miscellaneous  Statutes. 

§  425.   Definitions.  — The  anti-trust  statutes  of  several  States 
themselves  define  the  words  "trust,"  "monopoly"  and  "com- 

807 


§  425  INTERCORPORATE   RELATIONS  [PART  V 

bination"  used  therein.^  Definitions  of  these  and  similar  terms 
as  employed  in  such  statutes  also  appear  in  judicial  decisions. 

Thus  to  constitute  a  "trust"  under  the  Texas  statute^ 
there  must  be  a  "combination  of  capital,  skill  and  acts."  The 
term  "combination"  as  so  employed  means  "union"  or  "asso- 
ciation." And  a  union  or  association  to  come  within  the  stat- 
ute must  be  of  agencies  which  might  otherwise  have  been 
independent  and  competing.^ 

A  "monopoly"  within  the  meaning  of  the  Texas  statute  not 
only  includes  that  which  is  embraced  by  that  term  used  in  its 
primary  sense  but  any  combination  the  tendency  of  which  is  to 
prevent  competition  and  to  control  prices  to  the  public  injury.* 

The  Mississippi  statute^  declares  that  a  "trust  "or  "combine" 
is  a  combination  which  is  in  restraint  of  trade,  to  increase  prices, 
to  limit  production,  etc.,  and  "is  inimical  to  the  public  welfare, 
unlawful  and  a  conspiracy."  The  last  phrase,  however,  merely 
states  the  effect  of  the  "  trust  "  as  already  defined,  and  is 
not  an  added  element  of  the  definition.*^ 

A  "  trust"  under  the  Missouri  statute  "is  a  contract,  combi- 
nation, confederation  or  understanding,  express  or  implied,  be- 
tween two  or  more  persons,  to  control  the  price  of  a  commodity 
or  service  for  the  benefit  of  the  parties  thereto,  and  to  the 
injury  of  the  public,  and  which  tends  to  create  a  monopoly."  ^ 

^  See    ante,     §     414,     note:      "The  In  MacGinnis  v.  Boston,  etc.  Min- 

Statutes.     Development  of  State  Legis-  ing  Co.,  29  Mont.  454  (1904),  (75  Pac. 

lotion."  Rep.  89),  the  Supreme  Court  of  Mon- 

2  Texas  Rev.  Stat.,  1895,  Art.  5313.  tana  said  of  the  term  "trust"  as  used 

^  Gates    V.    Hooper,    90    Tex.    563  in  the  anti-trust  statute  of  that  State : 

(1897),  (39  S.  W.  Rep.  1079).  "The    term    'trust,'    if    assigned    the 

*  Jones  V.  Carter    (Tex.  Civ.  App.  meaning    given    to    it    by    the    text- 

1907),  101  S.  W.  Rep.  514.     See  also  writers,  includes  any  form  of  combina- 

ante,  §  §  332,  389.  tion  between  corporations,  or  corpora- 

^  Ante,  §   414,   note:  "  The  Statutes.  tions    and    natural    persons,    for    the 

Development  of  State  Legislation."  purpose  of  regulating  production  and 

^  Barataria  Canning  Co.  v.  Joulian,  repressing     competition     by     means 

80   Miss.    555    (1902),    (31    So.    Rep.  of   the   power  thus   centralized.   .   .   . 

961).     In  this  case  it  was  also  held  The    section    of  the    statute    quoted 

that    oysters,    canned    and    sold    as  involves  the  same  idea  and  demands 

merchandise,    were    a    "commodity"  the   same   construction,   though   it   is 

within  the  meaning  of  the  statute.  more   specific   in   its   provisions,    and 

''  State  V.  Firemen's  Fund  Ins.  Co.,  extends    to    and    includes    combina- 

152  Mo.  1  (1899),  (52  S.  W.  Rep.  595,  tions  in   restraint   of   competition   in 

45  L.  R.  A.  363).  transportation.     It     denounces     any 

808 


CHAP,    XLIl] 


CONSTRUCTION    AND    APPLICATION 


§426 


The  term  "  control, "  as  used  in  the  Mississippi  statute,  which 
a  corporation  is  forbidden  to  grant  to  others  than  its  officers 
or  agents,  means  power  to  dictate  corporate  action  and  not 
merely  to  manage  a  department  of  the  corporation's  business.* 

§  426.  Statutes  not  Regulations  of  Interstate  Commerce.  — 
State  legislatures  have  only  power  to  legislate  concerning  com- 
binations affecting  commerce  wholly  within  the  State.^  Com- 
merce across  State  lines  is  outside  their  s})here.  A  State  anti- 
trust statute,  therefore,  while  broad  enough  in  terms  to  embrace 
combinations  in  restraint  of  interstate  commerce  will  be  limited 
by  construction  to  those  to  which  alone  it  can  lawfully  apply  — 
combinations  affecting  domestic  trade  and  commerce.^     And 


form  of  combination  or  contract 
which  has  for  its  purpose,  directly 
or  indirecth',  the  restraint  of  produc- 
tion or  trade  in  any  way  or  manner, 
or  the  control  of  the  price  of  any 
article  of  consumption  by  the  people. 
It  was  not  the  purpose  of  the  con- 
vention, or  of  the  legislature,  to  limit 
either  the  terms  used  in  the  constitu- 
tion, or  in  the  statute,  by  any  narrow 
definition,  but  to  leave  it  to  the  courts 
to  look  beneath  the  surface,  and, 
from  the  methods  employed  in  the 
conduct  of  the  business,  to  determine 
whether  the  association  or  combina- 
tion in  question,  no  matter  what  its 
particular  form  should  chance  to  be, 
or  what  might  be  its  constituent  ele- 
ments, is  taking  advantage  of  the 
public  in  an  unlawful  way." 

'  Yazoo,  etc.  R.  Co.  v.  Searles,  85 
Miss.  520  (1905),  (37  So.  Rep.  939, 
68  L.  R.  A.  715)  citing  §  294  of  this 
work. 

A  boycott  is  a  combination  for 
the  purpo.se  of  creating  and  carrying 
out  a  restriction  in  trade  within  the 
meaning  of  the  Ohio  .statute. 

State  V.  Jacobs,  7  Ohio  N.  P.  261 
(1899). 

In  view  of  the  other  provisions  of 
the  Tennessee  .statute  relating  to 
corporations  the  words  "person  or 
persons"  as  used  in  the  .section  pre- 
scribing penalties  of  fine  or  imprison- 


ment for  violating  its  provisions  do 
not  embrace  corporations. 

Standard  Oil  Co.  v.  State,  117  Tcnn. 
618  (1907),  (100  S.  W.  Rep.  705, 
10  L.  R.  A.  (N.  s.)  1015). 

^  That  part  of  the  South  Carolina 
statute  which  prohibits  the  importa- 
tion into,  and  sale  within,  the  State 
of  articles  with  a  view  to  lessening 
free  competition  is  invalid  as  an 
attempted  regulation  of  interstate 
commerce. 

State  V.  Virginia-Carolina  Chemical 
Co.,  71  S.  C.  544  (1904),  (51  S.  E. 
Rep.  455). 

3  State  V.  Smile  J',  65  Kan.  240 
(1902),  (69  Pac.  Rep.  199,  67  L.  R.  A. 
903),  affirmed  196  U.  S.  447  (1905), 
(25  Sup.  Ct.  Rep.  289):  "A  State 
legislature  is  empowered  to  legislate 
generally  in  respect  to  trusts  and 
conspiracies  in  restraint  of  trade,  ex- 
cept as  limited  by  the  commerce 
clause  of  the  federal  Constitution; 
but,  on  the  other  hand,  Congress  is 
not  empowered  to  legislate  generally 
with  respect  to  trusts  antl  trade 
consjiiracies.  It  can  legislate  against 
them  only  under  the  commerce  clause 
of  the  Constitution.  Therefore,  a 
State  enactment,  though  broad 
enough  in  terms  to  apply  to  trusts 
engaged  in  interstate  commerce, 
or  conspiracies  in  restraint  of  inter- 
state trade,   will  be  limited   by  con- 

809 


§427 


INTERCORPORATE    RELATIONS 


[part  V 


the  decisions  of  the  State  courts  so  hmiting  the  general  language 
of  the  State  statutes  will  be  accepted  as  correct  interpretations 
of  them  by  the  federal  courts.' 

§  427.  Rule  of  Construction.  —  State  anti-trust  statutes, 
being  penal  in  their  nature,  must  be  strictly  construed.  Their 
meaning  cannot  be  extended  by  implication.^     General  language 


struction  to  that  to  which  it  can  alone 
legally  apply;  but  a  congressional 
act,  being  of  necessity  limited  to  the 
one  particular  class  of  trusts  or  trade 
conspiracies,  viz.,  those  engaged  in 
interstate  or  international  trade,  must 
express  that  limitation  on  its  face. 
Nevertheless,  we  do  not  doubt  that  if 
a  congressional  enactment,  general 
in  terms,  could  be  given  specific 
application  to  subjects  lying  within 
its  rightful  sphere,  without  the  aid  of 
other  and  qualifying  and  explana- 
tory words,  but  which  general  terms 
were  also  inclusive  of  subjects  lying 
without  such  sphere,  it  would  be 
restrained  by  construction  to  those 
matters  in  respect  of  which  Congress 
is  qualified  to  dispense,  and  not  be 
nullified  as  a  whole." 

In  People  v.  Butler  St.  Foundry, 
etc.  Co.,  201  111.  236  (1903),  (66  N.  E. 
Rep.  349),  it  was  held  that  while  the 
terms  of  the  Illinois  anti-trust  statute 
were  broad  enough  to  include  com- 
binations which  might  violate  the 
federal  anti-trust  statute,  it  should  be 
construed  as  relating  only  to  transac- 
tions occurring  within  the  limits  of 
the  State. 

Standard  Oil  Co.  v.  State,  117 
Tenn.  618  (1907),  (100  S.  W.  Rep. 
709,  10  L.  R.  A.  (N.  s.)  1015): 
"The  statute,  when  properly  con- 
strued, does  not  apply  to  interstate 
commerce.  The  sole  object  and  pur- 
pose of  the  enactment  of  it  was  to 
correct  and  prohibit  abuses  of  trade 
within  the  State.  This  was  the  legis- 
lative intent,  and  will  prevail  over 
the  literal  meaning  of  words  or  terms 
found  in  the  act." 

See    also     Hadley    Dean     Co.     v. 

810 


Highland  Co.,  143  Fed.  242  (1900); 
State  V.  Phipps,  50  Kan.  609  (1893), 
(31  Pac.  Rep.  1097,  34  Am.  St.  Rep. 
152,  18  L.  R.  A.  657);  Fuqua  v. 
Pabst  Brewing  Co.,  90  Tex.  298  (1897), 
(38  S.  W.  Rep.  29);  Waters-Pierce 
Oil  Co.  V.  State,  19  Tex.  Civ.  App.  1 
(1898),  (44  S.  W.  Rep.  945);  Pasteur 
Vaccine  Co.  v.  Burkey,  22  Tex.  Civ. 
App.  232  (1899),  (54  S.  W.  Rep.  804). 

In  S.  S.  White  Dental  Mfg.  Co.  v. 
Hertzberg  (Tex.  Civ.  App.,  1899),  51 
S.  W.  Rep.  355,  it  was  held  that  where 
the  invalidity  of  a  contract  under  the 
Texas  anti-trust  statute  arose  only 
after  the  delivery  of  articles  within 
the  State,  the  operation  of  the  statute 
would  not  be  defeated  by  the  fact 
that  the  delivery  within  the  State 
had  been  by  means  of  interstate  com- 
merce. 

'  Waters-Pierce  Oil  Co.  v.  State, 
177  U.  S.  43  (1900),  (20  Sup.  Ct.  Rep. 
580) ;  Sm'iley  v.  Kansas,  196  U.  S. 
447  (1905),  (25  Sup.  Ct.  Rep.  289). 
See  also  ante,  §  423. 

2  In  State  v.  Lancashire  Fire  Ins. 
Co.,  60  Ark.  472  (1899),  (51  S.  W. 
Rep.  633,  45  L.  R.  A.  348),  the  Su- 
preme Court  of  Arkansas,  in  constru- 
ing the  anti-trust  statute  of  that 
State,  said:  "To  determine  the  mean- 
ing of  a  statute,  the  courts  must  look 
mainly  to  the  language  of  the  act 
itself ;  for  that  is  the  final  expression 
of  the  legislativ-e  will,  and  therein 
must  such  will  and  intention  be  sought. 
Whatever  the  legislature  may  have 
intended,  such  intention  can  have  no 
effect  unless  expressed  in  the  statute; 
for  this,  being  a  penal  statute,  can- 
not be  extended  by  implication.  It 
would  be  in  the  highest  degree  unjust 


CHAP.    XLIl] 


CONSTRUCTION    AND    APPLICATION 


§428 


will  be  limited  in  its  application  to  such  objects  and  persons  as 
it  is  reasonable  to  presume  the  legislature  intended  to  deal 
with.^ 

§  428.  Form  of  Combination  Immaterial.  Application  of 
Statutes  to  Holding  and  Purchasing  Corporations.  —  State  anti- 
trust statutes,  while  broader  than  the  rules  of  public  policy  and 
covering  a  different  field  from  the  federal  enactment,  have  a 
common  purpose  —  the  presei'vation  of  competition  —  and 
are  governed  in  their  application  by  similar  principles.  It 
follows,  therefore,  from  the  principles  already  stated  that  the 
test  whether  a  combination  is  in  violation  of  a  State  statute 
lies  in  its  object  or  tendencies  and  not  in  its  form.^  The  form 
assumed  by  a  combination  is  immaterial.^ 

The  corporate  form  of  combination  in  no  way  prevents  the 
application  of  the  statutes.  The  corporation  as  an  entity 
may  not  be  able  to  create  a  combination,  but  its  acts, 
within  the  purview  of  the  statutes,  will  be  taken  as  the  acts  of 
the  persons  composing  it.  Its  stockholders  may,  in  controlling 
it  and  in  conjunction  with  it,  create  an  unlawful  combination.* 


to  punish  conduct  not  clearly  for- 
bidden by  the  law  itself  .  .  .  and  so, 
to  quote  the  words  of  a  recent  opinion 
of  the  Supreme  Court  of  the  United 
States,  'we  are  left  to  determine 
the  meaning  of  this  act,  as  we  deter- 
mine the  meaning  of  other  acts,  from 
the  language  used  therein.' "  Citing 
United  States  v.  Trans-Missouri 
Freight  Ass'n,  166  U.  S.  318  (1897), 
(17  Sup.  Ct.  Rep.  540). 

See  also  State  v.  Associated  Press, 
159  Mo.  410  (1901),  (60  S.  W.  Rep. 
91,  51  L.  R.  A.  151). 

'  State  V.  Smiley,  65  Kan.  240 
(1902),  (69  Pac.  Rep.  199,  67  L.  R.  A. 
903),  affirmed  196  U.  S.  447  (1905), 
(25  Sup.  Ct.  Rep.  289). 

^  See  ante,  §  354  :  "  Analt/sis  of  Rule 
governing  Private  Corporations.  Form 
of  Combination  Immaterial."  Ante, 
§  397:  "Form  of  Combination  Im- 
material. Illegality  of  Corporate  De- 
vice." 

'  Jones  V.  Carter  (Te.t.  Civ.   App. 


1907),  101  S.  W.  Rep.  514;  Standard 
Oil  Co.  V.  State,  117  Tenn.  618 
(1907),  (100  S.  W.  Rep.  705). 

*  An  association  of  dealers  formed 
for  the  purpose  of  regulating  the  price 
of  an  article  in  a  particular  locality 
which  is  carried  out  by  the  concurrent 
action  of  the  association  and  its 
members  is  in  conflict  with  the  Illi- 
nois statute.  And  the  fact  that  the 
association  is  incorporated  does  not 
affect  its  illegality,  upon  the  theory 
that  a  corporation  cannot  alone  con- 
stitute a  trust.  Its  act,  within  the 
purview  of  the  statute,  is  the  act  of 
the  persons  associated  together.  In  .so 
holding  the  Court,  in  Ford  v.  Chicago 
Milk  Shippers  Ass'n,  155  111.  179 
(1895),  (.39  N.  E.  Rep.  651,  27  L.  R.  A. 
298),  said:  "It  is  urged  that  the 
corporation  cannot  alone  enter  into  a 
trust  or  combination  that  would  be  a 
violation  of  this  statute.  Whilst  it  is 
true  a.s  a  general  proposition  that  a  cor- 
poration niaj'  be  created   and  consti- 

811 


§428 


INTERCORPORATE    RELATIONS 


[part  V 


And  where  a  corporation  is  organized  for  the  purpose  of  effect^ 
ing  an  unlawful  scheme  of  combination  its  acts  when  organized 
in  carrying  out  the  arrangement  constitute  a  violation  of  an 
anti-trust  statute.* 

A  combination  by  means  of  a  holding  corporation  when 
affecting  intrastate  commerce  is  as  much  in  violation  of  an 
appropriate  State  statute  against  combinations  as  such  a  com- 
bination is  in  contravention  of  the  federal  statute  when  affecting 
interstate  commerce.^  In  such  a  case,  it  is  not  material  whether 
the  holding  corporation  is  foreign  or  domestic  and  to  determine 
its  purposes  the  court  will  look  through  the  various  steps  which 
led  to  its  organization.^  While  the  State  may  have  granted 
power  to  the  holding  corporation  to  hold  shares  in  other  cor- 
porations it  acquired  no  right  to  exercise  such  power  in  violation 
of  the  anti-trust  statutes  of  the  State.*      Without  statutory 


tuted  a  legal  entity,  existing  separate 
and  apart  from  the  natural  persons 
composing  it,  yet  it  cannot  act  inde- 
pendently, or  against  the  will,  or 
abstain  from  complying  with  the 
direction,  of  the  natural  persons  who 
constitute  the  corporate  body.  A 
corporation  is,  in  fact,  an  association 
of  persons  united  in  one  body,  having 
perpetual  succession,  vested  with 
political  rights  conferred  upon  it  by 
the  authority  creating  it.  Such  being 
the  nature  of  the  corporate  body,  acts 
done  by  it  are  the  acts  of  the  asso- 
ciated persons  as  corporators  or  as 
individuals,  and  in  which  capacity 
the  act  is  done  must  be  determined 
from  the  nature  and  character  of  the 
act  and  the  purpose  for  which  the  cor- 
poration was  organized.  And  when 
the  acts  of  the  corporate  body  are 
violative  of  the  statutes  of  the  State 
and  would  be  a  misdemeanor  that 
would  subject  it  to  punishment  in 
accordance  with  law,  such  acts  are 
wholly  without  the  power  of  the 
corporation,  as  the  statute  will  create 
no  body  with  authority  to  violate  its 
laws.  .  .  .  There  can  be  no  immu- 
nity for  evasion  of  the  policy  of  the 
State  by  its  own  creations.     The  cor- 

812 


poration  as  an  entity  may  not  be  able 
to  create  a  tru.st  or  combination  with 
itself,  but  its  individual  share- 
holders may,  in  controlling  it,  to- 
gether with  it,  create  such  trust  or 
combination  that  will  constitute  it, 
with  them,  alike  guilty." 

'  Attorney-general,  v.  A.  Booth  & 
Co.,  143  Mich.  89  (1906),  (106  N.  W. 
Rep.  868). 

2  See  ante,  §  397a:  "The  Northern 
Securities  Case." 

^  Southern  Electric  Securities  Co. 
V.  State  (Miss.  1907),  44  So.  Rep.  785. 

See  also  Dunbar  v.  American  Tele- 
phone, etc.  Co.,  224  111.  9  (1906),  (79 
N.  E.  Rep.  423,  115  Am.  St.  Rep. 
132);  Bigelow  v.  Calumet,  etc.  Min- 
ing Co.,  155  Fed.  874  (1907);  Mac- 
Ginnis  v.  Boston,  etc.  Mining  Co., 
29  Mont.  428  (1904),  (75  Pac.  Rep. 
89). 

*  Bigelow  V.  Calumet,  etc.  Mining 
Co.,  155  Fed.  874  (1907) :  "The  result 
of  these  two  statutes  is  that  power 
was  given  to  the  Calumet  &  Hecla 
Company  to  purchase  stock  in  the 
Osceola  Company,  but  the  right  to 
exercise  that  power  in  \'iolation  of 
the  anti-monopoly  statutes  of  the 
State  was  not  given." 


CHAP.  XLIl] 


CONSTRUCTION  AND   APPLICATION 


§429 


authority  it  had  no  power  to  purchase  such  shares  at  all.  With 
such  authority  it  had  only  the  right  to  purchase  for  lawful 
purposes. 

Upon  similar  principles,  a  combination  formed  by  means  of  a 
purchasing  corporation  undoubtedly  violates  the  State  anti-trust 
statutes.'  But  an  actual  purchase  and  sale,  as  distinguished 
from  a  combination  in  the  form  of  a  sale,  does  not  violate  them. 
Thus  it  has  been  held  that  it  is  not  contrary  to  such  a  statute 
for  a  manufacturing  corporation  to  purchase  the  plant  and  prop- 
erty of  another  corporation  engaged  in  the  same  business,  for 
a  cash  consideration  and  in  good  faith. - 

§  429.  Objects  and  Tendencies  of  Combination  as  determining 
Application  of  Statutes.  —  Both  the  objects  and  the  natural 
consequences  of  the  operation  of  a  combination  must  always  be 
considered  in  determining  whether  there  has  been  a  violation  of 
a  State  anti-trust  statute.  The  test  of  the  validity  of  an  agree- 
ment is  not  alone  what  the  parties  intend  but  what  its  effect 
will  be.^  And  while,  as  we  have  seen,*  further  testing  the 
agreement  by  its  tendencies  is  making  a  standard  of  that  which 


•  For  consideration  of  this  subject, 
see  ante,  §354:  "Analysis  of  Rule 
governing  Private  Corporations.  Form 
of  Cotnbination  Immaterial." 

^  State  V.  Continental  Tobacco  Co., 
177  Mo.  1  (1903),  (75  S.  W.  Rep. 
737).  In  this  case  the  Court  said 
(p.  32):  "On  the  other  hand,  the 
terms  of  the  statute  are  not  broad 
enough  to  prohibit  one  corporation, 
in  good  faith,  in  the  legitimate  pur- 
suit of  its  business,  from  purchasing 
the  assets  of  another  corporation  in  a 
similar  business.  Its  terms  are  appli- 
cable to  individuals  and  partnerships, 
as  well  as  corporations;  its  condem- 
nation is  as  pronounced  against  the 
individual  as  it  is  against  the  corpo- 
ration ;  hence  it  follows,  if  this  statute 
is  to  be  construed  as  prohibiting  cor- 
porations from  purchasing,  in  good 
faith,  the  assets  of  another  corpora- 
tion, it  must  be  applied  with  equal 
force  to  the  rights  and  powers  of 
individuals." 


See  also  Davis  v.  Booth,  131  Fed. 
31  (1904). 

^  Yazoo,  etc.  R.  Co.  v.  Searles,  85 
Miss.  520  (1905),  (37  So.  Rep.  939, 
68  L.  R.  A.  723):  "But  at  last  the 
test,  and  only  test,  is,  not  what  the 
intent  of  the  parties  may  bo,  not  what 
form  the  combination  has  taken,  but 
what  will  its  probable  effect  be?  If 
unlawful  or  oppressive,  if  obnoxious 
to  public  policy,  if  inimical  to  public 
welfare,  they  will  be  denounced,  and 
punishment  meted  out  to  every  par- 
ticipant; otherwise  courts  will  not 
limit  or  restrict  the  inalienable  right  of 
contract,  and  will  not  interfere  unless 
the  violation  of  law  be  apparent,  or  the 
apprehended  evil  effect  assume  some 
tangible  form."      (Citing  this  treatise.) 

See  also  MacGinnis  v.  Boston,  etc. 
Mining  Co.,  29  Mont.  428  (1904), 
(75  Pac.  Rep.  89). 

*  See  ante,  §  355:  "  Anali/sis  of 
Ride.  Objects  and  Tendencies  of 
Combination." 

813 


§429 


INTERCORPORATE    RELATIONS 


[part  V 


is  necessarily  uncertain,  still  such  test  is  applied  by  the  courts 
in  determining  the  applicability  of  State  anti-trust  statutes.^ 

In  the  very  recent  case  of  Standard  Oil  Co.  v.  State  ^  the  Su- 
preme Court  of  Tennessee  said:  "The  making  of  the  agreement 
.  .  .  with  a  view  to  lessen  competition,  and  which  tended  to  do 
so,  is  thus  fully  proven.  This  is  all  that  is  necessary  to  con- 
stitute a  violation  of  the  statute.  The  statute  was  not  only 
intended  to  prohibit  contracts  and  combination  between  those 
engaged  in  the  same  business,  made  for  the  purpose,  or  which 
had  a  tendency,  to  destroy  all  competition,  and  which  are  in- 
jurious to  the  whole  public,  but  those  made  and  formed  by  any 
and  all  persons  with  a  view,  or  which  in  their  nature  tend,  to 
lessen  competition  to  any  material  extent,  to  the  injury  of  any 
part  of  the  people  of  the  State.  The  number  of  persons,  gener- 
ally speaking,  engaged  in  the  conspiracy,  the  extent  of  the  ter- 


>  standard  Oil  Co.  v.  State,  117 
Tenn.  618  (1907),  (100  S.  W.  Rep. 
705,  10  L.  R.  A.  (n.  s.)  1015) ;  Chicago, 
etc.  Coal  Co.  v.  People,  214  111.  421 
(1905),  (73  N.  E.  Rep.  770),  affirming 
114  111.  App.  75  (1904);  Dunbar  v. 
American  Telephone,  etc.  Co.,  224  111. 
9  (1906),  (79  N.  E.  Rep.  423,  115  Am. 
St.  Rep.  132) ;  Jones  v.  Carter  (Tex. 
Civ.  App.  1907),  101  S.  W.  Rep.  514. 

Ferd  Heim  Brewing  Co.  v.  Belinder, 
97  Mo.  App.  64  (1902),  (71  S.  W.  Rep. 
691):  "What  is  the  tendency  of  the 
agreement?  It  does  not  affect  the 
character  of  the  agreement  proved, 
that  the  brewers  only  intended  a 
worthy  pvirpose.  Intention  will  not 
avail  when  the  effect  is  within  the 
statutes.  And  it  has  been  held  by 
the  highest  authority  that,  though 
no  imposition  was  consummated  by 
the  raising  of  prices;  and  even 
though  the  agreement  was  necessary 
to  curb  against  unjust  or  ill-advised 
competition,  j^et  if  the  effect  of  the 
agreement  was  within  the  prohibi- 
tion of  the  law,  it  was  void." 

Walter  A.  Wood  Mowing,  etc. 
Mach.  Co.  V.  Greenwood  Hardware 
Co.,  75  S.  C.  383  (1906),  (55  S.  E. 
Rep.  973):    "In  determining  whether 

814 


a  particular  contract  falls  within  the 
inhibition  of  the  statute  (against 
monopolies)  the  Court  must  neces- 
sarily consider  the  tendency  or  power 
of  the  contract  to  injure  the  public, 
either  considered  in  itself  or  as  a  part 
of  a  scheme  to  destroy  or  impede 
competition  and  control  supply  and 
prices.  A  contract  may  be  lawful 
in  itself  as  an  isolated  matter,  but  yet 
be  unlawful  as  a  part  of  a  scheme 
to  create  a  virtual  monopoly.  The 
immediate  effect  of  a  trust  or  com- 
bination may  be  really  beneficial  to 
the  public,  improving  the  c^ualitj'  of 
goods  or  services  and  reducing  the 
price,  yet  if  it  has  inherent  capability 
or  natural  tendency  to  injure  the  pub- 
lic, then  competition  is  stifled  and 
control  of  supply  and  prices  secured 
and  it  is  obnoxious  to  the  statute. 
The  main  general  test  should  be 
whether  the  contract,  trtist  or  com- 
bination is  monopolistic  in  purpose 
or  natural  tendency.  If  so  it  un- 
reasonably affects  competition  and 
prices  to  the  detriment  of  the  public 
and  is  obnoxious  to  the  statute." 

2  Standard  Oil  Co.  v.  State,  117 
Tenn.  618,  659  (1907),  (100  S.  W. 
Rep.  70.5,  10  L.  R.  A.  (n.  s.)  1015). 


CHAP.    XLIl]  CONSTRUCTION   AND    APPLICATION  §   430 

ritory  affected,  the  degree  which  it  was  intended  or  has  a 
tendency  to  lessen  competition,  the  extent  of  the  injuiy  to  the 
pubUc,  or  whether  it  be  permanent  or  temporary  in  its  character, 
are  not  material  elements  of  the  offence.  The  form  of  the  com- 
bination is  also  a  matter  of  indifference.  No  forms  or  prece- 
dents are  followed  in  the  commission  of  crime.  In  any  form 
the  agreement  may  be  made,  or  disguise  in  which  it  may  appear, 
or  whatever  scheme  may  be  adopted  to  accomplisli  the  prohibited 
acts,  it  is  within  the  statute.  It  is  enough  that  the  contract 
was  made  with  a  view  to  lessen  competition  in  the  sale  of  an 
article  of  commerce  of  prime  necessity,  and  that  it  is  injurious 
to  the  pu])lic,  however  limited  and  restricted  it  may  be  in  its 
scope,  effect,  duration.  It  is  its  purpose,  tendency,  and  effect 
that  makes  it  unlawful." 

:?  430.  Extent  of  Combination  as  determining  Application 
of  Statutes.  —  To  establish  a  violation  of  State  statutes  against 
monopolies  — -  the  term  being  used  in  its  modern  sense  —  a 
complete  monopoly  need  not  be  shown. ^  Similarly,  statutes 
against  combinations  affecting  competition  to  the  detriment 
of  the  public  not  only  embrace  those  combinations  and  agree- 
ments made  for  the  purpose  of,  or  which  tend  toward,  destroy- 
ing all  competition  to  the  injury  of  the  whole  public,  but  those 
which  tend  to  lessen  competition  to  any  material  extent  to  the 
injury  of  any  part  of  the  public.^  And  when  the  statute  is 
directed  against  combinations  to  regulate  or  fix  prices  injury 
to  the  public  need  not  be  shown. ^ 

Upon  these  principles,  it  was  held  that  a  comliination  of 
retail  dealers  to  prevent  sales  by  wholesale  dealers  to  retailers 
not  in  the  combination  violated  the  Nebraska  anti-trust  statute 
regardless  of  the  proportion  of  dealers  in  the  trade  outside  tlie 
combination.^     So  it  has  been  held  that  the  application  of  the 

'  State    V.    Armour    Packing    Co.,  Rep.  770),  affirming  114  111.  .\pp.  75 

173     Mo.     356    (3),    190    (73     S.    W.  (1904). 

Rep.  G45,  61  L.  R.  A.  4G4);    Hunt  v.  ^  Standard    Oil    Co.    v.    State,    117 

Riverside  Cooperative  Club,  140  Mich.  Tenn.    618   (1907),    (100   S.    W.    Rep. 

538  (1905),  (104  N.  W.  Rep.  40,  112  705,  10  L.  R.  A.  (n.  s.)  101.5). 
Am.  St.  Rep.  420) ;    Standard  Oil  Co.  »  gt-^tg    ^      Armour    Packing    Co., 

V.   State,   117  Tenn.   618   (1907),   (100  173   Mo.  356  (1903),  (73  S.  W.   Rep. 

S.  W.  Rep.  705,   10  L.  R.  A.   (n.  s.)  645,  61  L.  R.  A.  464). 
1015) ;      Chicago,     etc.     Coal    Co.     v.  *  Clcland  v.  Anderson,   66  Neb.  2.52 

People,  214  111.  421  (1905),  (73  N.  E.  (1902),  (92  N.  W.   Rep.  306). 

815 


§431 


INTERCORPORATE    RELATIONS 


[part  V 


Illinois  statute  does  not  depend  upon  the  number  of  those  im- 
plicated in  its  violation  nor  the  extent  of  the  territory  covered 
by  the  combination.' 

§  431.  Application  of  Statutes  to  Ancillary  Contracts  in  Re- 
straint of  Trade.  —  As  already  shown,  contracts  in  restraint  of 
trade  —  using  the  phrase  in  its  original  sense  —  were  agree- 
ments auxiliary  to  a  principal  contract  —  usually  the  sale  of  a 
business  —  by  a  party  thereto  to  refrain  from  engaging  in  some 
trade  or  occupation  for  a  certain  time  in  a  particular  territor}'.^ 

While  the  effect  of  such  agreements  is  in  a  degree  to  restrain 
competition,  their  primary  object  is  to  protect  the  purchaser  of 
the  good-will  of  a  business  and,  when  reasonable,  they  have 
always  been  sustained  at  common  law.  They  have  also,  as  we 
have  seen,  been  held  to  be  outside  the  application  of  the  federal 
anti-trust  statute.^ 

One,  at  least,  of  the  State  anti-trust  statutes  expressly  ex- 
cludes these  ancillary  contracts  from  its  operation,*  and  other 
statutes  have  been  held  not  to  apply  to  them.^ 


'  Chicago,  etc.  Coal  Co.  v.  People, 
214  111.  421  (1905),  (73  N.  E.  R^. 
770),  affirming  114  111.  App.  75  (1904). 

2  See  ante,  ch.  XXXIII. :  "Applica- 
tion of  Law  of  Contracts  in  Restraint 
of  Trade." 

3  Ante,  §  387  :  "  Use  of  Phrase  '  Con- 
tract in  Restraint  of  Trade.'  Applica- 
tion of  Statute  to  Ancillary  Con- 
tracts." 

*  See  §  6  of  Michigan  act  of  1905, 
in  note  to  §  414:  "The  Statutes.  De- 
velopment of  State  Legislation." 

For  construction  of  the  Michigan 
statutes  see  Davis  v.  Booth,  131  Fed. 
31  (1904). 

^  An  agreement  by  the  vendor  of 
a  business  not  to  engage  in  a  similar 
business  in  a  certain  territory  is  not 
in  violation  of  the  Minnesota  anti- 
trust statute  of  1899. 

Espenson  v.  Kolpe,  93  Minn.  278 
(1904),  (101  N.  W.  Rep.  168). 

An  agreement  by  one  party  to 
employ  at  certain  wages  another  en- 
gaged in  the  same  line  of  business 
provided  he  will  give  up  his  business 

816 


and  enter  the  service  of  the  former 
has  been  held  not  to  contravene  the 
Ohio  anti-trust  act  of  1898. 

Kevil  V.  Standard  Oil  Co.,  8  Ohio 
N.  P.  311,  11  Ohio  S.  &  C.  P.  Dec. 
114  (1900). 

An  agreement  by  a  merchant  in 
selling  out  his  business  that  he  will 
not  engage  in  business  in  the  town  for 
a  period  of  twelve  months  does  not 
create  a  "trust"  under  the  Texas 
statute. 

Gates  V.  Hooper,  90  Tex.  563 
(1897),  (39  S.  W.  Rep.  1079). 

See  also  Crump  v.  Ligon  (Tex. 
1904),  84  S.  W.    Rep.  250. 

But  an  ancillary  contract  by  the 
vendor  of  a  business  not  to  reenter 
such  business  for  a  certain  period  and 
in  a  particular  place  is  in  violation  of 
the  Texas  anti-trust  statute  of  1895, 
where  it  also  appears  that  the  pur- 
chasers of  the  business  were  the  only 
dealers  engaged  in  that  business  in 
such  locality  and  combined  and  made 
the  purchase  for  the  purpose  of  elimi- 
nating competition. 


CHAP.  XLII.] 


CONSTRUCTION   AND    APPLICATION 


§432 


§  432.  Application  of  Statutes  to  Agency  and  Other  Exclusive 
and  Restrictive  Contracts.  Sales  and  Leases.  — The  State  anti- 
trust statutes  are  directed  against  contracts  and  combinations 
in  restraint  of  competition  to  the  public  injury.  It  is  not  their 
purpose  to  interfere  with  ordinary^  transactions  of  business  nor 
to  prevent  a  person  from  conducting  his  affairs  accor(Ungto  his 
own  judgment.  These  are  broad  and  general  principles.  But 
the  courts  have  found  difficulty  in  applying  them  to  the  sweeping 
terms  of  the  statutes  and  the  decisions,  both  on  account  of  the 
varying  views  of  the  courts  and  the  varying  phraseology  of  the 
statutes,  are  not  uniform. 

Thus,  it  is  held  that  an  agreement  creating  an  agency  for  the 
sale  of  articles  is  not  a  combination  in  contravention  of  a  State 
statute,  although  fixing  prices  and  containing  stipulations  not 
to  deal  with  other  persons.*  But  a  contract  whereby  a  party 
obtains  the  exclusive  agency  for  the  sale  of  the  goods  manufac- 
tured by  the  other  party  and  agrees  not  to  sell  any  other  line 
of  goods  has  been  held  to  be  a  contract  restricting  trade  within 
the  meaning  of  such  a  statute.^ 


Comer  v.  Burton-Lingo  Co.,  24 
Tex.  Civ.  App.  251  (1900),  (58  S.  W. 
Rep.  969). 

And  an  agreement  between  com- 
peting hotel  proprietors  wherein  one 
agreed  to  close  his  hotel  for  hotel  pur- 
poses for  a  period  of  three  years  and 
the  other  agreed  to  pay  him  a  specified 
sum  monthly  during  such  period  has 
been  held  to  violate  the  Kentucky 
.statute. 

demons  v.  Meadows  (Kj'.  1900), 
94  S.  W.  Rep.  13. 

'  Welch  V.  Phelps,  etc.  Windmill 
Co.,  89  Tex.  656  (1896),  (36  S.  W. 
Rep.  71):  "It  was  not  the  purpose  of 
the  statute,  however,  to  interpose 
any  obstacle  to  a  principal's  contract- 
ing with  his  agent  with  reference 
either  to  the  terms  or  the  subject 
matter  of  the  agency.  In  the  case 
before  us  it  was  entirely  within  the 
discretion  of  the  principal,  before  as 
well  as  after  the  contract  was  signed, 
as  to  how  many  of  its  windmills  it 
would  send  into  the  named  territorj-, 


as  well  as  to  decline  to  sell  for  less 
than  the  net  price,  or  permit  its  agent 
to  sell  for  others.  It  controlled  them 
all,  and  therefore  there  was  no  union 
or  association  of  otherwise  indepen- 
dent, separate  and  possibly  competing 
'capital,  skill  or  acts';  and  hence  no 
combination." 

See  also  Weiboldt  v.  Standartl 
Fashion  Co.,  80  111.  App.   67  (1899). 

2  White  Dental  Mfg.  Co.  v.  Hertz- 
berg  (Tex.  Civ.  App.  1899),  51  S.  W. 
Rep.  355. 

An  agreement  to  assign  an  out- 
standing agency  contract  to  a  com- 
petitor operating  in  the  same 
territory  and  to  refrain  from  doing 
business  in  such  territory  is  in  viola- 
tion of  the  Mississippi  anti-tru.st 
statute. 

Kosciusko  Oil  Mill,  etc.  Co.  v. 
Wilson  Cotton  Oil  Co.,  90  Miss.  551 
(1907),  (43  So.  Rep.  435,  8  L.  R.  A. 
(N.  s.)  1053). 

Where  it  appeared  that  a  corpora- 
tion  had   appointed   a  general   agent 

817 


§432 


INTERCORPORATE   RELATIONS 


[part  V 


Contracts  wherein  a  manufacturer  agrees  to  confine  the  sale 
of  his  products  to  a  particular  dealer  in  a  given  territory  and 
the  dealer  agrees  to  buy  of  such  manufacturer  exclusively  are 
generally  held  not  to  violate  the  State  statutes.^  But  such 
agreements  are  held  to  be   within   the    meaning  of   statutes 


and  authorized  him  to  establish  agen- 
cies in  a  particular  territory  for  the 
sale  of  machinery  made  by  different 
manufacturers  which  had  previously 
been  competitors  in  such  territory, 
and  that  such  general  agent  had  es- 
tablished the  agencies  and  had  bound 
the  local  agents  under  penalties  to 
sell  all  the  machinery  at  prices  fixed 
by  such  corporation  or  general  agent, 
it  was  held  that  a  trust  to  fix  the 
price  of  manufactured  articles  in  vio- 
lation of  the  Kentucky  statute  (see 
ante,  §  414,  note)  was  shown. 

International  Harvester  Co.  v. 
Commonwealth  (Ky.,  1907),  30  Ky. 
Law  Rep.  716,  99  S.  W.  Rep.  637. 

»  Houck  V.  Wright,  77  Miss.  483 
(1900),  (27  So.  Rep.  616) :  "The  legis- 
lature, by  the  chapter  on  trusts  and 
combines,  did  not  intend  to  debar  a 
person  from  conducting  his  own  pri- 
vate business  according  to  his  own 
judgment.  Indeed,  there  is  no  law, 
federal  or  State,  that  requires  a  person 
to  sell  his  goods,  against  his  will,  to 
any  other  person,  or  to  send  agents 
abroad  to  seek  business,  or  even  com- 
pel him  to  employ  agents  in  the  con- 
duct of  his  business.  These  are 
matters  of  private  judgment  and  dis- 
cretion which  belong  to  every  citizen 
by  the  laws  of  nature;  they  are 
rights  inherent  in  every  freeman, 
which  no  human  law  can  rightly 
supersede  or  impair." 

A  contract  by  which  a  manu- 
facturer agrees  to  sell  exclusively  to  a 
dealer  certain  machinery  to  be  resold 
in  a  particular  territory  and  by  which 
the  dealer  agrees  to  purchase  exclu- 
sively from  the  manufacturer  is  not 
in  violation  of  the  South  Carolina 
statute. 

818 


Walter  A.  Wood  Mowing,  etc. 
Co.  V.  Greenwood  Hardware  Co.,  75 
S.  C.  378  (1906),  (55  S.  E.  Rep. 
973). 

A  contract  by  a  brewing  company 
to  sell  to  one  dealer  only  in  a  desig- 
nated territory  does  not  violate  the 
Texas  statute. 

Vanderweghe  v.  American  Brewing 
Co.  (Tex.  Civ.  App.  1901),  61  S.  W. 
Rep.  526.  See  also  Norton  v.  Thomas, 
99  Tex.  578  (1906),  (91  S.  W.  Rep. 
780). 

An  agreement  by  one  corporation 
to  purchase  all  its  raw  materials 
from  and  sell  all  its  finished  prod- 
uct to  another  corporation  is  not  in 
conflict  with  the   Illinois  statute. 

Heimbucher  v.  Goff,  Horner  &  Co., 
119  111.   App.   373   (1905). 

A  contract  between  a  manufacturer 
and  a  dealer  wherein  the  former  agrees 
to  sell  its  product  to  the  latter  at  a 
reduced  price  in  consideration  of  the 
latter's  agreement  not  to  sell  at  less 
than  a  stipulated  price  is  not  in  con- 
travention of  the  New  York  statute 
against  monopolies. 

Walsh  V.  Dwight,  40  App.  Div. 
(N.  Y.)  513  (1899),  (58  N.  Y.  Supp. 
91).  See  also  Commonwealth  v.  Grin- 
stead,  HI  Ky.  203,  1901  (63  S.  W. 
Rep.  427) ;  Over  v.  Byram  Foundry 
Co.,  37  Ind.  App.  452  (1906),  (77  N. 
E.  Rep.  302). 

The  grant  by  a  railroad  company 
of  the  exclusive  privilege  of  soliciting 
transfer  busin'ess  upon  its  trains  has 
been  held  not  to  contravene  the  Texas 
statute. 

Lewis  V.  Weatherford,  etc.  R.  Co., 
36  Tex.  Civ.  App.  48  (1904),  (81  S.  W. 
Rep.   111). 


CHAP.  XLIl] 


CONSTRUCTION   AND   APPLICATION 


§432 


specifically  declaring  void  all  agreements  to  limit  trade  in  any 
article.^ 

An  agreement  between  manufacturers  or  wholesale  dealers 
not  to  sell  to  any  person  indebted  to  any  party  thereto  is  in 
conflict  with  the  Missouri  statute.  It  is  said  to  deprive  the 
debtor  of  the  benefit  of  free  competition  and  to  impose  a 
penalty  upon  his  condition.^  On  the  other  hand,  it  is  broadly 
held  that  the  right  to  refuse  to  maintain  trade  relations  is  an 
inherent  right  and  its  exercise  not  in  violation  of  the  New  York 
statute.^ 

An  agreement  among  all  the  dealers  in  a  certain  market 
limiting  their  right,  under  forfeitures  and  penalties,  to  buy  all 
the  grain  on  such  market  they  might  desire  or  require  is  a 


'  Simmons  v.  Terry  (Tex.  Civ.  App. 
1904),  79  S.  W.  Rep.  1103.  Hut  see 
Norton  v.  Thomas,  99  Tex.  578  (1906), 
(91  S.  W.  Rep.  780).  See  also  Troy 
Buggy  Works  v.  Fife  (Tex.  Civ. 
App.  1903),  74  S.  W.  Rep.  950; 
Texas  Brewing  Co.  v.  Temploman,  90 
Tex.  277  (1896),  (38  S.  W.  Rep.  27); 
Texas  Brewing  Co.  v.  Meyer  (Tex. 
1896),  38  S.  W.  Rep.  262.  These 
decisions  of  course  refer  to  the  Texas 
statutes. 

Compare  these  decisions  with  Lan- 
yon  V.  Garden  City  Sand  Co.,  223  111. 
616  (1906),  (79  N.  E.  Rop.  313,  9 
L.  R.  A.  (n.  s.)  446),  wliore  it  was 
held  that  an  agreement  of  a  manufac- 
turer to  sell  his  product  cxclusivclj' 
to  the  other  party  who  agreed  to  take 
it  was  not  in  violation  of  the  Illinois 
statute  making  it  an  offence  to  enter 
into  any  contract  to  limit  the  quality 
of  any  article  mined,  produced  or  sold. 

Contracts  wherein  maiuifacturers 
and  wliolcsale  dealers  have  granted 
to  retailers  exclusive  rights  for  the 
sale  of  goods,  containing  stipulations 
that  the  vendor  should  not  permit 
other  persons  to  handle  their  products 
in  the  designated  territory,  have  also 
been  held  to  violate  the  Texas  statutes. 

Columbia  Carriage  Co.  v.  Hatch,  19 
Tex.  Civ.  App.  120  (1898),  (47  S.  W. 
Rep.  288). 


An  agreement  to  purchase  salt 
from  a  certain  corporation  for  a 
particular  period  and  not  to  purchase 
from  other  parties  or  make  any 
importations  and  "to  discourage 
in  every  possible  manner,  any  such 
shipments  or  importations  of  salt 
by  other  parties"  is  in  violation  of 
the  California  statute. 

Getz  V.  Federal  Salt  Co.,  147  Cal. 
115  (1905),  (81  Pac.  Rep.  416,  109 
Am.  St.  Rep.  114). 

A  contract  to  purchase  lambs 
wherein  the  purchaser  agrees  not 
to  buy  any  other  lambs  in  a  desig- 
nated territory  within  a  prescribed 
time,  is  void  under  the  Michigan 
statute  (3  How.  Stat.  §  9354 j)  de- 
claring void  all  contracts  designed  to 
restrict  free  competition  in  the  pro- 
duction or  sale  of  agricultural  com- 
modities. Bingham  v.  Brands,  119 
Mich.  255  (1899),  (77  N.  W.  Rep. 
940). 

-  Fcrd  Iloini  Brewing  Co.  r.  Be- 
lindcr,  97  Mo.  App.  64  (1903),  (71 
S.  W.  Rep.  691). 

^ In  the  recent  case  of  Locker  r. 
American  Tobacco  Co.,  121  App.  Div. 
(N.  Y.)  443  (1907),  (106  N.  Y.  Supp. 
115),  the  Court  said:  "The  complaint 
evidently  proceeds  upon  the  theory 
that  the  plaintiffs  are  vested  with  the 
legal    right   to   buy   and   deal   in   the 

819 


§   433  INTERCORPORATE   RELATIONS  [PART   V 

contract  in  restraint  of  trade  in  violation  of  the  Kansas 
statute.^ 

A  contract  by  a  producer  to  sell  to  a  purchaser  all  his  product 
except  a  specified  amount,  and  stipulating  that  this  amount 
shall  not  be  sold  to  the  trade  at  a  lower  price  than  that  at 
which  the  purchaser  offers  the  product  bought  by  it,  is  an 
agreement  to  fix  the  price  of  a  commodity  within  the  pro- 
hibition of  the  Mississippi  statute.^ 

The  leasing  of  property  to  an  unlawful  combination  does 
not  contravene  the  New  York  statute  against  monopolies 
which  is  "designed  to  prevent  the  owners  or  controllers  of 
property  entering  into  a  combination  to  regulate  production 
and  maintain  prices  for  their  mutual  benefit  according  to  their 
respective  interests."^ 

§  433.  Application  of  Statutes  to  Particular  Associations 
of  Manufacturers  and  Dealers.  —  An  association  of  retail  deal- 
ers, formed  to  prevent  the  competition  of  wholesale  dealers, 
requiring  as  a  condition  of  membership  that  each  member  con- 
tinuously carry  a  fixed  amount  of  stock,  and  collecting  from 
wholesale  dealers  a  penalty  in  case  they  sell  directly  to  con- 
merchandise  manufactured  and  con-  State  and  federal,  guarantee  to 
trolled  by  the  defendants  and  to  be  the  citizen.  It  is  not  within  the 
supplied  at  all  times,  as  the  demands  power  of  the  courts  to  compel  an 
of  their  customers  require,  upon  com-  owner  of  property  to  sell  or  part  with 
plying  with  the  conditions  attached  his  title  to  it  without  his  consent 
to  the  sale  of  such  products,  and  and  against  his  wishes  to  any  par- 
paying    therefor    with    such    amount       ticular  person." 

thereof    as    their    business    demands,  See  also  Wills  v.  Central  Ice,  etc. 

and  that  a  refusal  to  sell  to  them  is  a  Co.  (Tex.  Civ.  App.  1905),  88  S.  W. 
wrongful  and  actionable  invasion  of       Rep.  265. 

such    right ;     but    we    are    unable    to  '  State    v.    Smiley,    65    Kan.    240 

discover  in  this  record  anj-thing  war-        (1902),  (69  Pac.  Rep.  199,  67  L.  R.  A. 
ranting    or    sustaining    such    theory.        903),   affirmed  196  U.   S.   447   (1905), 
It  is  the  well  settled  law  of  this  State        (25  Sup.  Ct.  Rep.  289). 
that   the    refusal   to    maintain    trade  ^  Barataria  Canning  Co.  v.  Joulian, 

relations  with  an5^  individual  is  an  SO  Miss.  555  (1902),  (31  So.  Rep. 
inherent    right    which    every    person       961). 

may  exercise  lawfully,  for  reasons  he  ^  Brooklyn  Distilling  Co.  v.  Stand- 

deems  sufficient  or  for  no  reasons  ard  Distilling  Co.,  120  App.  Div. 
whatever,  and  it  is  immaterial  whether  (N.  Y.)  237  (1907),  (105  N.  Y.  Supp. 
such  refusal  is  based  upon  reason  or  264).  See  also  Export  Lumber  Co.  v. 
is  the  result  of  mere  caprice,  prejudice  South  Brookh^i  Sawmill  Co.,  54  App. 
or  malice.  It  is  a  part  of  the  liberty  Div.  (N.  Y.)  518  (1900),  (67  N.  Y. 
of    action  which    the    Constitutions,       Supp.  626). 

820 


CHAP.  XLIl] 


CONSTRUCTION   AND   APPLICATION 


§433 


sumers  or  to  retail  dealers  ineligible  to  membership,  is  in  con- 
travention of  the  Nebraska  anti-trust  statute.' 

An  agreement  between  an  association  of  plumbers  and  cer- 
tain manufacturers  and  dealers,  entered  into  for  the  purpose 
of  fixing  prices  and  limiting  production,  wherein  the  latter 
agree  not  to  sell  supplies  to  others  than  members  of  the 
association  and  the  former  agree  to  boycott  any  dealer 
selling  to  a  non-member,  is  unlawful  under  the  Missouri 
statute.^ 

A  combination  of  corporations,  effected  by  means  of  a  series 
of  contracts  between  each  corporation  and  an  intermediary 
association  composed  of  a  member  from  each  of  the  combining 
corporations,  wherein  the  several  corporations  agree  to  sell  all 
their  respective  products  to  such  association  for  a  stated  period 


■  Cleland  v.  Anderson,  60  Neb.  252 
(1902),  (92  N.  W.  Rep.  300):  "The 
provisions  of  §  1,  ch.  91a,  Comp.  St. 
1901,  are  very  broad,  and  expressly 
cover  any  combination  of  dealers 
intended  'to  prevent  others  froni 
conducting  or  carrying  on  the  same 
business,'  or  which  tend  'to  prevent 
or  preclude  a  free  and  unrestricted 
competition  among  themselves  or 
others  or  the  public  generally.' 
The  express  object  of  the  associatrion 
in  question  is  to  prevent  competition 
of  wholesale  dealers  in  selling  directly 
to  contractors  and  other  consumers, 
and  it  endeavors  not  only  to  prevent 
this,  but  to  prevent  its  members 
from  selling  in  localities  where  other 
members  arc  in  business,  and  to  pre- 
vent wholesalers  from  selling  to  deal- 
ers who  do  not  carry  a  stock  of 
75,000  feet  and  maintain  a  per- 
manent yard.  These  purposes  are 
clearly  in  contravention  of  the  statute, 
and,  however  lawful  its  other  objects, 
render  its  acts  and  the  acts  of  its 
members,  and  those  who  unite  with 
them  therein,  so  far  as  they  are  in 
furtherance  of  such  purposes,  unlawful 
and  actionable.  A  point  is  made 
that  a  large  number  of  dealers  in  the 
State  are  not  members,  and  that  the 


number  of  wholesalers  who  cooperate 
is  relatively  small.  But  the  statute 
meets  such  a  case  expressly.  It  pro- 
vides that  combinations  of  this  nature 
on  the  part  of  'two  or  more  persons' 
shall  be  unlawful,  and  acts  of  even  a 
single  person,  intended  to  prevent 
others  from  engaging  in  the  same 
business,  are  prohibited.  Hence  the 
number  of  persons  who  engage  in 
such  combinations,  and  the  propor- 
tion they  bear  to  the  whole  number 
of  dealers  in  the  same  trade,  are  not 
material." 

The  early  Nebraska  statute  di- 
rected against  combinations  of  grain 
dealers  does  not  relieve  such  dealers 
from  the  operation  of  the  later  .statutes 
declaring  illegal  all  combinations  in 
restraint  of  competition. 

State  V.  Omaha  Elevator  Co., 
75  Neb.  637  (1906),  (106  N.  W.  Rep. 
979). 

*  Walsh  V.  Association  of  Plumbers, 
97  Mo.  App.  280  (1902),  (71  S.  W. 
Rep.  455). 

A  somewliat  similar  plumbers' 
a.s.sociation  was  held  to  conflict  with 
the  Michigan  statute  of  1899  in 
Hunt  V.  Riverside  Club,  140  Mich. 
538  (1905),  (104  N.  W.  Rep.  40, 
112  Am.  St.  Rep.  420). 

821 


§  433  INTERCORPORATE   RELATIONS  [PART   V 

and  at  a  stipulated  price,  is  also  contrary  to  the  Missouri 
statute.* 

On  the  other  hand,  a  live  stock  exchange  formed  to  promote 
the  interests  of  its  members  was  held  not  to  be  an  illegal  com- 
bination under  the  Missouri  statute  although  its  by-laws  pro- 
vided that  no  member  should  do  business  with  a  member  who 
had  been  suspended  or  expelled.^ 

The  by-laws  of  an  association  of  local  dealers  which  permit 
its  members  to  purchase  only  from  such  wholesale  dealers  as 
will  sell  to  members  exclusively  contravene  the  Tennessee 
statute.  Such  by-laws  are  "contracts,  arrangements  and  com- 
binations" calculated  to  prevent  free  competition,  influence 
prices  and  injuriously  affect  trade  and  commerce.^ 

An  association  of  commission  merchants  by  means  of  a 
corporation  the  constitution  and  by-laws  of  which  provide  for 
discriminations  in  favor  of  members  in  the  prices  to  be  paid 
for  produce,  regulate  deliveries,  and  prescribe  penalties  against 
offending  members,  is  a  combination  interfering  with  the  free 
purchase  and  sale  of  commodities  in  contravention  of  the 
Minnesota  statute.* 

An  association  of  dealers  in  live  stock,  a  by-law  of  which 
forbids  members  buying  or  selling  for  others  without  charging 
a  minimum  commission,  has  been  held  to  violate  the  Kansas 
statute.^ 

An  agreement  among  brewers  to  raise  the  price  of  beer  to  the 
extent  of  a  tax  imposed  thereon  is  in  violation  of  the  Kentucky 
statute  against  combinations  to  fix  the  price  of  merchandise  or 

'  Finck   V.    Schneider  Granite   Co.,  8978)    was   that    prohibiting   persons 

187  Mo.  244  (1905),   (86    S.  W.  Rep.  engaged    in    selling    any    article    of 

213,  106  Am.  St.  Rep.  452).  commerce    from    entering    into    any 

For  consideration  of  the  applica-  agreement    to    limit    competition    by 

tion  of  the  Missouri  statute  of  1899  refusing    to    buy    from,    or    sell    to, 

prohibiting  combinations  to  fix  prices  another  person. 

inthecascof  a  "corner  "of  the  market,  ^  Bailey  t;.  Ma.ster  Plumbers' Ass'n, 

see  C.    H.   Albers  Commission  Co.   v.  103  Tenn.  99  (1899),  (52  S.  W.  Rep. 

Spencer,    205    Mo.    105    (1907),    (103  853,  46  L.  R.  A.  561). 

S.  W.  Rep.  523).  *  Ertz   v.    Produce   Exchange   Co., 

"Gladish    v.     Bridgeford    (Kansas  82  Minn.  173  (1901),  (84  X.  W.  Rep. 

City  a.  of  App.  1905),  89  S.  W.  Rep.  743,  51  L.  R.  A.  825). 

77.  "State    v.    Wilson,    73    Kan.    334 

The   statutory   provision   in   ques-  (1906),   (84  Pac.  Rep.  737). 
tion    (Missouri    Rev.    Stat.     1899,    § 

822 


CHAP.  XLIl] 


CONSTRUCTION  AND  APPLICATION 


§435 


manufactured  articles,  notwithstanding  it  relates  to  an  article 
the  increased  use  of  which  is  not  favored  bv  hiw.' 

§  434.  Application  of  Statutes  to  Combinations  under  Patents 
and  Copyrights.  —  The  principles  which  control  the  applica- 
tion of  the  federal  anti-trust  statute  to  combination.s  under 
patents  and  copyrights  govern  the  application  of  the  State 
statutes  to  such  combinations  and  do  not  require  separate 
examination.- 

§  435.  Application  of  Statutes  to  Insurance  Combinations.  — 
The  anti-trust  statutes  of  several  States  include,  in  express 
terms,  combinations  of  insurance  companies  designed  to  pre- 
vent competition  and  maintain  rates. ^  In  other  States,  the 
question  has  been  judicially  considered  whether  such  a  combi- 
nation comes  within  the  general  provisions  of  the  State  statute. 

An  Iowa  statute*  prohibited  the  formation  of  combinations 
to  regulate  and  fix  the  price  of  "oil,  lumber,  coal  ...  or  any 
other  commodity."     The  Supreme  Court  of  Iowa  held  that 


'  Commonwealth  v.  Bavarian  Brew- 
ing Co.,  112  Ky.  925  (1902),  (6G  S.  W. 
Rep.  1016). 

*  See  ante,  §  399:  "Application  of 
Statute  to  Coynhinations  under  Pat- 
ents";  §  400:  "Application  of  Statute 
to  Combinations  under  Copi/rights." 

A  corporation  organized  for  the 
purpose  of  acquiring  patents  and 
granting  licenses  thereunder,  and 
which  has  acquired  nearly  all  the 
patents  covering  a  particular  article 
but  which  does  not  bind  its  licensees 
as  to  prices  or  output,  is  not  in  con- 
travention of  the  Illinois  anti-trust 
statute. 

Columbia  Wire  Cloth  Co.  v.  Free- 
man Wire  Co.,  71  Fed.  302  (1895). 
See  also  Clark  v.  Cyclone  Woven  Wire 
Fence  Co.,  22  Tex.  Civ.  App.  41 
(1899),  (54  S.  W.  Rep.  392). 

An  agreement  between  publishers 
representing  over  ninety  per  cent  of 
the  book  trade  and  controlling  over 
ninety-five  per  cent  of  the  books 
published  in  this  country  that  all 
future  copyrighted  books  should  be 
sold   at    retail    at    certain    net    prices 


and  that  all  other  books,  whether 
copyrighted  or  not,  should  be  .sold 
only  to  retailed  agreeing  to  maintain 
prices  or  to  jobbers  agreeing  not  to 
sell  to  any  blacklisted  retailers,  while 
purporting  to  secure  to  the  publishers 
the  monopoly  granted  by  the  cojiy- 
right  law,  in  effect  interferes  with  tiie 
sale  of  uncopyrighted  book,s  and  is 
in  violation  of  the  New  York  anti- 
monopoly  act. 

Strauss  v.  American  Publishers 
Ass'n,  177  N.  Y.  473  (1904),  (69  N.  K. 
Rep.  1107,  101  Am.  St.  Rep.  819, 
64  L.  R.  A.  701),  affirming  85  Ai>p. 
Div.  (N.  Y.)  44G  (1903),  (83  N.  Y. 
Supp.  271). 

'The  Arkansas  statute  printol  in 
note  to  §  414,  ante,  "The  Stalutm. 
Development  of  State  Legislation,"  is 
illustrative. 

For  construction  of  the  jirovisii'ii-i 
of  the  Missouri  statute  relating  to 
insurance  companies,  see  State  v. 
Firemen's  Fund  Ins.  Co.,  152  Mo.  1 
(1899),  (52  S.  W.  Rep.  595,  45  L.  R.  .V. 
363). 

«McClain'.s    low.-i   Code,    §    r,Ar,\. 

823 


§435 


INTERCORPORATE   RELATIONS 


[part  V 


insurance  was  a  "commodity"  within  the  meaning  of  this 
statute,  and  that  a  combination  of  insurance  companies 
was  prohibited  by  its  provisions.^  On  the  other  hand,  the 
Supreme  Court  of  Texas  held  that  the  term  "commodity,"  in 
the  Texas  statute  of  1889,  did  not  include  insurance,  and  that 
a  combination  of  fire  insurance  companies  to  establish  uniform 
rates  did  not  contravene  the  act.^  The  decision  in  the  Iowa 
case  cannot  be  regarded  as  sound.  It  ignores  the  ejusdem 
generis  rule  of  construction.  The  term  "commodity,"  in  its 
broadest  sense,  may  include  insurance,  but  it  is  not  a  commodity 
of  the  same  general  class  or  nature  as  those  commodities  pre- 
viously mentioned  in  the  Iowa  statute. 

The  word  "property,"  as  used  in  the  Kentucky  anti-trust 
statute,  "  does  not  include  the  right  to  enter  into  a  contract 
of  insurance  nor  to  fix  the  terms  upon  which  such  a  contract 
will  be  made."  ^ 

Insurance  is  a  "business,"  the  control  of  which  cannot  be 
placed  in  the  hands  of  trustees,  within  the  meaning  of  the 
Mississippi  statute.* 


1  Beechley  v.  Mulville,  102  Iowa, 
602  (1897),  (70  N.  W.  Rep.  107,  63 
Am.  St.  Rep.  479). 

The  word  "trade"  in  the  title  of 
an  act  fairly  includes  the  provisions 
of  the  act  concerning  insurance,  and 
such  an  act  is  valid  in  a  State  where 
the  subject  of  an  act  must  be  clearly 
expressed  by  its  title. 

In  re  Pinkney,  47  Kan.  89  (1891), 
(27  Pac.  Rep.  179).  See  also  State  v. 
Phipps,  50  Kan.  609  (1893),  31  Pac. 
Rep.  1097,  34  Am.  St.  Rep.  152,  18  L. 
R.  A.  657). 

^  Queen  Ins.  Co.  v.  State,  86  Tex. 
250  (1893),  (24  S.  W.  Rep.  397,  22 
L.  R.  A.  483).  To  meet  this  decision 
the  word  "business"  was  inserted  in 
the  Texas  act  of  1895. 

*  ^tna  Ins.  Co.  v.  Commonwealth, 
106  Ky.  864  (1899),  (21  Ky.  Law  Rep. 
503,  51  S.  W.  Rep.  624):  "While  it 
may  be  admitted  that  a  contract, 
either  for  labor  or  for  indemnity 
against  contingent  loss,  like  an  insur- 
ance contract,  when  executed,  becomes 

82-1 


property,  because  it  is  then  a  chose  in 
action,  the  right  to  enter  into  such 
contracts,  which  belongs  to  all  per- 
sons capable  of  contracting  —  as  well 
natural  persons  as  artificial  ones 
authorized  by  their  organic  law  to 
make  such  contracts  —  would  hardly 
be  considered  to  be  included  in  the 
word  'property,'  unless  that  word 
were  used  in  a  much  broader  sense 
than  it  is  customarily  used  by  lawyers 
or  in  statutes." 

*  American  Fire  Ins.  Co.  v.  State, 
75  Miss.  24  (1897),  (22  So.  Rep.  99) : 
"It  [the  statute]  prohibits  any  trust 
the  object  of  which  is  to  place  the 
control  of  business  (any  business) 
to  s.ny  extent  in  the  power  of  trustees. 
The  law-makers  wisely  refrained  from 
any  specification  of,  or  attempt  to 
enumerate,  the  kinds  of  business 
whose  control  should  thus  be  placed 
in  the  power  of  trustees,  for  the  ob- 
vious reason  that  such  kinds  of  busi- 
ness in  modern  life  are  multiform. 
It,    therefore,    prohibited    any    trust 


CHAP.  XLIl] 


CONSTRUCTION   AND   APPLICATION 


436 


Contracts  of  insurance  issued  by  a  forei<;n  insurance  com- 
pany upon  property  within  a  State  do  not  constitute  interstate 
commerce,  and  State  statutes  against  combinations  may  apply 
to  foreign  insurance  companies  combining  to  increase  local 
rates,  and  when  so  applying  are,  as  shown  in  the  next  section, 
within  the  appropriate  scope  of  State  legislation.' 

§  436.  Application  of  Statutes  to  Foreign  Corporations  doing 
Local  Business. — A  corpoi-ation  created  by  the  laws  of  one  State 
has  no  absolute  right  to  transact  business  beyontl  its  borders. 
Its  privileges  in  other  States  are  permissive  and  depend  upon 
the  comity  between  States.  A  State,  in  admitting  foreign 
corporations,  may  impose  any  conditions,  reasonable  or  un- 
reasonable, which  it  deems  expedient.^ 

A  foreign  corporation  doing  business  in  a  State  is  .subject 
to  its  general  laws  and  regulations.  It  cannot  exercise,  within 
the  State,  powers  prohibited  in  the  case  of  corporations  gener- 
ally.    Statutes  against  combinations  of  corporations  apj)ly  to 


whose  object  wa.s  to  place  the  control 
of  any  business  in  the  power  of  trus- 
tees, when  the  effect  of  such  trust 
should  be  to  injure  the  public  or  any- 
particular  person  or  corporation  in 
this  State.  Such  legislation  has  be- 
come very  general  in  the  United  States 
owing  to  the  pernicious  results  of  such 
trusts." 

'  State  V.  Phipps,  50  Kan.  615 
(1893),  (31  Pac.  Rep.  1097,  34  Am. 
St.  Rep.  152,  18  L.  R.  A.  657):  "It 
is  a  conclusive  presumption  of  the 
law  that  this  court  knew  that  the 
legislature  of  this  State  had  no  power 
to  regulate  interstate  commerce,  and 
the  presumption  is  equally  strong  and 
conclusive,  that  by  the  use  of  the 
word  'trade'  the  intercourse  between 
citizens  of  different  States,  that 
constitutes  interstate  commerce,  was 
not  in  contemplation.  It  has  been 
judicially  dotorminod,  time  and  time 
again,  by  the  highest  judicial  author- 
ity in  the  land,  that  issuing  a  policy 
of  insurance  is  not  a  transaction  of 
commerce." 

In  holding  the  Iowa  statute  (Code 


1897,  §  1754)  prohibiting  particularly 
combinations  of  insurance  companies 
constitutional,  the  Supreme  Court 
of  the  United  States  in  Carrol  v. 
Greenwich  Ins.  Co.,  199  U.  S.  401, 
411  (1905),  (26  Sup.  Ct.  Rep.  06) 
said:  "If  the  legislature  of  the  .State 
of  Iowa  deems  it  desirable  artificially 
to  prevent,  so  far  as  it  can,  the  sub- 
stitution of  combination  for  compe- 
tition, this  court  cannot  .say  that  fire 
insurance  may  not  present  so  con- 
spicuous an  example  of  what  that 
legislature  thinks  an  evil  as  to  justify 
special  treatment." 

^'Hartfonl  Tire  Ins.  Co.  r.  Ray- 
mond, 70  Mich.  501  (1888),  (38  .\.  \V. 
Re|i.  474):  "It  ha.s  been  repeatedly 
held,  .  .  .  that  corporations  of  one 
State  have  no  right  to  exercise  their 
franchises  in  another  State  except 
upon  the  a.ssent  of  such  other  State, 
and  upon  such  terms  as  may  be  im- 
posed by  the  State  where  their  busi- 
ness is  to  be  done.  The  conditions 
impo.sed  may  be  rea.sonable  or  (m- 
rea.sonable ;  they  are  absolutely  within 
the  discretion  of  the  legislature." 

825 


§436 


INTERCORPORATE    RELATIONS 


[part  V 


foreign  as  well  as  domestic  corporations.     Foreign  corporations 
violating  their  provisions  may  be  ousted  from  the  State.* 


'  United  States:  Waters-Pierce  Oil 
Co.  V.  Texas,  177  U.  S.  28  (1900), 
(20  Sup.  Ct.  Rep.  518). 

Illinois:  Harding  v.  American 
Glucose  Co.,  182  111.  551  (1899),  (55 
N.  E.  Rep.  577,  74  Am.  St.  Rep. 
189,  64  L.  R.  A.  738).  See  also 
Bishop  V.  American  Preservers  Co., 
157  111.  284  (1895),  (41  N.  E.  Rep. 
765,  48  Am.  St.  Rep.  317) ;  Chicago, 
etc.  Coal  Co.  v.  People,  214  111.  421 
(1905),  (73  N.  E.  Rep.  770). 

Kansas:  State  v.  Phipps,  50  Kan. 
619  (1893),  (31  Pac.  Rep.  1097,  34 
Am.  St.  Rep.  152,  18  L.  R.  A.  657): 
"The  State  has  power  to  regulate  and 
control,  and  to  provide  penalties 
for  the  transgression  of  its  regulating 
and  controlling  statutes,  the  business 
of  a  foreign  insurance  company  within 
its  borders." 

Michigan:  The  anti-trust  statute 
of  this  State  in  providing  in  case  of 
the  violation  of  its  provisions  by  a 
foreign  corporation  for  the  revoca- 
tion of  the  certificate  of  such  corpora- 
tion, upon  which  its  right  to  do  busi- 
ness in  the  State  depends,  is  not  in 
contravention  of  the  Fourteenth 
Amendment  as  abridging  the  privi- 
leges or  immunities  of  citizens  of  the 
United  States. 

Attorney-General  v.  A.  Booth  & 
Co.,  143  Mich.  89  (1905),  (106  N.  W. 
Rep.  868).     See  also  ante,  §  421. 

Missouri:  National  Lead  Co.  v. 
Grote  Paint  Store  Co.,  80  Mo.  App. 
247  (1899) :  "  Neither  can  the  plaintiff 
shut  off  an  investigation  of  its  cor- 
porate organization  and  purpose 
upon  the  plea  of  comity  due  it  as  a 
foreign  corporation.  The  doctrine 
on  this  subject  is  simple  and  clear. 
It  concedes  no  rights  to  a  corporation 
of  a  sister  State  which  are  denied  by 
law  to  a  domestic  corporation,  or 
which  are  contrary  to  the  laws  or 
public  polic}-  of  the  State  into  which 

826 


the  foreign  corporation  enters  for 
business."  See  also  State  v.  Fire- 
men's Fund  Ins.  Co.,  152  Mo.  1 
(1899),  (52  S.  W.  Rep.  595,  45  L.  R. 
A.  363). 

A  State  may  impose  such  condi- 
tions as  it  may  deem  expedient  upon 
the  privilege  of  foreign  corporations 
to  do  business  therein  so  long  as  it 
does  not  interfere  with  interstate 
commerce  or  invade  some  other 
federal  right. 

State  V.  Standard  Oil  Co.,  194  Mo. 
124  (1906),   (91  S.  W.  Rep.   1062). 

Nebraska:  State  v.  Standard  Oil 
Co.,  61  Neb.  28  (1901),  (84  N.  W.  Rep. 
413). 

South  Carolina :  A  foreign  corpora- 
tion accepting  the  privilege  to  do 
business  within  a  State  upon  the  .same 
conditions  as  domestic  corporations 
is  not  deprived  of  any  constitutional 
rights  by  a  statute  which  deprives  it 
of  such  privilege  in  case  it  violates 
an  anti-trust  statute. 

State  V.  Virginia-Carolina  Chemical 
Co.,  71  S.  C.  544  (1904),  (51  S.  E. 
Rep.  455). 

Tennessee :  State  v.  Schlitz  Brew- 
ing Co.,  104  Tenn.  715  (1900),  (59 
S.  W.  Rep.  1039,  78  Am.  St.  Rep. 
941).  See  also  Standard  Oil  Co.  v. 
State,  117  Tenn.  618  (1907),  (100  S. 
W.  Rep.  705,  10  L.  R.  A.  (n.  s.)  1015). 

Texas:  Waters-Pierce  Oil  Co.  v. 
State,  19  Tex.  Civ.  App.  1  (1898), 
(44  S.  W.  Rep.  936).  See  also 
Waters-Pierce  Oil  Co.  v.  State  (Tex. 
Civ.  App.  1908),  106  S.  W.  Rep.  918; 
National  Cotton  Oil  Co.  v.  State  (Tex. 
Civ.  App.  1903),  72  S.  W.    Rep.   615. 

That  foreign  corporations  may 
attack  constitutionality  of  State 
anti-trust  statute,  see  Niagara  Fire 
Ins.  Co.  V.  Cornell,  110  Fed.  816 
(1901).  See  also  Carrol  v.  Greenwich 
Ins.  Co.,  199  U.  S.  401  (1905),  (26 
Sup.  Ct.  Rep.  66). 


CHAP.  XLIl]  CONSTRUCTION   AND   APPLICATION  §  437 

In  Waters- Pierce  Oil  Co.  v.  Texas,^  the  Supreme  Court  of 
the  United  States,  in  holding  that  a  Texas  anti-trust  statute 
appHed  to  foreign  corporations,  and  that  their  privilege  of 
transacting  business  within  the  State  might  be  forfeited  for 
disobeying  it,  said:  "The  plaintiff  in  error  is  a  foreign  corpora- 
tion, and  what  right  of  contracting  has  it  in  the  State  of  Texas  ? 
This  is  the  only  inquiry,  and  it  can  only  find  an  answer  in  the 
rights  of  corporations  and  the  power  of  the  State  over  them. 
What  those  rights  are  and  what  that  power  is  has  often  been 
declared  by  this  court.  A  corporation  is  the  creature  of  the 
law,  and  none  of  its  powers  are  original.  They  are  precisely 
what  the  incorporating  act  has  made  them,  and  can  only  be 
exerted  in  the  manner  which  that  act  authorizes.  In  other 
words,  the  State  prescribes  the  purposes  of  a  corporation  and 
the  means  of  executing  those  purposes.  Purposes  and  means 
are  within  the  State's  control.  This  is  true  as  to  domestic 
corporations.  It  has  even  a  broader  application  to  foreign 
corporations.  ...  A  contract  of  the  corporation  is  the  con- 
tract of  the  legal  entity,  and  not  of  its  individual  members. 
Its  rights  are  those  given  to  it  in  that  character,  and  not  the 
rights  which  belong  to  its  constituent  citizens.  Its  charter 
confers  its  powers  and  the  means  of  executing  them,  and  such 
powers  and  means  can  only  be  exercised  in  other  States  by  the 
permission  of  the  latter." 

The  greater  power  of  wholly  excluding  from  a  State  for- 
eign corporations  contravening  its  laws  or  policy  includes  the 
power,  when  such  a  corporation  is  formed  for  the  purpose  of 
controlling  a  domestic  corporation  in  violation  of  an  anti-trust 
statute,  to  enjoin  it  from  doing  any  act  in  furtherance  of  such 
purpose.^ 

§  437.  Statutes  have  no  Extraterritorial  Force.  — The  penal 
statutes  of  a  State  have  no  binding  effect  outside  its  borders. 
A  law  attempting  to  make  criminal,  acts  done  without  the  State 
is  void.^     The  State  may,  however,  make  criminal  and  unlawful 

'  Waters-Pierce   Oil   Co.    v.   Texas,  "The  fifth  paragraph  of  the  said  act, 

177    U.    S.    43    (1900),    (20    Sup.    Ct.  in    which    it    is    attempted    to    chiiin 

Rep.  518).  jurisiliction    for    offences    committed 

^  Southern     Electric     Sec.     Co.     v.  outside  of  the  State  of  Texas,   is  so 

State  (Miss.  1907),  44  So.  Rep.  785.  absurd  that  a  denial  thereof  is  scarcely 

*  In  re  Grice,  79  Fed.  038  (1897) :-  necessary.   ...     It  has  been  properly 

827 


§437 


INTERCORPORATE    RELATIONS 


[part  V 


the  carrying  into  effect  within  its  limits  of  a  combination  entered 
into  without. 

In  the  construction  of  an  anti-trust  statute,  it  will  be  pre- 
sumed that  the  legislature  recognized  these  elementary  prin- 
ciples, and  intended  "that  its  statutes  should  not  apply  to  acts 
or  contracts  done  or  effected  beyond  the  limits  of  the  State, 
and  having  no  reference  to  or  effect  upon  persons  or  property 
in  this  State."  ' 

Upon  these  principles  it  follows  that  while  a  State  has  no 
extraterritorial  jurisdiction  and  cannot  reach  offences  com- 
mitted outside  its  borders,  it  has  power  to  deal  with  offences 
put  in  motion  in  a  foreign  State  but  carried  into  execution 
within  its  limits.  Thus  a  foreign  corporation  doing  business 
in  a  State  which  becomes  a  member  of  a  combination  outside 
the  State  to  fix  the  prices  of  property  therein  violates  a  State 
statute  prohibiting  combinations  to  fix  prices.^ 


suggested  that,  should  this  feature  of 
this  act  be  carried  out  and  adminis- 
tered, it  would  be  unnecessary  for 
any  other  State  or  the  nation  at  large 
to  have  any  other  laws  upon  the  sub- 
ject, as  all  persons  within  the  limits 
of  the  United  States  could  be  regu- 
lated in  their  dealings  and  in  the 
conduct  of  their  business  according 
to  the  wishes  of  the  legislature  of 
Texas.  The  State,  in  its  criminal 
jurisdiction  as  to  acts  committed 
within  its  own  boundaries,  and  within 
the  limits  prescribed  by  the  federal 
Constitution,  is  sovereign,  and  its 
process  should  not  be  interfered  with 
where  it  does  not  contravene  the  said 
Constitution ;  but,  beyond  the  bound- 
aries of  the  State,  it  has  no  more 
authority  in  New  York,  Missouri,  or 
Ohio  than  it  has  in  Great  Britain  or 
Austria,  and  that  part  of  the  act 
which  proposes  this  extraterritorial 
jurisdiction  is  absolutely  null  and 
void." 

See  also  State  v.  Associated  Press, 
159  Mo.  410  (1901),  (60  S.  W.  Rep. 
91,  81  Am.  St.  Rep.  368,  51  L.  R.  A. 
151). 

^  State  V.  Lancashire  Fire  Ins.  Co., 

828 


66  Ark.  472  (1899),  (51  S.  W.  Rep. 
633,  45  L.  R.  A.  348),  (per  Riddick, 
J.).  See  also  State  v.  ^tna  Fire  Ins. 
Co.,  66  Ark.  480  (1899),  (51  S.  W.  Rep. 
638). 

^  International  Harvester  Co.  v. 
Commonwealth  (Ky.  1907),  30  Ky. 
Law  Rep.  716,  99  S.  W.  Rep.  637. 
In  this  case  the  Court  said:  "The 
legislature  has  no  extraterritorial 
power  to  punish  crime.  The  crime 
specified  in  the  statute  is  the  enter- 
ing into,  becoming  a  member  of,  or  a 
party  to,  any  pool,  trust,  etc.,  to  fix 
the  prices  at  which  property  may  be 
sold  in  this  State.  If  a  foreign 
corporation  doing  business  in  this 
State  enters  into  or  becomes  a  member 
of  a  pool  or  trust  beyond  the  limits 
of  this  State,  then  the  crime  is  clearly 
committed  beyond  the  limits  of  this 
State,  unless  the  pool  or  trust  is  to 
fix  the  prices  of  property  in  this  State, 
in  which  event  the  crime  put  in 
motion  in  the  foreign  State  took 
effect  and  became  complete  in  Ken- 
tucky." 

See  also  Waters-Pierce  Oil  Co.  v. 
State  (Tex.  Civ.  App.  1908),  106  S.  W. 
Rep.  918. 


CHAP.  XLIl]  CONSTRUCTION  AND   APPLICATION  §  438 

§  438.  Application  of  Statutes  to  Agreements  of  Quasi-public 
Corporations.  —  An  agreement  between  the  gu.s  and  electric 
lighting  corporations  of  a  city,  the  effect  of  which  is  to  practically 
place  them  under  one  management,  divide  public  contracts, 
and  eliminate  competition,  is  in  violation  of  the  Texas  statute.' 

A  practical  consolidation  of  electric  companies  for  the  pur- 
pose of  eliminating  competition,  effected  by  means  of  a  foreign 
holding  corporation,  is  in  conflict  with  the  Mississippi  statute.- 

An  agreement  between  a  gas  company  and  &  coal  company 
wherein  the  former  agrees  to  sell  to  the  latter  exclusively  all 
its  coke  —  a  by-product  —  is  not  in  conflict  with  the  ^Minnesota 
statute.  By-products  stand  in  a  different  position  from  the  gas 
or  electricity  which  a  public  service  corporation  is  bound  to 
furnish  to  all  alike.' 

A  contract  between  a  railroad  company  and  a  sleeping  car 
company  giving  the  latter  the  exclusive  right  to  run  its  cars 
upon  the  railroad  for  a  stated  period  is  not  in  conflict  with  the 
Texas  statute.  Sleeping  car  companies  have  no  right  to  run 
their  cars  upon  railroads  except  under  arrangements  with  the 
railroad  companies.  "Since  no  such  busine.ss  right  existed  it 
could  not  be  restricted."  * 

An  agreement  by  railroad  companies  to  make  specially  low 

*  San    Antonio    Gas   Co.    v.    State,  corporation;     the    rule    remains    the 

22   Tex.    Civ.    App.    118    (1899),    (54  same." 
S.  W.  Rep.  289).  ♦  Fort  Worth,  etc.  R.  Co.  v.  State 

2  Southern    Electric    Sec.    Co.     v.  (Tex.   1905),  87  S.   W.   Rep.  33(3,   70 

State    (Miss.  1907),  44  So.  Rep.  78G.  L.  R.  A.  950. 
See  also  ante,  §  428.  An  agreement  between  a  railroad 

^  State  V.  St.  Paul  Gaslight  Co.,  company  and  an  express  company 
92  Minn.  470  (1904),  (100  N.  W.  Rep.  whereby  the  latter  is  granteil  exclu- 
216):  "A  distinction  must  be  made  sive  privileges  upon  the  railroad  of 
between  a  corporation  engaged  in  a  the  former,  and  is  protected  in  the 
particular  line  of  business,  which  contingency  that  the  railroad  corn- 
enters  into  a  combination  to  dispose  pany  should  be  required  by  law  to 
of  all  of  its  products  to  a  competitor  accord  similar  privileges  to  other 
for  the  purpose  of  enabling  the  com-  cx])ress  companies,  is  in  violation  of 
petitor  to  fix  prices  and  control  the  the  Texas  anti-trust  statute,  which 
markets,  and  one  situated  as  defend-  is  not  rendered  inapplicable  by  the 
ant,  which,  in  the  course  of  its  prin-  fact  that  the  railroad  conunission  of 
cipal  business,  accumulates  incident-  that  State  has  power  to  regidate  the 
ally  thereto  a  by-product  or  com-  rates  of  both  railroad  and  express 
modity    in  which    it    does    not    deal.  companies. 

It     is     unimportant    that    the    gas-  State  i'.   Mis.souri,  etc.    R.   Co.,   99 

light    company    is   a    public    service  Tex.  516  (1906),   (91   S.  W.  Rep.  214). 

829 


§  439  INTERCORPORATE   RELATIONS  [PART  V 

rates  for  non-transferable  excursion  tickets  from  a  certain  city 
is  not  in  violation  of  the  Texas  statutes,  there  being  no  agree- 
ment to  restrain  competition  in  the  sale  of  such  tickets.* 

A  car-service  association  organized  by  railroad  companies 
for  the  purpose  of  securing  the  prompt  and  just  assessment  of 
demurrage  for  the  detention  of  cars  is  not -unlawful  under  the 
provisions  of  the  Mississippi  statute  forbidding  the  placing  of 
the  control  of  the  business  of  corporations  in  the  hands  of 
trustees  or  persons  other  than  their  officers  and  agents.^ 

§  439.  Effect  of  Statutes  upon  Exercise  of  Statutory  Authority 
to  consolidate  or  hold  Stock.  —  Statutes  authorizing  corpora- 
tions to  consolidate  or  to  hold  shares  in  other  corporations  in 
themselves  define  the  policy  of  the  State  upon  such  subjects. 
The  exercise  of  the  power  conferred  could  not  be  held  invahd 
upon  any  principle  of  the  common  law.  But  it  does  not  neces- 
sarily follow  that  it  could  be  exercised  in  contravention  of  a 
State  statute  forbidding  combinations. 

Under  such  conditions,  in  the  case  of  private  corporations, 
the  statute  which  applied  the  more  specifically  would  control. 
Thus,  for  example,  if  a  particular  combination  were  expressly 
authorized  it  would  undoubtedly  be  held  valid  notwithstanding 
it  might  conflict  with  an  anti-trust  statute.  And,  on  the  other 
hand,  a  consolidation  under  a  general  statute  would  probably 
not  be  upheld  if  clearly  contrary  to  the  specific  provisions  of  a 
statute  against  combinations.  The  latter  statute  would  be 
treated  as  limiting  the  powers  conferred  by  the  former. 

These  principles  also  apply  to  quasi--pnh\ic  corporations 
subject  to  the  additional  principle  that  the  State  has,  in  the 
case  of  such  corporations,  full  power  to  protect  itself  against 
increases  in  charges.  A  union  of  public  utility  corporations, 
either  by  strict  consolidation  or  through  corporate  stockhold- 
ing, when  authorized  by  law,  could  hardly  be  said  to  constitute 
a  combination  to  increase  charges  in  violation  of  an  anti-trust 
statute  although  embracing  all  the  corporations  in  a  particular 
territoiy  and  although  designed  to  prevent  competition.^     The 

'  Lytle   V.    Galveston,    etc.    R.    Co.  ^  In  In  re  Consolidated  Gas  Co.,  124 

(Tex.  1907),  99  S.  W.  Rep.  396.  App.   Div.    (N.   Y.)   401    (190S),    (108 

2  Yazoo,  etc.  R.  Co.  v.  Searles,  85  N.  Y.   Supp.  823),  affirming  56  Misc. 

Miss.   520   (1905),    (37   So.   Rep.   939,  49  (1907),  (106  N.  Y.  Supp.  407),  it 

68  L.  R.  A.  715).  was  held  that  the  consolidation,  under 

830 


CHAP.  XLIl] 


CONSTRUCTION   AND   APPLICATION 


§439 


legislature  would  have  full  power  over  the  situation  for  the 
protection  of  the  public.     Probably  only  a  statute  applying 


statutory  authority,  of  six  gas  com- 
panies and  the  subsequent  purchase 
by  the  consolidated  company,  under 
like  autliority,  of  all,  or  controlling  in- 
terests in,  the  shares  of  other  similar 
corporations  in  order  to  prevent  com- 
petition did  not  create  a  monopoh'  in 
violation  of  the  New  York  statute. 
The  Court  said :  "  What  is  prohibited  is 
the  creation  of  a  monopoly,  and  estab- 
lishing such  a  competition  as  will 
result  in  limiting  the  supply  and 
enhancing  the  cost  of  the  commodity 
dealt  in.  In  no  sense  can  the  consoli- 
dation of  the  lighting  companies  in 
the  City  of  New  York  into  a  single 
corporation  be  said  to  create  such  a 
monopoly,  for  it  gains  thereby  no 
exclusive  right,  the  field  is  still  open 
to  any  other  company  that  can  obtain 
the  necessary  consents  from  the  con- 
stituted authorities,  and  neither  the 
production  nor  the  price  can  be  arbi- 
trarily fixed  by  the  Consolidated 
Company.  In  this  respect  there  is 
a  very  clear  distinction  between  a 
company  supplying  gas  or  electricity 
and  a  corporation  or  combination  of 
producers  who  deal  in  ice,  envelopes, 
bluestone,  milk,  sheep  and  lambs, 
coal  and  lard,  as  to  all  of  which  our 
courts  have  condemned  combinations 
organized  for  the  purpose  of  control- 
ling output  and  fixing  prices.  ...  In 
the  case  of  the  Consolidated  Gas 
Company  it  cannot,  as  a  result  of  its 
control  of  the  business  of  furnishing 
light,  either  limit  production  or  in- 
crease prices  and  maintain  them,  be- 
cause both  of  those  matters  arc  within 
the  control  of  the  Legislature.  It  is 
within  the  power  of  that  body,  and  it 
has  frequently  used  the  power,  to  fix 
the  maximum  rate  which  may  be 
charged  to  consumers,  and  it  is  well 
settled  that  any  person  within  the 
territory  served  by  a  gas  or  electric 
light  company  js  entitled  to  be  fur- 


nished with  such  gas  or  electricity 
as  he  require  upon  payment  of  the 
statutory  price  therefor,  and  can 
compel  the  company  so  to  furnish  it. 
That  a  single  company,  thus  regulated 
bj'  law  as  to  price  and  production, 
does  not  offend  against  the  anti- 
monopoly  laws,  even  although  its 
field  of  operation  extends  over  a 
whole  city,  seems  to  be  quite  clear. 
.  .  .  We  are,  therefore,  of  the 
opinion  that  the  organization  of  the 
Consolidated  Gas  Company  of  New 
York,  under  the  provision  of  ch.  367 
of  the  Laws  of  1884  was  lawful  and 
valid,  and  its  subsequent  purchase 
of  the  stock  of  the  companies  named 
in  the  petition  was  authorized  by  §  40 
of  the  Stock  Corporation  Law,  and 
that  neither  by  the  organization  of 
the  company  nor  by  its  purchase 
of  the  stock  of  other  companies  was 
an  unlawful  monopoly  created  within 
the  meaning  of  §  7  of  the  Stock  Cor- 
poration Law  or  of  the  Anti-Monopoly 
Act  of  1899." 

Compare,  however.  Burrows  v. 
Interborough-Metropolitan  Co.,  156 
Fed.  389  (1907),  where  it  was  hold  that 
the  acquisition  by  a  holding  corpora- 
tion of  controlling  stock  interests  in 
all  the  .street  railway  lines  in  the 
boroughs  of  Manhattan  and  the  Bronx 
in  New  York  City,  although  in  the 
exercise  of  statutory'  authority  to 
purchase  shares,  was  invalid  as  creat- 
ing a  monopoly  in  violation  of  the 
New  York  statutes.  Juilge  Holt  said : 
"There  may  be  many  ca.ses  in  which 
it  is  desirable  and  in  all  respects 
imobjootionable  for  a  corporation  to 
purchase  and  hold  some  of  the  stock 
of  another  corporation;  and  it  would 
have  been  perfectly  consistent  for 
the  Legislature  to  have  tacked  §  7 
on  to  §  40  as  a  proviso.  I  think  that 
is  the  true  construction  of  the  legisla- 
tive meaning  as  shown  by  the  statute. 

831 


§  442  INTERCORPORATE    RELATIONS  [PART    V 

specifically  to  gwasi-public  corporations  would  curtail  the  power 
to  consolidate  or  purchase  shares  conferred  upon  them  by  other 
statutes. 

§  440.  Statutes  Inapplicable  to  Contracts  with  State.  — Con- 
tracts in  which  a  contractor  agrees  to  furnish  for  the  use  of  the 
State  articles  below  the  normal  cost  of  production  do  not  con- 
travene the  Mississippi  statute.  A  public  contract  for  an  article 
below  cost  cannot  be  said  to  be  "  inimical  to  the  public  welfare."  * 

§  441.  Statutes  Inapplicable  where  Other  Statutes  eliminate 
Competition.  —  State  statutes  for  the  preservation  of  competi- 
tion are  inapplicable  where  other  statutes  eUminate  the  possi- 
bility of  there  being  competition.  Thus  the  purchase  by  a  cor- 
poration engaged  in  the  business  of  compressing  cotton  of  other 
compress  plants  is  not  in  contravention  of  an  anti-trust  statute 
where  the  price  for  compressing  is  the  same  throughout  the 
State  —  being  regulated  by  a  commission  —  and  where  the 
laws  require  cotton  to  be  compressed  at  the  nearest  press.^ 

§  442.  Statutes  do  not  supersede  Common  Law.  —  The  inade- 
quacy of  the  common  law  remedy  of  merely  refusing  to  enforce 
contracts  contrary  to  public  policy  lead  to  the  present  anti-trust 
legislation.^     But    while   the   statutes    generally    embrace   all 

Corporations   were   authorized    by   it  *  Johnson    Pub.    Co.    v.    Mills,    79 

to  purchase,   acquire,   and    hold    the  Miss.  543  (1902),   (31  So.  Rep.   101). 

stocks  of  other  corporations,  provided  For  consideration  of  the  question 

they    did    not    thereby    combine    for  whether  statutes   authorizing   boards 

the   creation   of    a  monopoly   or   the  of  education  to  enter  into  contracts 

unlawful    restraint    of    trade,    or    for  for  the  exclusive  use  of  school  books 

the     prevention    of    competition    in  contravene    constitutional    provisions 

any    necessary    of    life.     So    long    as  against    monopolies,    see    Rand,    Me- 

such    acquisition    did    not    create    a  Nally  &  Co.  v.  Hartranft,  29  Wash, 

monopoly,  or  restrain  trade,  or  pre-  591  (1902),  (70  Pac.  Rep.  77);   Leeper 

vent  competition  in  any  necessary  of  v.   State,    103  Tenn.   500   (1899),    (53 

life,  such  a  purchase  was  lawful;    as  S.   W.   Rep.   962,   48  L.   R.   A.    167). 

soon  as  it  did,  it  became  unlawful."  See   also    Dickinson   v.    Cunningham, 

In   In  re   Interborough-Metropoli-  140  Ala.  527  (1903),  (37  So.  Rep.  345). 

tan  Co.,   56  Misc.   Rep.    (N.   Y.)    128  ^  State  v.   Shippers  Compress,   etc. 

(1907),(106N.Y.  Supp.  416),theNew  Co.,  95  Tex.   603   (1902),    (69    S.   W. 

York  Supreme  Court  followed  In  re  Rep.    58,    93   Am.    St.    Rep.    870,    58 

Consolidated  Gas  Co.,  swpra,  and,  upon  L.  R.  A.  714). 

the  same  facts,  declined  to  follow  the  '  State  v.  Firemen's  Fund  Ins.  Co., 

decision  of  Judge  Holt.  152  Mo.  42  (1899),  (52  S.  W.  Rep.  595, 

See  also   Rafferty  v.   Buffalo  City  45  L.  R.  A.  363):    "But  the  common 

Gas  Co.,   37  App.    Div.    (N.   Y.)   622  law    remedy    of    refusing    to    enforce 

(1899),   (56  N.  Y.  Supp.  288).  such  contracts  proved  insufficient  to 

832 


CHAP.  XLIl]  CONSTRUCTION    AND    APPLICATION  §   443 

contracts  and  combinations  contrary  to  the  rules  of  public 
policy  —  and  go  much  farther  —  they  do  not,  unless  expressly 
so  providing,  supersede  the  common  law.  They  supplement 
and  add  to,  but  do  not  abrogate,  it.' 

Conversely,  no  right  to  recover  a  penalty  prescribed  in  an 
anti-trust  statute  can  be  based  upon  the  ground  that  the  con- 
tract, in  addition  to  violating  the  statute,  creates  a  monopoly 
at  common  law.^ 

§  443.  Statutes  not  Retroactive,  but  apply  to  Continuing 
Combinations.  —  An  act  making  it  unlawful  for  a  corporation 
to  enter  into  a  combination  for  certain  purposes,  and  imposing 
penalties  for  its  violation,  is  not  retroactive  and  does  not 
deprive  a  corporation,  infringing  its  provisions,  of  the  right  to 
enforce  its  antecedent  contracts.'  And,  in  general,  an  anti- 
trust statute  cannot  affect  contracts  entered  into  and  executed 
before  its  enactment.  Otherwise  it  would  be  unconstitutional 
as  impairing  the  obUgation  of  contracts.^ 

The  object  of  anti-trust  statutes,  however,  is  to  eliminate 
combinations  of  the  character  prohibited,  and,  while  not  retro- 
active, the  effect  of  their  enactment,  as  a  general  rule,  is  to 
prevent  the  continuance  of  combinations  of  that  nature  which 
may  be  in  existence,  as  well  as  the  formation  of  new  ones.^ 

prevent  the  blighting  injuries  to  the  *  Crump  v.  Ligon    (Tex.  Civ.  App. 

public  interests  which  modern  trusts  1904),  84  S.  W.  Rep.  250. 
produced,  and  hence  it  has  been  found  *  Matter  of  Davies,   168  N.   Y.  S9 

necessary  by  the    national  and  State  (1901),  (61  N.  E.  Rep.  118,  56  L.  R.  .\. 

legislatures    to    enact    stringent    laws  855). 

against  trusts,   pools,   unlawful   com-  State    v.     Missouri,     etc.     R.     Co. 

binations  and  conspiracies  which  will  (Tex.  1906),  91  S.  W.  Rep.  219:    "The 

prevent  them,  and  not  leave  them  to  State  may,  in  the  exercise  of  its  police 

exist     and     enforce     their     contracts  power,    prohibit    the    continuance    in 

among  themselves,  denying  them  only  the  future  of  those  things  already  in 

the  aid  of  the  courts,  as  at  common  existence  which  are  so  injurious  to  the 

law."  rights    and    interests    of    its    citizens 

'  People  V.  Aachen,  etc.  Fire  Ins.  generally  as  to  ju.stify  such  an  exer- 
Co.,  126111.  App.  636(1906).  See  al.so  cise  of  the  power  whether  the  con- 
Chicago,  etc.  Coal  Co.  v.  People,  214  tinuance  of  the  things  is  provided 
111.  421   (1905),  (73  N.  E.  Rep.  770).  for  by  contract  or  not." 

*  Missouri,    etc.    R.    Co.    v.    Sisson  A   State   anti-trust  statute   is   not 

(Tex.  Civ.  App.   1905),  88  S.  W.  Rep.  retroactive,  but  it  prohibits  both  the 

371.  continuance  in  business  and  the  en- 

'  Sterling  Remedy  Co.  v.  Wyckoff,  gaging  in  business  in  violation  of  its 

154  Ind.  437  (1900),  (56  N.  E.  Rep.  provisions.     State    i'.    Jack.    69    Kan. 

911).  387     (1904),     (76     Pac.     Hop.     911), 

833 


§  444  INTERCORPORATE    RELATIONS  [PART    V 

The  offence  is  rather  in  persisting  in  the  combination  than  in 
entering  into  it. 

Moreover,  where  a  contract  is  a  continuing  one  a  statute 
which  declares  it  unlawful  has  no  retroactive  effect.  If  it 
results  in  an  unlawful  combination  or  monopoly  after  the 
adoption  of  the  statute,  it  may  be  reached  by  the  statute 
acting  prospectively  although  it  was  entered  into  before  its 
enactment.^ 

§  444.  Construction  and  Application  of  Miscellaneous  Statutes. 
—  The  New  York  statute^  against  combinations  is  disjunctive, 
and  prohibits  corporations  from  combining  to  accomplish  three 
things:  (1)  the  "creation  of  a  monopoly";  (2)  "  the  unlawful 
restraint  of  trade";  or  (3)  "the  prevention  of  competition 
in  any  necessary  of  life."  ^  In  making  such  prohibitions  the 
statute  "is  little  more  than  a  codification  of  the  common  law 
upon  the  subject."  * 

The  Minnesota  statute  ^  follows  substantially  the  language  of 
the  federal  anti-trust  statute  and  should  receive  a  similar  con- 
struction.^ 

A  broad  provision  in  the  Texas  statute  of  1899  that  it  should 
be  held  to  be  cumulative  of  all  the  laws  upon  the  subject  did 

affirmed    199    U.    S.    372    (1905),    (26  >  Finck   v.    Schneider  Granite  Co., 

Sup.   Ct.   Rep.   73).  187  Mo.  244  (1905),   (86  S.  W.  Rep. 

Ford    V.    Chicago    Milk    Shippers'  213,  106  Am.  St.  Rep.  452). 
Ass'n,     155     111.      166      (1895),     (39  ^  j^ew;  York  Laws  of  1897,  ch.  384, 

N.     E.     Rep.    651,     27     L.     R.     A.  §  7. 

298):      "The     corporation      is     sub-  ^National  Harrow  Co.  v.  Bement, 

ject    to    the    statute     and     although  21  App.  Div.  (N.  Y.)  290  (1897),  (47 

the  contract  of  guaranty  was  entered  N.   Y.    Supp.    462). 
into  before  the  passage  of  the  act,  yet  *  Matter  of  Da  vies,   168  N.  Y.   89 

by    its   terms   the    furnishing   of   the  (1901),  (61  N.  E.  Rep.  118,  56  L.  R.  A. 

commodity    named,    froni    month    to  855).     The  statute,   however,   in  im- 

month,  was  contemplated,  and  by  the  posing  penalties  goes  farther  than  the 

facts     as     found     by     the     appellate  common  law. 

court     that      for     which     the     price  ^  Minnesota    Laws    1899,    p.    487, 

is    sought    to    be  recovered     in    this  ch.  359. 

case  was  furnished  after  the  passage  •  Minnesota  v.  Northern  Securities 

of  the  act.     The  acts  of  the  corpora-  Co.,  123  Fed.  692  (1903).     The  deci- 

tion  and  its  stockholders  with  refer-  sion   in   this   case   was,    however,    re- 

ence    to    this    sale    were    within    the  versed  by  the   Supreme  Court   upon 

meaning  of  the  act."  the  ground  that  the  case  had  been  im- 

See  also  ante,  §404:  " Statute  (Fed-  properly     removed     from    the     State 

eral)   not  Retroactive    but    applies    to  court.      194  U.  S.  48   (1903),  (24  Sup. 

Continuing  Combinations."  Ct.  Rep.  589). 

834 


CHAP.  XLIl]  CONSTRUCTION   AND   APPLICATION  §  444 

not  incorporate  in  it  the  unconstitutional  class  exemption  of  an 
earlier  law  and  thus  render  it  itself  unconstitutional.' 

Where  an  oil  company  in  order  to  procure  the  countermand 
of  an  order  given  by  a  merchant  to  a  competitor  presented  a 
quantity  of  oil  to  the  merchant,  it  was  held  that  both  the  oil 
company  and  the  merchant  were  engaged  in  a  conspiracy  to 
lessen  competition  within  the  meaning  of  the  Tennessee  statute.^ 

A  Nebraska  statute  ^  forbidding  combinations  entered  into 
by  persons  "  engaged  in  manufacturing,  selling  or  dealing  in 
the  same  or  any  like  manufactured  or  natural  products,"  does 
not  apply  to  persons  engaged  in  the  laundry^  business.'* 

The  Indiana  statute  ^  declares  that  contracts  designed  or 
tending  to  affect  prices  entered  into  by  persons  or  corporations 
who  "control  the  output"  of  merchandise  shall  be  void.  The 
phrase  "control  the  output"  in  the  act  is  given  a  broad  inter- 
pretation. It  is  said  that  a  limited  number  of  firms  cannot 
control  the  output  of  an  article  which  can  be  made  in  any  foun- 
dry, and  that  the  statute  does  not  apply  to  those  who  merely 
control  the  output  of  a  single  town  or  factory.^ 

The  Illinois  anti-trust  statute  did  not  repeal  a  previously 
existing  general  conspiracy  statute  —  there  being  no  repug- 
nancy between  the  acts  — and  both  enactments  are  in  force.' 
The  Kansas  statute  of  1891  prohibiting  combinations  among 
dealers  in  live  stock  was,  however,  superseded  by  the  later  gen- 
eral anti-trust  act.^ 

The    contracts    and    combinations    declared    unlawful    and 

*  State  V.  Laredo  Ice  Co.,  96  Tex.  ^  Sanford  v.  People,  121  111.  App. 
461  (1903),  (73  S.  W.  Rep.  951).                 619  (1905). 

'^Standard    Oil    Co.    v.    State,    117  A    combination    between    several 

Tenn.   618   (1907),    (100   S.    W.    Rej).  independent    newspaper    concerns   to 

706,  10  L.  R.  A.  (n.  s.)  1015).     The  compel    another    concern    to    reduce 

statute    in    question    was     Tennessee  rates  for  advertising  or  lose  customers 

Acts    1903,    p.      268,    ch.    140.     See  is  indicative  of  a  malicious   purpose 

ante,  §  414.  and  is  in  contravention  of  a  Wi.scon- 

'  Nebraska  Sess.  Laws  1889,  ch.  69.  sin   .statute   again.st    combinations   to 

■•  Downing  v.   Lewis,   56   Neb.   386  maliciously    injure    the    hiisincss    of 

(1898),  (74  N.  W.  Rep.  900).  anotlu-r. 

^Indiana     Anno.     Stat.     1901,     §  State    v.    Huegin,     110     Wis.    189 

3312g.  (1901),  (85  N.  W.  Rep.  1046). 

•  Over  V.  Byram  Foundry  Co.,  37  «  State  v.  Wil.son,  73  Kan.  334 
Ind.  App.  452  (1906),  (77  N   E.  Rep.  (1906),  (84  Pac.  Rep.  737). 

302). 

835 


§   445  INTERCORPORATE    RELATIONS  [PART   V 

void  by  the  South  Carolina  statute  ^  are  only  those  made  with 
a  view  to  lessen,  or  which  tend  to  lessen,  competition  to  an 
unreasonable  degree.^ 

The  provision  in  the  Arkansas  statute  ^  requiring  the  Secretary 
of  State  to  send  yearly  to  each  corporation  in  the  State  a  letter 
of  inquiry  as  to  whether  it  has  any  interest  in  any  unlawful  trust 
or  combination,  to  be  answered  under  oath  by  an  officer  of  the 
corporation,  but  not  expressly  requiring  the  corporation  to 
answer  or  making  the  failure  of  the  officers  to  answer  an  offence, 
does  not  create  an  offence  and  the  mere  failure  to  answer  does 
not  constitute  a  violation  of  the  act.* 


CHAPTER   XLIII 


RIGHTS,    REMEDIES,    AND    PROCEDURE    UNDER    STATE    ANTI- 
TRUST   STATUTES 

§  445.  Contracts  in  Violation  of  Statutes  Unenforceable.     Independent  Con- 
tracts.    Invalidity  under  Statutes  as  Ground  of  Collateral  Attack. 

§  446.  Criminal  Proceedings.     Indictments. 

§  447.  Proceedings  to  enforce  Forfeitures. 

§  448.  Proceedings  against  Corporations. 

§  449.  Actions  for  Damages. 

§  450.  Evidence.     Production  of  Books. 

§  451.  Statutes  of  Limitation. 

§  445.  Contracts  in  Violation  of  Statutes  Unenforceable.  In- 
dependent Contracts.  Invalidity  under  Statutes  as  Ground  of 
Collateral  Attack.  —  The  State  anti-trust  statutes,  as  a  general 
rule,  contain  a  provision  that  any  contract  in  violation  thereof 
shall  be  void  and  shall  not  be  enforced  in  law  or  equity.^     And 

'  South  Carolina  Code  1902,  §  2845.  free  competition  in  the  manufacture 

^  State  V.  Virginia-Carolina  Chemi-  or  sale  of  anj^  article,  an  agreement 

cal  Co.,  71  S.  C.  544  (1904),  (51  S.  E.  with   subscribers   to    stock   in   a   cor- 

Rep.  455).  poration   which  was  designed  to  mo- 

'  Acts  1905,  p.  6,  §  7.  nopolize  the  dairj-  business  of  a  cer- 

*  State  V.  International  Harvester  tain  territory  was  held  to  be  invalid 
Co.,  79  Ark.  517  (1906),  (96  S.  W.  and  unenforceable.  The  Court  said: 
Rep.  119).  "If  the  plaintiff  entered  into  a  com- 

*  Under  a  statute  declaring  void  all  bination  with  subscribers  to  the  stock 
contracts  designed  or  tending  to  lessen  in  the  contemplated  association  with 

836 


CHAP.  XLIIl]        RIGHTS   UNDER   STATE   ANTI-TRUST   STATUTES 


§445 


without  such  express  provision  any  such  contract  would  be 
unenforceable.  An  agreement  in  violation  of  a  statute  has  no 
validity. 

A  provision  in  a  contract  in  violation  of  a  State  anti-trust  act 
is  not  only  void  itself  but,  when  not  severable,  taints  the  con- 
tract as  a  whole,  and  all  the  other  provisions  of  it,  and  renders 
them  unenforceable.^  But  upon  the  principles  considered  with 
respect  to  illegal  combinations  in  general,^  and  combinations  in 
violation  of  the  federal  statute  in  particular,^  the  fact  that  one 
of  the  parties  to  an  independent  contract  is  a  member  of,  or  is, 
itself,  a  combination  in  violation  of  a  State  anti-trust  statute, 
cannot  be  set  up  as  a  defence  to  an  action  brought  upon  the 
contract.  In  the  absence  of  express  statutory  provision,  the 
vaUdity  of  a  combination  must  be  tested  in  direct  proceedings. 
Buyers  from  a  combination  cannot  avoid  paying  their  debts 
by  showing  its  illegality  unless  a  statute  authorize  such  pro- 
cedure.^ 


the  purpose  and  intent  to  lessen  full 
and  free  competition  in  the  produc- 
tion and  sale  of  articles,  products 
and  commodities  to  be  bought, 
handled  and  manufactured  by  such 
contemplated  association,  the  con- 
tract was  void." 

Hastings  Industrial  Co.  v.  Baxter, 
125  Mo.  App.  494  (1907),  (102  S.  W. 
Rep.  1075). 

1  Getz  Bros.  &  Co.  v.  Federal  Salt 
Co.,  147  Cal.  115  (1905),  (81  Pac.  Rep. 
416,  109  Am.  St.  Rep.  114). 

Where  two  notes  and  a  mortgage 
securing  them  were  given  for  a  con- 
sideration, a  part  of  which,  and  less 
than  either  of  the  notes,  was  based 
upon  a  transaction  contrary  to  an 
anti-trust  statute,  it  was  held  that 
both  of  the  notes  and  the  mortgage 
were  void.  State  v.  Wilson,  73  Kan. 
334  (1906),   (84  Pac.   Rep.  737). 

In  this  case  the  Court  said:  "A 
part  of  the  consideration  of  the  mort- 
gage was,  therefore,  illegal,  if  the 
facts  were  as  the  defendant  attempted 
to  show.  Would  this  render  the 
mortgage  itself  void?  The  generally 
accepted  rule  is  that  if  any  part  of  a 


single  consideration  or  either  of  two 
separate  considerations  of  a  contract 
is  illegal  the  entire  contract  is  void, 
although  where  two  promises,  one  of 
which  is  illegal,  are  made  upon  a 
lawful  consideration,  the  promise 
which  is  unobjectionable  is  ordinarily 
held  to  be  enforceable.  .  .  .  Where 
one  of  two  considerations  or  a  distinct 
part  of  one  consideration  is  unlawful 
as  being  forbidden  either  bj'  the 
statute  or  by  the  common  law  the 
prevailing  view  is  that  the  partial 
illegality  taints  the  entire  transac- 
tion and  the  contract  itself  is  void." 

2  See  ante,  §  369:  "Collateral 
Attack  upon  Combination.  Remedies 
upon  Independent  Contracts." 

'See  ante,  §  405:  "  Invalidity  under 
Federal  Statute  as  a  Ground  of  Col- 
lateral Attack." 

*  A  lea.se  of  a  distiller}'  to  a  cor- 
poration organized  to  create  a  monoj}- 
oly  in  violation  of  a  State  anti-trust 
statute  is  not  invalid  even  if  the 
lessor  know  the  purposes  of  the  corpo- 
ration. In  so  holding  the  Court, 
in  Brooklyn  Distilling  Co.  v.  Standard 
Distilling  Co.,  120  App.  Div.  (N.  Y.) 

837 


§445 


INTERCORPORATE    RELATIONS 


[part  V 


In  several  States,  however,  the  anti-trust  statutes  provide 
that  pui'C'hasers  of  goods  from  a  combination,  formed  in  viola- 
tion of  their  provisions,  shall  not  be  liable  for  the  purchase  price, 
and  may  plead  the  statute  as  a  defence  to  any  action  therefor.^ 
The  difficulties  attending  the  application  of  such  statutes  and 
the  possibility  of  conflicting  adjudications  are  obvious;  but  it 
is  not  perceived  upon  what  ground  they  can  be  declared  uncon- 
stitutional.^    Certainly,  the  obstacles  in  the  way  of  the  prac- 


237  (1907),  (105  N.  Y.  Supp.  264), 
said:  "It  must  be  borne  in  mind  that 
the  plaintiff  in  making  the  lease 
did  not  in  any  way  become  a  party 
to  the  illegal  combination  or  partici- 
pate to  any  extent  in  any  scheme  to 
avoid  the  statute  by  controlling  the 
manufacture  or  sale  of  the  commodity 
referred  to.  The  lease  was  the  only 
contract  which  it  made  with  the  de- 
fendant. It  could  just  as  well  be 
contended  that  a  contractor  who  had 
built  the  distillery  for  the  defendant 
with  knowledge  of  its  purpose  was  not 
entitled  to  recover  the  contract  price, 
or  that  a  farmer  who  had  sold  his 
corn  to  the  defendant  knowing  its 
purpose  in  buying  it,  could  not  re- 
cover the  price  agreed  to  be  paid,  as 
it  can  that  the  plaintiff  is  not  entitled 
to  recover  in  this  action.  The 
plaintiff,  as  we  have  already  seen, 
took  no  part  in  the  illegal  com- 
bination; could  derive  no  benefit 
from  it  or  from  the  incorporation  of 
the  defendant  or  the  carrying  out  of 
its  purpose;  had  nothing  to  do  with 
regulating  the  quantity  of  alcohol 
and  spirituous  liquors  to  be  produced, 
or  the  price  to  be  charged,  and,  there- 
fore, the  contract  is  clearly  distin- 
guishable from  those  where  premises 
are  leased  to  be  used  for  immoral 
purposes." 

See  also  Harrison  r.  Glucose  Sugar 
Refg  Co.,  116  Fed'.  304  (1902),  (58 
L.  R.  A.  915);  National  Salt  Co.  v. 
Ingraham,  143  Fed.  805  (1906); 
Chicago  Wall  Paper  Mills  v.  General 
Paper  Co.,   147  Fed.  491   (1906). 

838 


'  The  Illinois  statute  is  illustrative 
(Act  of  June  11,  1891):  "Any  pur- 
chaser of  any  article  or  commodity 
from  any  individual,  company  or 
corporation  transacting  business  con- 
trary to  any  provision  of  the  preceding 
sections  of  this  act  shall  not  be  liable 
for  the  price  or  payment  of  such 
article  or  commodity'  and  may  plead 
this  act  as  a  defence  to  any  suit  for 
such  price  or  paj^ment." 

See  also  anti-trust  statutes  of  Iowa, 
Kansas,  Kentucky,  Missouri,  Ne- 
braska, North  Dakota  and  Texas,  re- 
ferred to  in  note  to  §  414,  ante:  "The 
Statutes.  Development  of  State  Legis- 
lation." 

^  The  statutes  have  been  pleaded 
and  the  defences  sustained  as  valid 
in  National  Lead  Co.  v.  Grote  Paint 
Store  Co.,  80  Mo.  App.  247  (1899); 
Ford  V.  Chicago  Milk  Shippers' 
Ass'n,  155  111.  166  (1895),  (39  N.  E. 
Rep.  651,  27  L.  R.  A.  298).  See  also 
American  Strawboard  Co.  v.  Peoria 
Strawboard  Co.,  65  111.  App.  502 
(1895). 

An  agreement  between  brewers  in 
a  certain  city  not  to  sell  beer  to  any 
dealer  indebted  to  am^  part}'  thereto 
until  such  debt  should  be  paid  is  in 
violation  of  the  Missouri  anti-trust 
statute  and  is,  consequently,  by  the 
provision  of  that  statute  —  which  is 
the  same  as  the  Illinois  pro^^sion 
pointed  out  in  a  preceding  note  —  a 
complete  defence  to  an  action  by  a 
party  to  such  agreement  to  recover 
the  price  of  beer  sold.  Ferd  Heim 
Brewing    Co.     v.     Belinder,     97    Mo. 


CHAP.  XLIIl]        RIGHTS    UNDER   STATE   ANTI-TRUST   STATUTES  §   445 


tical  working  of  such  a  statute  can  hardly  furnish  ground  for 
a  conclusion  which  has  been  reached,  that  the  illegality  of  a 
plaintiff  organization  can  only  be  pleaded,  under  such  a  statute, 
when  it  has  been  previously  estabUshed  in  direct  proceedings.' 


App.  64  (1902),  (71  S.  W.  Rep. 
691). 

In  Chicago  Wall  Paper  Mills  v. 
General  Paper  Co.,  147  Fed.  491 
(1906),  it  was  held  in  an  action  to 
recover  the  price  of  merchandise  that 
the  fact  that  the  plaintiff  was  a 
corporation  formed  for  purposes  con- 
trary to  the  Illinois  anti-trust  statute 
was  no  defence  under  the  aforesaid 
provision  of  the  statute,  unless  such 
corporation  were  organized  in  Illinois. 

In  Peoria  Gas,  etc.  Co.  v.  Peoria, 
200  U.  S.  48  (1906),  (26  Sup.  Ct.  Rep. 
214),  where  a  gas  company  had  been 
denied  relief  by  the  lower  court,  in 
an  action  to  restrain  the  enforcement 
of  an  ordinance  fixing  rates,  upon  the 
ground  that  it  had  violated  the 
Illinois  anti-trust  statute,  the  Supreme 
Court  of  the  United  States  said :  "  We 
shall  assume  that  there  was  testimony 
from  which  the  court  justly  found  that 
the  rates  announced  on  August  1 
were  fixed  by  an  agreement  between 
the  two  companies.  We  shall  also 
assume,  though  without  deciding, 
that  while  that  agreement  was  in 
force  and  the  parties  were  acting 
under  it,  neither  could  recover  for  the 
gas  that  it  furnished,  nor  could  this 
plaintiff  question  the  validity  of 
the  ordinance  of  September  4.  But 
although  the  stringent  provisions 
of  the  Illinoi.s  anti-trust  law  may 
apply  to  the  case  of  an  agreement 
between  two  gas  companies  fixing 
the  price  of  gas,  and  even  if  while  the 
parties  are  proceeding  under  it  any 
party  receiving  gas  may  avoid  pay- 
ment therefor  on  that  ground,  and 
the  city  likewise  be  upheld  in  an 
ordinance  establishing  maximum  rates 
which  are  not  remunerative,  yet  the 
making  of  stich  an  agreement  does 
not  subject  the  companies  to  a  per- 


petual penalty.  Parties  making  an 
agreement,  unlawful  by  the  anti- 
trust act,  maj'  while  the  agreement 
is  in  force  be  subject  to  its  penalties, 
but  whenever  they  cease  to  act  under 
it  the  penalties  also  cease.  The 
punishment  adheres  to  the  offence  and 
stops  when  the  offence  itself  stops." 

See  also  with  respect  to  defences 
under  such  statutes.  American  Handle 
Co.  V.  Standard  Handle  Co.  (Tenn.  Ch. 
1900),  59  S.  W.  Rep.  709;  Wylie  v. 
National  Wall  Paper  Co.,  70  111.  App. 
543  (1896);  Barton  v.  Mulvane,  59 
Kan.  313  (1898),  (52  Pac.  Rep.  883). 

'  Lafayette  Bridge  Co.  v.  City  of 
Streator,  105  Fed.  731  (1900):  "The 
defendant  is,  in  this  suit,  attempting  to 
avail  itself  in  a  collateral  proceeding  of 
a  defence  based  on  a  fact  which  should 
be  determined  in  a  direct  proceeding. 
In  other  words,  before  a  defendant  can 
evade  the  payment  of  the  purchase 
price  of  commodities,  actually  re- 
ceived, on  the  ground  that  the  seller 
is  a  trust  or  combination,  in  restraint 
of  trade,  in  contravention  of  the 
statute,  there  should  be  an  adjudica- 
tion of  a  competent  tribunal,  in  a 
direct  proceeding  instituted  for  that 
purpose,  determining  that  such  seller 
is  a  trust  or  combination  in  the  sense 
contemplated  by  the  statute.  This 
is  in  accord  with  the  ordinary  rules 
of  statutory  construction.  The  prac- 
tical working  of  any  other  rule  could 
not  fail  to  emphasize  the  justice  and 
necessity  of  so  holding  in  cases  similar 
to  the  one  at  bar.  It  cannot  be 
insisted  that  the  decision  in  one  ca.se 
would  be  binding  or  even  persuasive  in 
any  other  case.  Each  suit  to  recover 
purchase  money,  in  which  the  statute 
is  pleaded  by  way  of  defence,  would 
call  for  a  separate  and  distinct  tie- 
termination  of  the  legal  status  of  the 

839 


§  446  INTERCOUPORATE    RELATIONS  [I'ART   V 

In  National  Lead  Co.  v.  Grote  Paint  Store  Co.,^  the  Court, 
in  holding  that  the  Missouri  anti-trust  statute  might  be  pleaded, 
and  the  illegality  of  the  plaintiff  organization  —  a  corporate 
combination  — estabUshed,  as  a  defence  to  an  action  of  debt, 
said:  "It  is  quite  true,  as  a  general  rule,  that  questions  affect- 
ing the  right  of  a  corporation  to  enjoy  its  franchise  to  be  a 
corporation,  or  its  legal  entity  as  such,  can  only  be  raised  in  a 
direct  proceeding  to  annul  or  forfeit  the  grant,  to  which  the 
State  granting  the  charter  is  a  party,  for  the  reason  that,  as  to 
third  parties,  the  legality  of  the  corporation  is  avouched  by  its 
charter  from  the  State,  which  reserves  to  itself  the  power  to 
withdraw  the  franchises  bestowed,  upon  evidence  of  fraudulent 
obtensions  or  subsequent  abuse.  But  the  existence  of  this  rule 
of  procedure  cannot  deprive  the  legislature  of  the  power  of 
enacting  that  inquiries  affecting  the  validity  of  the  charter  of 
a  corporation  may  be  made  in  other  proceedings  than  by  an 
action  in  the  name  of  the  State,  and  this  is  just  what  was  done 
when  the  anti-trust  act  pleaded  in  defendant's  answer  became 
the  law  of  this  State.  ...  As  it  thus  appears  that  the  Act,  in 
express  terms,  permits  a  violation  of  any  of  its  provisions  to  be 
pleaded  by  a  private  person  in  a  suit  against  him  for  the  price 
of  goods  purchased  of  a  corporation  transacting  business  con- 
trary to  the  statute,  it  must  follow  that  the  right  to  plead  such 
a  defence  entitles  the  party  so  authorized  by  the  legislature  to 
prove  what  he  has  pleaded." 

§  446.  Criminal  Proceedings.  Indictments.  —  State  anti- 
trust statutes  create  statutory  offences  and  prescribe  penalties 
to  be  imposed  upon  those  who  commit  them.^  Combinations 
in  violation  of  their  provisions  are  made  criminal  conspiracies. 
They  are  generally  declared  to  be  "conspiracies  to  defraud," 

plaintiff,  thereby  making  the  claim  confusion  as  would  force  federal 
for  purchase  money  merely  an  inci-  courts  to  so  construe  the  statutes  as 
dental  issue.  This  would  be  true  to  protect  the  due  and  regular  ad- 
even  if  the  amount  involved  were  but  ministration  of  justice  from  uncon- 
five  dollars,  and  the  case  were  before  scionable  prolixity  and  irreconcilable 
a   justice   of   the   peace.     The    result  adjudications." 

would  depend  upon  the  varying  condi-  '  National  Lead  Co.  v.  Grote  Paint 

tions  of  each  case  as  affected  by  the  Store  Co.,  80  Mo.  App.  264  (1899). 
skill  of   lawyers,    the  bias  of  jurors,  ^  State  v.  Buckeye  Pipe  Line  Co., 

and    other    attendant    circumstances.  61  Ohio  St.  545  (1900),  (56  N.  E.  Rep. 

This  would   inevitably   lead   to   such  464). 

840 


CHAP.  XLin]        RIGHTS   UNDER   STATE   ANTI-TRUST   STATUTES  §   446 

or  "conspiracies  against  trade."  While,  in  exceptional  in- 
stances, a  penalty  in  the  form  of  a  forfeiture  is  prescribed,  gen- 
erally the  penalty  is  a  fine  for  offending  corporations,  and  a  fine 
or  imprisonment  for  individuals,  including  officers  and  agents 
of  corporations.* 


'  The  following  penalties  arc  pre- 
scribed in  the  anti-trust  statutes  of 
the  several  States  for  violating  their 
provisions.  (For  references  to  stat- 
utes, see  note  to  §  414,  ante.) 

Alabama.  Fine  of  not  less  than 
$500  nor  more  than  $2000  to  be 
imposed  upon  any  "person  or  corpora- 
tion." 

Florida.  Fine  of  not  more  than 
$5000,  or  imprisonment  for  not  more 
than  one  year,  or  both.  Applies  to 
any  person  as  principal,  manager, 
director  or  agent. 

Illinois.  "Corporations,  compa- 
nies, firms  and  associations"  punish- 
able by  fine  of  not  less  than  .$500  nor 
more  than  $2000  for  first  offence. 
Additional  penalties  for  subsequent 
offences.  Officers,  agents  and  indi- 
viduals may  be  fined  not  less  than 
$200  nor  more  than  $1000,  or  impris- 
oned for  not  more  than  one  year,  or 
both. 

Indiana.  Fine  not  exceeding  $5000 
and  imprisonment  not  exceeding  one 
year. 

Iowa.  "Corporation,  company,  firm 
or  association"  may  be  fined  not  less 
than  one  nor  more  than  twenty  per 
cent  of  capital  stock  or  inoney  in- 
vested. Officers,  agents  or  indivi- 
duals arc  punishable  by  fine  of  not 
less  than  $.500  nor  more  than  $.5000, 
or  by  imprisonment  for  not  more  than 
one  year,  or  both. 

Kansas.  Fine  not  less  than  $100 
nor  more  than  ,$1000  antl  imprison- 
ment for  not  less  than  thirty  days  nor 
more  than  six  months.  Applies  to 
"all  persons,  companies  and  corpo- 
rations, their  officers,  agents,  repre- 
sentatives or  consignees." 

Kentucky.  "Corporation,  company, 


firm,  partnership  or  person  or  asso- 
ciation of  persons"  may  be  fined 
not  less  than  $500  nor  more  than 
$5000. 

.\ny  officer  or  agent  or  any  indi- 
vidual may  be  fined  not  less  than  $500 
nor  more  than  $5000,  or  imprisoned 
for  not  less  than  six  nor  more  than 
twelve  months,  or  both. 

Louisiana.  Fine  of  not  less  than 
$100  nor  more  than  $1000,  or  impris- 
onment for  not  less  than  six  months 
nor  more  than  one  year,  or  both.  Ap- 
plies to  any  person  who,  as  "principal, 
manager,  director  or  agent,"  engages 
in,  or  knowingly  carries  out  purposes 
of,  conspiracy. 

Maine.  "Any  person,  incorporated 
or  unincorporated  company,  or  associa- 
tion of  pensons  or  stockholders"  enter- 
ing into  an  unlawful  combination, 
may  be  fined  not  less  than  five  nor 
more  than  $10,000. 

Michigan.  Fine  of  not  less  than 
$50  nor  more  than  $5000,  or  impris- 
onment for  not  less  than  six  months, 
nor  more  than  one  year,  or  both. 
Applies  to  any  person  engaging  in  or 
carrying  out  conspiracy  as  "principal, 
manager,  director,  agent,  servant  or 
employer,  or  in  any  other  capacity." 

Minnesota.  Fine  of  not  less  than 
$500  nor  more  than  $.5000,  or  im- 
prisonment for  not  less  than  three  nor 
more  tlian  five  years. 

Mississippi.  Fine  of  not  less  than 
$100  nor  more  than  $5000,  or  impris- 
onment for  not  less  than  three  nor 
more  than  twelve  months,  or  both. 
.\pplies  to  any  person  as  "i)rincipal, 
director,  manager,  agent,  or  in  any 
other  capacity,"  engaging  in  or  know- 
ingly carrying  out  purposes  of  con- 
spiracy.    The    minimum    fine    under 

841 


446 


INTERCORPORATE    RELATIONS 


[part  V 


Of  the  purpose  of  these  statutes  in  prescribing  penalties  to 
be  imposed,  not  only  upon  corporations  but  upon  their  officers 


another  statute  is  larger.  See  Ameri- 
can Fire  Ins.  Co.  v.  State,  75  Miss.  24 
(1897),  (22  So.  Rep.  99). 

Missouri.  "Any  person  violating 
any  of  the  provisions  cff  this  act,  or 
who  shall  do  any  act  prohibited  or 
declared  unlawful  by  the  provisions 
of  this  act,  shall  be  adjudged  guilty  of 
a  felony  and  upon  conviction  thereof 
shall  be  punished  by  imprisonment 
in  the  penitentiarj'  not  exceeding 
five  years,  or  by  impri.sonment  in  the 
county  jail  not  exceeding  one  year, 
or  by  a  fine  of  not  less  than  $.500  nor 
more  than  $5000,  or  bj^  both  such  fine 
and  imprisonment." 

Nebraska.  Any  person,  corpora- 
tion, joint  stock  company  or  other 
association  entering  into  contract, 
combination  or  conspiracy  in  viola- 
tion of  act  is  guilty  of  a  misdemeanor 
punishable  by  fine  not  exceeding 
$5000,  or  by  imprisonment  not  ex- 
ceeding one  year,  or  both.  Statute 
also  provides  for  forfeiture  of  prop- 
erty owned  under  combination  and 
prescribes  penalties  against  officers 
of  corporations. 

New  Mexico.  Fine  not  exceeding 
$1000  nor  less  than  $100,  and  impri.s- 
onment not  exceeding  one  year,  or 
until  fine  is  paid.  Applies  to  every 
person,  whether  individual,  agent, 
officer  or  stockholder,  violating  act. 

New  York.  Fine  not  exceeding 
$5000,  or  imprisonment  for  not  longer 
than  one  year,  or  both.  Applies  to 
every  person  or  corporation  making 
contract  or  engaging  in  combination  in 
violation  of  act. 

North  Dakota.  Any  person,  firm, 
company,  association  or  corporation 
violating  act  and  am'  officer,  agent  or 
receiver  of  any  firm,  company,  asso- 
ciation or  corporation,  or  any  member 
of  the  same  or  any  individual,  found 
guilty  of  a  violation  of  act,  is  subject 
to  fine  of  not  less  than  $500  nor  more 

842 


than  $5000,  or  to  imprisonment  not 
exceeding  one  year,  or  both. 

Ohio.  Fine  of  not  less  than  $50 
nor  more  than  $5000,  or  imprisonment 
for  not  less  than  six  month.s  nor  more 
than  one  year,  or  both.  Applies  to 
any  penson  engaging  in,  or  "as  princi- 
pal, manager,  director,  agent,  ser- 
vant or  employer,  or  in  any  other 
capacity,"  carrying  out  purposes  of 
conspiracy.  Each  violation  consti- 
tutes a  separate  offence. 

Oklahoma.  Fine  of  not  less  than 
$50  nor  more  than  $500.  Applies  to 
"any  individual,  firm,  partnership  or 
any  association  of  persons." 

South  Carolina.  Fine  of  not  less 
than  $100  nor  more  than  $5000,  or 
imprisonment  for  not  less  than  six 
months  nor  more  than  ten  years,  or 
both.  Applies  to  any  person  engag- 
ing in,  or  as  "principal,  manager, 
director  or  agent,  or  in  any  other  ca- 
pacity," knowinglj'  carrying  out  pur- 
poses of  conspiracy. 

South  Dakota.  Fine  of  not  less 
than  $1000  nor  more  than  $5000. 
Additional  penalties  for  second  of- 
fence. Applies  to  "any  person  or 
pensons,  officers  or  servants  of  any 
company,  copartnership  or  associa- 
tion of  persons"  violating  provisions 
of  act. 

Tennessee.  Fine  of  not  less  than 
$100  nor  more  than  $5000,  or  impris- 
onment for  not  less  than  one  year  nor 
more  than  ten  years,  or  both.  Applies 
to  any  person  engaging  in,  or  "as 
principal,  manager,  director  or  agent, 
or  in  any  other  capacity,"  knowingly 
carrying  out  purposes  of  conspiracy. 
Texas.  "  If  any  person  shall  enter 
into  an  agreement  or  understanding 
of  any  character  to  form  a  trust,  or 
to  form  a  monopoly,  or  to  form  a 
conspiracy  in  restraint  of  trade  .  .  . 
or  shall  form  a  trust,  monopoly  or 
conspiracy   in   restraint   of   trade,    or 


CHAP.  XLIIl]       RIGHTS    UNDER   STATE    ANTI-TRUST   STATUTES  §   446 

and  agents,  the  Supreme  Court  of  Kentucky  in  Commonwealth  \. 
Grinstead^  said:  "It  seems  manifest  that  the  object  of  the 
statute  was,  in  the  first  part,  to  impose  punishment  upon  the 
corporate  entities  which  might  violate  the  statute,  and  this 
could  be  done  only  by  a  fine;  and  that  the  intention  in  the 
second  part  was  to  impose  punishment  upon  the  officers  of  such 
corporate  entities  or  associations,  and  punish  individuals  who 
might  be  guilty  of  the  same  offence;  and  that  in  the  case  of 
natural  persons,  as  it  was  possible  to  impose  an  additional 
penalty  of  imprisonment,  it  was  imposed,  in  order  the  more 
effectively  to  deter  them  from  committing,  or  permit'ting  the 
corporations  which  they  represent  to  commit,  the  offences 
denounced  by  the  statute." 

It  is  not  necessary  to  constitute  a  conspiracy  within  the 
provisions  of  an  anti-trust  statute,  in  a  common  form,  that 
the  combination  should  actually  have  an  effect  upon  competi- 
tion or  prices.  Entering  into  a  combination  designed  to 
affect  competition  or  prices  constitutes  a  complete  offence.^ 
And  persons  forming  such  a  combination  cannot  escape  crim- 
inal responsibility  therefor  upon  the  ground  that  there  were 
no  written  articles  of  association  and  that  the  organization 
was  entirely  voluntary.^ 

Where,  under  the  provisions  of  an  anti-trust  statute,  a  cor- 
poration is  not  indictable  for  entering  into  a  conspiracy  in 
restraint  of  competition,  it  may  still  be  counted  as  a  party  to 

shall  be  a  party  to  the  formation  of  and  individuals  may  be  fined  not  less 

a   trust    or   monopoly   or   conspiracy  than  $100  nor  more  than  SI 000,   or 

in  restraint  of  trade,  or  shall  become  imprisonment  for  not  more  than  one 

a   party  to   a  trust   or  monopolj'  or  year,  or  both. 

conspiracy  in  restraint  of  trade,  or  '  Commonwealth  v.  Grinstead,  111 
shall  do  any  act  in  furtherance  of  Ky.  203  (1900),  (21  Ky.  Law.  Rep. 
or  aid  to  such  trust  or  monopoly  or  1444,  55  S.  W.  Rep.  720). 
conspiracy  in  restraint  of  trade,  he  ^  American  Handle  f'o.  tJ.  Standard 
shall  be  punished  by  imprisonment  Handle  Co.  (Tenn.  1900),  59  S.  W. 
in  the  penitentiary  for  a  period  of  not  Rep.  709;  Commonwealth  t'.  Grin- 
less  than  two  years  nor  more  than  stead.  111  Ky.  203  (1900),  (21  Ky. 
ten  years."  Law     Rep.    1444,    55     S.     W.     Rep. 

Utah.     Corporations,  firms  and  as-  720). 

sociations  may  be  fined  not  less  than  *  Chicago,  etc.  Coal  Co.   v.  People, 

$100   nor  more   than   $2000   for  first  214   111.   421    (1905),    (73    N.   E.   Rep. 

offence.     Additional  i)enalties  for  sub-  770),     affirming     114     III.     .\pp.     75 

sequent     offences.     Officers,      agents  (1904). 

843 


§447 


INTERCORPORATE   RELATIONS 


[part  V 


the  conspiracy  as  distinct  from  its  officers  or  agents,  and  with 
an  officer  or  agent  may  make  up  the  two  or  more  parties  neces- 
sary to  constitute  the  conspiracy.* 

In  an  indictment  or  information  for  conspiracy  under  an 
anti-trust  statute  all  known  parties  to  the  conspiracy  niust  be 
named,  but  it  is  not  necessary  to  charge  them  all  jointly  with 
the  commission  of  the  offence.^ 

Where  the  words  of  an  anti-trust  statute  are  descriptive  of 
the  offence  an  indictment  thereunder  which  follows  the  lan- 
guage of  the  statute  is  sufficient.^  The  means  by  which  the 
alleged  unlawful  combination  was  intended  to  be  effected  need 
not  be  stated  in  an  indictment  nor  is  it  necessary  to  set  forth  the 
evidence  tending  to  establish  its  existence.* 

§  447.  Proceedings  to  enforce  Forfeitures.  —  The  statutes  of 
several  States  instead  of  prescribing  penalties  in  the  form  of 
fine  or  imprisonment  for  the  violation  of  their  provisions  prescribe 
them  in  the  form  of  forfeitures.^     Sometimes,  also,  the  statutes 


1  Standard  Oil  Co.  v.  State,  117 
Tenn.  618  (1907),  (100  S.  W.  Rep. 
705,  10  L.  R.  A.  (n.  s.)  1015). 

2  State  V.  Dreany,  65  Kan.  292 
(1902),   (69  Pac.   Rep.   182). 

^  International  Harvester  Co.  v. 
Kentucky,  (Ky.  1907),  30  Ky.  Law 
Rep.  716,  99  S.  W.  Rep.  637;  Com- 
monwealth V.  Grinstead,  111  Ky.  203 
(1900)  (21  Ky.  Law  Rep.  1444,  55 
S.  W.  Rep.  720). 

*  State  V.  Witherspoon,  115  Tenn. 
138  (1906),  (90  S.  W.  Rep.  852). 

In  this  case,  however,  it  was  held 
that  an  indictment  charging  the  de- 
fendant, as  agent  of  a  corporation, 
with  unlawfully  carrying  out  an 
agreement  entered  into  by  the  cor- 
poration with  others  for  the  purpose 
of  restricting  competition  and  con- 
trolling prices,  but  which  failed  to 
state  the  terms  of  the  agreement  or  the 
articles  affected,  was  fatally  defective. 

An  indictment  charging  a  con- 
spiracy to  destroy  competition  in  the 
sale  of  oil  "imported  into  this  State" 
refers  to  oil  which  has  been  imported 
and  not  oil  to  be  imported. 

844 


Standard  Oil  Co.  v.  State,  117 
Tenn.  618  (1907),  (100  S.  W.  Rep. 
705,  10  L.  R.  A.  (N.  s.)  1015). 

As  to  procedure  under  New  York 
statute  of  1899  for  the  purpose  of 
obtaining  testimony  before  institut- 
ing proceedings,  see  Matter  of  Davies, 
168  N.  Y.  89  (1901),  (61  N.  E.  Rep. 
118,  56  L.  R.  A.  855). 

^  The  provisions  of  the  California 
act  of  1907  (§  7)  are  illustrative: 
"Each  and  every  firm,  person,  part- 
nership, corporation,  or  association  of 
persons,  who  shall  in  any  manner  vio- 
late any  of  the  provisions  of  this  act, 
shall  for  each  and  every  day  that  such 
violations  shall  be  committed  or 
continued,  after  due  notice  given  by 
the  attorney-general  or  any  district 
attorney,  forfeit  and  pay  the  sum  of 
fifty  dollars,  which  may  be  recovered 
in  the  name  of  the  people  of  the  State 
of  California,  in  any  county  where  the 
offence  is  committed,  or  where  either 
of  the  offenders  resides;  and  it  shall 
be  the  duty  of  the  attorney-general, 
or  the  district  attorney  of  any  county 
on  the  order  of  the  attornej'-general, 


CHAP.  XLIIl]       RIGHTS   UNDEK  STATE   ANTI-TRUST  STATUTES  §  447 

provide  both  for  fines  and  forfeitures.'  And,  without  special 
provision,  it  is  held  that  for  violations  of  the  Illinois  statute 
the  State  may  prosecute  criminally  or  may  maintain  actions 
of  debt  to  recover  the  penalties  imposed.- 

A  suit  by  the  State  for  the  recovery  of  penalties  prescribed  in 
a  Texas  statute  is  a  civil  action.^  And  in  such  a  suit  no  right 
in  the  State  to  recover  such  penalties  can  be  predicated  upon  the 
ground  that  the  combination  was  unlawful  at  common  law  or 
contravened  the  federal  anti-trust  act.  The  penalties  can  be 
recovered  only  for  violations  of  the  statute  upon  which  the 
action  is  based. ^ 

A  violation  of  the  Arkansas  statute  ^  w^hich  subjects  an 
offender  to  the  forfeiture  of  a  money  penalty  does  not  constitute 
a  criminal  offence  requiring  the  action  of  the  grand  juiy.  Con- 
sequently, a  constitutional  provision  that  no  penson  shall  be 
held  to  answer  a  criminal  charge  except  upon  the  indictment  of 
a  grand  jury  is  inapplicable  to  an  action  by  the  State  for  the 
recovery  of  the  statutory  penalties.*' 


to  prosecute  for  the  recovery  of  the 
same.  When  the  action  is  prosecuted 
by  the  attornej^-general  against  a 
corporation  or  association  of  persons, 
he  may  begin  the  action  in  the  supreme 
court  of  the  county  in  which  defendant 
resides  or  does  business." 

See  also  statutes  of  Kansas,  Michi- 
gan (Act  of  1899),  Ohio,  and  Texas, 
referred  to  in  note  to  §  414,  ante: 
"The  Statutes.  Development  of  State 
Legislation."  See  Arkansas  statute 
in  another  note  to  this  section. 

'  The  Nebraska  statute  provides 
for  the  forfeiture  to  the  State  of 
property  owned  under  or  pursuant 
to  any  combination  or  conspiracy. 

"  Chicago,  etc.  Coal  Co.  v.  People, 
214  111.  421  (1905),  (73  N.  E.  Rep. 
770),  affirming  114  111.  App.  75  (1904). 

^  State  V.  Waters-Pierce  Oil  Co. 
(Tex.  1902),  G7  S.  W.  Rep.  1057. 
See  also  Waters-Pierce  Oil  Co.  v. 
State  (Tex.  Civ.  .\pp.  1908),  106 
S.  W.  Rep.  918. 

*  Fort  Worth,  etc.  R.  Co.  v.  State 
(Tex.  1905),  88  S.  W.  Rep.  370. 


An  action  by  the  attorney-general 
to  recover  from  a  railroad  company 
the  penalties  prescribed  in  the  Texas 
statute  of  1903  can  be  maintained 
without  the  con.sent  of  the  State  Rail- 
road Commission. 

State  V.  Missouri,  etc.  R.  Co., 
99  Tex.  516  (1906),  (91  S.  W.  Rep. 
214). 

"  The  Arkansas  statute  is  as  follows: 
"Any  person,  partnership,  firm  or 
association,  or  any  representative 
or  agent  thereof,  or  any  corporation 
or  company,  or  any  officer,  repre- 
sentative or  agent  thereof,  violating 
any  of  the  provisions  of  this  act,  shall 
forfeit  not  less  than  $200  nor  more 
than  $5000  for  every  such  offence, 
and  each  day  such  person,  corporation, 
partnership  or  association  shall  con- 
tinue to  do  so  shall  be  a  separate 
offence." 

•  Hammond  Packing  Co.  r.  State, 
81  Ark.  519  (1907),  (100  S.  W.  Rep. 
407). 

For  consideration  of  pleadings  in 
actions  by  the  State  for  the  recovery 

845 


§448 


INTERCORPORATE  RELATIONS 


[part  V 


§  448.  Proceedings  against  Corporations.  —  In  addition  to 
prosecutions  for  violations  of  State  anti-trust  statutes,  viewed 
as  criminal  offences,  civil  remedies  are  generally  provided  against 
offending  corporations,  which  take  substantially  the  following 
forms: 

(1)  Any  domestic  corporation  violating  any  of  the  provisions 
of  the  statute  shall  forfeit  its  charter  and  franchises  and  its 
corporate  existence  shall  thereupon  terminate. 

(2)  Any  foreign  corporation  violating  any  of  such  provisions 
shall  forfeit  the  right  and  privilege  of  doing  business  in  the 
State.i 

Proceedings  against  domestic  corporations  to  enforce  the 
forfeiture  of  their  charters  must,  in  the  absence  of  other  statu- 
tory provision,  be  by  quo  warranto.  Quo  warranto  proceedings 
may  also  be  instituted  against  foreign  corporations  to  oust 
them  from  the  State  for  violating  these  statutes;  ^  or,  it  is  held, 
the  attorney-general  may  maintain  a  suit  for  an  injunction  to 
restrain  them  from  further  doing  business,^  or  from  further 
violating  the  statutes.^ 


of  penalties,  see  State  v.  Missouri, 
etc.  R.  Co.,  99  Tex.  516  (1906),  (91 
S.  W.  Rep.  214) ;  State  v.  .Etna  Fire 
Ins.  Co.,  66  Ark.  480  (1899),  (51  S.  W. 
Rep.  638). 

'  See  statutes  of  Arkansas,  Cali- 
fornia, Indiana,  Iowa,  Kansas,  Ken- 
tucky, Louisiana,  Michigan,  Minne- 
sota, Mississippi,  Missouri,  Nebraska, 
North  Carolina,  North  Dakota,  Ten- 
nessee, Texas,  Utah  and  Wisconsin 
referred  to  in  note  to  §  414,  ante: 
"The  Statutes.  Development  of  State 
Legislation." 

For  provisions  found  in  several 
anti-trust  statutes  prohibiting  the 
issue  of  trust  certificates  or  the  plac- 
ing of  the  management  or  control  of 
corporations  in  the  hands  of  trustees, 
see  Illinois  statute  printed  in  note 
to  said  §  414,  ante. 

^  See  cases  collected  in  note  to 
§  436,  ante:  "  Application  of  Statutes 
to  Foreign  Corporations  doing  Local 
Business." 

When   the    unlawful    combination 

846 


has  been  abandoned  punishment 
may  be  by  a  fine  instead  of  a  general 
judgment  of  ouster. 

State  V.  Armour  Packing  Co.,  173 
Mo.  536  (1903),  (73  S.  W.  Rep.  645, 
61  L.  R.  A.  464). 

3  State  V.  SchUtz  Brewing  Co.,  104 
Tenn.  715  (1900),  (59  S.  W.  Rep. 
1041,  78  Am.  St.  Rep.  941).  See  also 
Hartford  Ins.  Co.  v.  Raymond,  70 
Mich.  485  (1888),  (38  N.  W.  Rep. 
474). 

*  Attorney-General  v.  A.  Booth  & 
Co.,  143  Mich.  89  (1906),  (106  N.  W. 
Rep.  868).  See  also  People  v. 
Aachen,  etc.  Fire  Ins.  Co.,  126  111. 
App.  636  (1906). 

Compare,  however,  Minnesota  v. 
Northern  Securities  Co.,  123  Fed.  692 
(1903),  (reversed  on  other  grounds, 
194  U.  S.  48  (1903),  (24  Sup.  Ct.  Rep. 
598)),  where  it  was  held  that  a  court 
of  equity,  in  the  absence  of  statutory 
authorization,  has  no  power  to  enjoin 
the  violation  of  anti-trust  statute. 

The  anti-trust  statutes  of  several 


CHAP.  XLIIl]        RIGHTS    UNDER    STATE   ANTI-TRUST   STATUTES  §   449 


These  remedies  against  offending  corporations  are  inde- 
pendent of  the  other  remedies  prescribed  in  the  statutes,  and  an 
antecedent  criminal  conviction  of  a  violation  of  such  a  statute 
is  not  a  condition  precedent  to  the  institution  of  quo  warranto, 
or  other,  proceedings.^ 

In  quo  warranto  proceedings  against  a  corporation  upon  the 
ground  that  it  is  a  member  of  a  combination  in  violation  of  an 
anti-trust  statute  it  cannot  object  that  the  other  members  of 
the  combination  are  not  joined  with  it  as  parties  defendant. 
It  may  be  proceeded  against  whether  the  others  can  be  reached 
or  not.^ 

§  449.  Actions  for  Damages.  — Combination  agreements  con- 
trary to  public  policy  while  invalid  and  unenforceable  at  com- 
mon law  were  not  unlawful  in  the  sense  of  affording  a  right  of 
action  to  persons  injured  thereby.     State  statutes  against  com- 


States  expressly  authorize  the  at- 
torneys-general to  institute  proceed- 
ings in  equity  to  prevent  and  restrain 
violations  of  their  provisions.  See 
Missoxiri  Rev.  Stat.  (1907),  §  8979. 

'  State  V.  Schlitz  Brewing  Co.,  104 
Tenn.  715  (1900),  (59  S.  W.  Rep.  1041, 
78  Am.  St.  Rep.  941);  Attorney- 
General  V.  A.  Booth  &  Co.,  143  Mich. 
89   (1906),   (106  N.   W.   Rep.  8G8). 

The  Nebraska  statute  of  1905  pro- 
vides that  any  corporation  twice  ad- 
judged to  have  violated  its  provi.^ions 
which  shall  thereafter  violate  them 
shall,  on  the  suit  of  the  attorney-gen- 
eral, be  prohibited  from  further  doing 
business  in  the  State.  It  is  held  that, 
in  an  action  to  obtain  an  injunction 
under  the  act,  the  court  cannot  for- 
feit the  charter  of  the  corporation. 

State  V.  Omaha  Elevator  Co.,  75 
Neb.  654  (1906),  (110  N.  W.  Rep. 
874). 

*  Attorney-General  v.  A.  Booth  & 
Co.,  143  Mich.  89  (1906),  (106  N.  W. 
Rep.  868). 

That  foreign  corporations  may  be 
ousted  from  the  State  for  acts  of  their 
agents  within  the  State,  see  Waters- 
Pierce  Oil  Co.  V.  State,  19  Tex.  Civ. 
App.  1  (1898),  (44  S.  W.  Rep.  936), 


s.  c.  177  U.  S.  43  (1900),  (20  Sup.  Ct. 
Rep.  518) ;  State  v.  Schlitz  Brewing 
Co.,  104  Tenn.  715  (1900),  (59  S.  W. 
Rep.  1041,  78  Am.  St.  Rep.  941). 
As  to  liability,  under  anti-trust 
statutes,  of  agents  of  foreign  corpora- 
tions, see  State  v.  Phipps,  50  Kan.  609 
(1893),  (31  Pac.  Rep.  1097,  34  Am.  St. 
Rep.  152,  18  L.  R.  A.  657).  See  also 
State  V.  Schlitz  Brewing  Co.,  supra. 

Under  the  Missouri  statutes  a  for- 
eign corporation,  in  accepting  a  licen.se 
to  do  business  in  the  State,  agrees  that 
notice  in  any  matter  affecting  such 
license  to  its  attorney  of  record  shall 
be  notice  to  it. 

State  V.  Standard  Oil  Co.,  194  Mo. 
124  (1906),  (91  S.  W.  Rep.   1062). 

For  extended  consideration  of  the 
apj)ointiuent  of  receivers  in  proceed- 
ings by  the  State  against  corporations 
for  violating  the  Texas  anti-trust 
statutes ;  the  rights  and  powers  of 
such  receivers,  and  the  possible  con- 
flict of  authority  with  federal  re- 
ceivers, see  Waters-Pierce  Oil  Co.  i'. 
State  (Tex.  Civ.  App.  1907),  103  S.  W. 
Rep.  836;  (Tex.  Sup.  Ct.  1907),  106 
S.  W.  Rep.  326;  (Tex.  Civ.  App. 
1907),  105  S.  W.  Rop.  851 ;  (Tex.  Civ. 
App.  1908),  106  S.  W.  Rep.  918. 

847 


§449 


INTERCORPORATE    RELATIONS 


[part  V 


binations,  however,  go  beyond  the  common  law;  make  that 
positively  unlawful  which  was  only  negatively  invalid  before, 
and  thus  —  it  is  held  —  give  rights  of  action  to  injured  per- 
sons. Thus,  where  a  statute  declares  a  combination  in  restraint 
of  competition  criminal  and  unlawful  and  prescribes  a  penalty, 
it  is  said  that  any  person  suffering  special  damage  by  reason  of 
the  combination  has  a  right  of  action  therefor.^ 

Moreover,  the  State  anti-trust  statutes  not  only  declare  com- 
binations previously  only  invalid  criminal  and  unlawful,  but,  as 
a  general  rule,  specifically  grant  to  persons  injured  by  unlawful 
combinations  rights  of  action  for  damages  or  penalties.  Some- 
times these  statutes  give  a  purchaser  of  articles,  the  sale  of 
which  is  controlled  by  a  combination,  the  right  to  recover  back 
the  full  consideration  paid.^  Other  and  more  drastic  provisions 
are  along  the  lines  of  the  seventh  section  of  the  federal  anti-trust 
statute  ^  and  provide  that  persons  injured  by  reason  of  anything 
declared  unlawful  by  the  act  may  recover  the  damages  —  and 
sometimes  double  or  treble  the  damages  —  sustained.* 


1  Rourke  v.  Elk  Drug  Co.,  75  App. 
Div.  (N.  Y.)  145  (1902),  (77  N.  Y. 
Sup.  373) :  "The  combination  charged 
being  prohibited  and  made  criminal, 
every  act  of  the  defendants  in  further- 
ance of  the  object  of  the  combination 
was  unlawful,  and  any  person  suffering 
special  injury  on  account  of  any  of 
such  acts  has  a  right  of  action.  It 
makes  no  difference  whether  such  acts 
if  done  by  an  individual  not  in  the 
combination  might  have  been  lawful, 
and  a  person  suffering  therefrom 
would  be  without  remedy.  The  same 
acts  done  by  agreement  or  combina- 
tion of  several  are  made  unlawful,  and 
for  that  reason  a  right  of  action  fol- 
lows." 

Compare  Brewster  v.  C.  Miller's 
Sons  Co.,  101  Ky.  368  (1897),  (41 
S.  W.  Rep.  301). 

^  Thus  for  example  the  Tennessee 
statute  provides:  "Any  person  or 
persons  or  corporation  that  may  be 
injured  or  damaged  by  any  such 
arrangement,  contract,  agreement, 
trust,    or    combination,    described    in 

848 


§  1  of  this  act,  may  sue  for  and  re- 
cover in  any  court  of  competent 
jurisdiction  in  this  State  of  any  person 
or  persons  or  corporation  operating 
such  trust  or  combination,  the  full 
consideration  or  sum  paid  by  him  or 
them  for  any  goods,  wares,  merchan- 
dise, or  articles,  the  sale  of  which  is 
controlled  by  such  conibination  or 
trust." 

^  For  construction  of  the  seventh 
section  of  the  federal  statute,  see  ante, 
§  409:  "  Actions  for  Treble  Damages. 
Pleadings." 

*  The  Missouri  statute  as  amended 
in  1907  provides  as  follows:  "Any 
person  injured  in  his  business  or 
property  by  any  other  person  or 
persons  by  reason  of  anj'thing  for- 
bidden or  declared  to  be  unlawful 
by  this  act  may  sue  therefor  in  any 
circuit  court  of  this  State  in  which 
the  defendant  or  defendants,  or  any  of 
them,  reside,  or  have  any  officer,  agent 
or  representative,  or  in  which  any 
such  defendant  or  any  agent,  officer 
or    representative    may    be     found. 


CHAP.  XLIIl]      RIGHTS    UNDER    STATE    ANTI-TRUST   STATUTES 


§  449 


While  the  statutory  provision  that  persons  injured  by  a  com- 
bination may  recover  the  "full  consideration  or  sum  paid"  ap- 
parently prescribes  a  penalty,  it  has  been  held  by  the  ^Supreme 
Court  of  Tennessee  that  the  amount  recoverable  may  also  be 
designated  as  "damages."*  The  Court  said:  "It  cannot  be 
affirmed  with  any  degree  of  certainty  that  the  measure  of  re- 
covery prescribed  in  the  act  is  not  in  fact  within  the  bounds  of 
actual  damages,  for  it  is  a  matter  of  common  knowledge  that 
men  who,  in  their  business,  become  the  injured  victims  of  trusts 
or  combinations  often  suffer  not  only  a  depreciation  in  the 
salable  value  of  their  commodities  then  on  hand,  but  also  a 
complete  destruction  of  their  business  for  the  future;  the  aggre- 
gate losses  so  sustained  in  many  instances  greatly  exceed  the 
prices  they  originally  paid  for  the  commodities  in  question." 

Where  retail  lumber  dealers  formed  an  association  to  prevent 
the  sale  of  lumber  by  wholesalers  to  dealers  not  members  of  the 
association  it  was  held,  under  the  provisions  of  the  Nebraska 
statute,  that  a  dealer  injured  by  such  unlawful  combination 
might  maintain  an  action  against  any  or  all  the  members  thereof 
for  the  recovery  of  the  damages  sustained.^ 


without  regard  to  the  amount  in 
controversy  and  shall  recover  three- 
fold the  damages  by  him  sustained, 
and  the  costs  of  suit,  including  a 
reasonable  attorney's  fee." 

See  also  statutes  of  California, 
Indiana,  Kansas,  Michigan,  Nebraska, 
Oklahoma,  Ohio  and  Utah,  referred  to 
in  note  to  §  414,  ante:  "The  Statutes. 
Development   of  State    Legislation." 

Most  of  the  late  comprehensive 
anti-trust  statutes  have  a  similar 
provision  to  that  of  the  Missouri 
statute,  excepting  that  they  may  pro- 
vide for  the  recovery  of  actual  or 
double,  instead  of  treble,  damages. 
A  few  follow  the  Tennessee  form 
shown   in   a   preceding   note. 

'  State  V.  Schlitz  Brewing  Co.,  104 
Tenn.  715  (1900),  (59  S.  W.  Rep.  104, 
78  Am.  St.  Rep.  941). 

Compare,  however,  Mason?'.  Adoue, 
30  Tex.  Civ.  App.  27()  (1902),  (70  S.  \V. 
Rep.  347),  where  it  was  held  that  the 


provision  authorizing  the  recovery 
back  of  money  paid  to  an  unlawful 
combination  was  a  penalty,  and  not 
liquidated  damages. 

As  to  recovery  of  double  damages 
under  Tennessee  statute  of  1891,  see 
American  Handle  Co.  v.  Standard 
Handle  Co.  (Tenn.  Ch.  1900),  59  S.  W. 
Rep.  709. 

^Cleland  v.  Anderson,  66  Neb.  252 
(1902),  (92  N.  W.  Rep.  306). 

In  an  action  against  an  ice  com- 
pany for  breach  of  contract  to  deliver 
ice  the  damages  cannot  be  enhanced 
by  showing  that  the  reason  why  the 
contract  was  broken  was  that  the 
defendant  had  entorotl  into  an  vmlaw- 
ful  combination  in  violation  of  the 
Kansas  anti-trust  statute.  "Tiie 
reason  for  the  breach  furnished  no 
cau.se  of  action." 

Cry.stal  Ice  Co.  r.  Wylie,  65  Kan. 
104  (1902),  (68  Pac.  Rep.  1086). 

849 


§  450  INTERCORPORATE   RELATIONS  [PART   V 

The  Missouri  statute  gives  a  person  injured  by  a  combina- 
tion in  violation  of  its  provisions  a  right  of  action  at  law 
to  recover  treble  damages,  but  affords  no  direct  remedy  in 
equity.* 

§  450.  Evidence.  Production  of  Books.  — For  reasons  al- 
ready considered  in  reference  to  illegal  combinations  generally, 
it  is  not  necessary,  in  order  to  establish  a  violation  of  an  anti- 
trust statute,  to  show,  by  direct  evidence,  that  a  combination 
with  an  unlawful  object  has  been  formed.^  The  facts  and  cir- 
cumstances attending  the  acts  of  the  parties  may  clearly  show 
their  purpose  and  may  constitute  the  best  evidence.  Illegal 
combinations  are  seldom  evidenced  by  written  agreements 
stating  a  purpose  forbidden  by  law. 

In  State  v.  Firemen's  Fund  Ins.  Co}  the  Supreme  Court  of 
Missouri  said:  "Of  course  there  was  no  written  agreement 
forming  the  trust,  for  that  was  'inexpedient,  and  might  make 
the  members  liable  to  prosecution  under  the  trust  laws,'  as  the 
president  of  the  club  well  and  wisely  remarked  when  the  club 
was  formed.  When  people  set  out  to  do  acts  that  are  either 
mala  in  se  or  mala  prohibita,  they  do  not  put  up  a  sign  over  the 
door  or  a  stamp  on  the  act  declaring  their  purposes  and  intent. 
Concealment  is  generally  their  prime  object.  But  as  such  mat- 
ters exist  without  agreements  and  rest  upon  common  under- 
standing and  practice,  so  the  proof  of  their  existence  may  be  of 
the  same  character;  and  while  such  laws  are  penal  in  their  na- 
ture and  should  be  strictly  construed,  .  .  .  nevertheless  a  pool 
or  trust  may  be  as  conclusively  proved  by  facts  and  circum- 

*  C.  H.  Albers  Commission  Co.  v.  Rep.  770),  affirming  114  III.  App.  75 
Spencer,  205  Mo.  105  (1907),  (103  (1904);  Detroit  Salt  Co.  v.  National 
S.  W.  Rep.  523).  Salt  Co.,  134  Mich.  1113  (1903),   (96 

Co7npare  Walsh  v.   Association  of  N.    W.    Rep.    1);     Waters-Pierce   Oil 

Master   Plumbers,   97   Mo.    App.    280  Co.    v.    State,    19   Tex.    Civ.    App.    1 

(1902),  (71  S.  W.  Rep.  455).     See  also  (1898),  (44  S.  W.  Rep.  936).     See  also 

Union  Pressed  Brick  Co.  v.  Chicago,  American    Handle    Co.    v.    Standard 

etc.  Brick  Co.,  31  Chic.  Leg.  News  428,  Handle  Co.  (Tenn.  Ch.  1900),  59  S.  W. 

4  Chic.  L.  J.  Wkly.  346.  Rep.     709.      And    see    ante,     §   375 : 

*  State  r.  Firemen's  Fund  Ins.  Co.,  "Evidence";  ante,  §  405:  "  Proof  of 
152  Mo.  1  (1899),  (52  S.  W.  Rep.  595,  Violation  of  Statute.     Evidence." 

45  L.  R.  A.  363) ;    Southern  Electric  ^  g^ate  v.  Firemen's  Fund  Ins.  Co., 

Sec.  Co.  V.  State   (Miss.  1907),  44    So.  152  Mo.   40   (1899),    (52  S.   W.   Rep. 

Rep.   785;    Chicago,   etc.  Coal  Co.   v.  595,  45  L.  R.  A.  363),  (per  Marshall, 

People,  214  111.  421  (1905),  (73  N.  E.  J.). 

850 


CHAP.  XLIIl]        RIGHTS   UNDER   STATE   ANTI-TRUST   STATUTES 


§451 


stances  as  by  direct  written  evidence,  for  in  this  regard  they  are 
like  all  other  frauds."  ^ 

A  court  having  power  to  require  any  party  to  a  suit  to  produce 
any  books  in  its  possession  relating  to  the  merits  of  the  case 
may  compel  a  corporation,  charged  with  violating  an  anti-trust 
statute,  to  produce  its  stock  book  when  it  is  material  to  the 
issues.  And  the  stock  book  is  material  when  it  is  claimed  that 
a  defendant  corporation,  while  ostensibly  independent,  is  actu- 
ally controlled  by  another  corporation  through  stock  ownership 
which  likewise  controls  its  competitors.^ 

§  451 .  Statutes  of  Limitation.  —  Upon  the  principle  that  every 
overt  act  is  a  renewal  of  the  original  conspiracy,  a  prosecution 
for  a  violation  of  a  State  anti-trust  statute  making  combinations 
criminal  conspiracies  may  l)e  maintained  against  a  continuing 
combination,  although  the  statutory  period  has  elapsed  between 


^  It  is  not  necessarj'  in  order  to 
establish  an  unlawful  combination 
to  show  that  an  agreement  has  been 
actually  entered  into.  Proof  of  an 
understanding  to  work  a  common 
purpose  is  sufficient.  Chicago,  etc. 
Coal  Co.  V.  People,  214  111.  421  (1905), 
(73  N.  E.  Rep.  770),  affirming  114 
111.  App.  75  (1904). 

For  statements  of  evidence  held 
sufficient  to  establish  combinations 
in  violation  of  State  anti-trust  stat- 
utes, see  State  v.  Armour  Packing  Co., 
173  Mo.  356  (1903),  (73  S.  W.  Rep. 
645,  61  L.  R.  A.  464);  Detroit  Salt 
Co.  V.  National  Salt  Co.,  134  Mich.  103 
(1903),  (96  N.  W.  Rep.  1);  State  v. 
Omaha  Elevator  Co.,  75  Neb.  654 
(1906),  (110  N.  W.  Rep.  874).  Com- 
pare State  V.  Continental  Tobacco,  177 
Mo.  1  (1903),  (75  S.  W.  Rep.  737); 
State  V.  Shippers  Compress,  etc.  Co., 
95  Tex.  603  (1902),  (69  S.  W.  Rep. 
58,  93  Am.  St.  Rep.  870,  .58  L.  R.  A. 
714);  Wilson  V.  Mor.se,  117  Iowa,  581 
(1902),  (91  N.  W.  Rep.  823). 

Where  in  an  action  upon  a  lease 
it  was  set  up  in  the  answer  that  it 
was  taken  as  part  of  a  scheme  to 
create  an  unlawfid  monopoly  and 
was,  consequently,  invalid,  it  was  held 


that  the  question  whether  the  lease 
was  made  to  control  prices  or  restrict 
production  was  for  the  jury. 

Hartz  V.  Eddy,  140  Mich.  479 
(1905),  (103  N.  W.  Rep.  8.52). 

But  where  all  the  evidence  is  con- 
sistent only  with  an  unlawful  purpose 
the  question  of  illegality  should  not 
be  submitted  to  the  jury. 

Detroit  Salt  Co.  v.  National  Salt 
Co.,  134  Mich.  103  (1903),  (96  N.  VV. 
Rep.  1). 

Mandamus  will  not  lie  to  compel 
the  attornej'-general  to  institute 
proceedings  to  forfeit  the  charters 
of  corporations  alleged  to  be  violat- 
ing an  anti-trust  statute.  Before  he 
acts  he  must  look  into  the  facts  and 
determine  whether  the  evidence  neces- 
sary to  a  successful  prosecution  can  be 
obtained. 

Lcwright  v.  Bell,  94  Tex.  556 
(1901),  (63  S.  W.  Rep.  623). 

2  State  V.  Standard  Oil  Co.,  194  Mo. 
124  (1906),   (91  S.  W.  Rep.   1062). 

For  construction  of  Arkansas 
statute  relating  to  the  production  of 
books  and  papers  in  prosecutions 
imder'^the  anti-trust  act,  see  Hammond 
Packing  Co.  v.  State,  81  Ark.  519 
(1907),  (100  S.  W.   Rep.  407). 

851 


§  451  INTERCORPORATE    RELATIONS  [PART   V 

the  formation  of  the  combination  and  the  finding  of  the  indict- 
ment.^ 

An  action  by  the  State  for  the  recovery  of  penalties  under 
the  Texas  statutes  is  a  civil  suit  and  is  not  barred  by  the  statutes 
of  limitation  which  prevent  prosecutions  for  the  criminal  offences 
created  by  such  statutes.  And  as  such  a  suit  is  for  the  protec- 
tion of  the  public  rights,  it  is  not  barred  by  statutes  of  limitation 
applicable  to  civil  actions  upon  the  theory  that  it  is  an  action  of 
debt  only ,2 

1  American  Fire  Ins.  Co.  v.  State,  ^  Waters-Pierce    Oil    Co.    v.    State 

75    Miss.    24    (1897),    (22    So.    Rep.       (Tex.   Civ.   App.    1908),    (106  S.    W. 
99).  Rep.  918). 


852 


INDEX 

(References  are  to  sections.     Letter  "  n  "  refers  to  note.) 


ABSORPTION.     (See  Merger.) 
ACCOUNTING,  after  attempted  consolidation,  97. 
ACQUIESCENCE, 

of  stockholders  in  consolidation,  45. 
implied  sanction  of  sale,  116. 
implied  sanction  of  sale  of  railroad,  150. 
of  stockholders  in  lease  of  railroad,  192. 
of  stockholders  in  ultra  vires  stockholding,  293. 
(See  also  Estoppel.) 
ACTIONS.     (See  Pending  Suits;  Remedies.) 
ADMISSIONS, 

consolidated  corporation  bound  by,  of  constituents  regarding  obli- 
gations, 86. 

(See  also  Evidence;  Procedure.) 
ADOPTION  OF  RAILROAD  LEASES, 
acknowledgment,  witnesses,  etc.,  195. 
allegation  and  proof  of  proper,  195  n. 
authority  of  officers  or  agents,  195. 
construction  of  statutes  prescribing  method  of,  194. 
estoppel  to  allege  irregular,  196. 
formalities  attending,  195. 
place  of  execution,  195. 
seals,  195. 

statutes  prescribing  method  of,  193. 
AGREEMENT  FOR  LEASE,  power  to  make,  184. 
ALABAMA, 

(a)    Consolidation. 

statute  authorizing  consolidation  of  business  corporations,  23  n. 
statute  authorizing  consolidation  of  railroads,  22  n. 
statutes  prescribing  method  of  consolidating,  52  n. 
(6)    Sales. 

statutes  authorizing  sales  of  railroads,  145  n. 

statute  prescribing  method  of  authorizing  sale  of  railroad,  148  n. 

853 


INDEX 

ALABAMA  —  continued, 
(c)    Leases. 

statute  authorizing  railroad  leases,  145  n,  180  n. 
statute  prescribing  method  of  adopting  railroad  lease,  193  n. 
((/)    Stockholding. 

statute  authorizing  corporate  stockholding,  271  n. 
(e)    Combinations. 

anti-trust  statutes,  414  n. 
ALLEGATION  OF  CONSOLIDATION,  how  made,  91. 

(See  also  Pleadings.) 
ALLIANCE.     (See  Confederation.) 
AMALGAMATION, 

compared  with  consolidation,  12. 
English  statute  authorizing,  12  n. 
remarks  of  English  judges  concerning,  12. 
uncertain  meaning  of  term,  12. 
AMERICAN  BISCUIT  COMBINATION, 

formation  and  purposes  of,  349. 
ANCILLARY  CONTRACTS  IN  RESTRAINT  OF  TRADE. 
(See    CoNTBACTs    IN    Restraint    of    Trade;     Federal    Anti-trust 

Statute.) 
ANTI-TRUST  LEGISLATION. 

(See  Federal  Anti-trust    Statute;    State    Anti-trust  Statutes.) 
APPRAISAL, 

of  stock  of  dissenting  stockholders  in  case  of  exchange,  121. 
of  stock  of  dissenting  stockholders  upon  consolidation,  57. 
statutory  provisions  for,  of  stock,  57. 
whether  court  of  equity  can  make,  without  statute,  121. 
whether  stock  can  be  appraised  in  aid  of  lease,  167. 
ARIZONA, 

(a)  Consolidation. 

statute  authorizing  consolidation  of  railroads,  22  n. 
statute  prescribing  method  of  consolidating,  52  n. 

(b)  Sales. 

statutes  authorizing  sales  of  railroads,  145  n. 

statute  prescribing  method  of  authorizing  sale  of  railroad,  148  n. 

(c)  Leases. 

statutes  authorizing  railroad  leases,  145  n,  180  n. 

statute  prescribing  method  of  adopting  railroad  lease,  193  n. 

(d)  Stockholding. 

statutes  authorizing  corporate  stockholding,  271  n. 
ARKANSAS, 

(a)    Consolidation. 

constitutional    provision    against    consolidation    of    competing 

corporations,  32  n. 
statutes  authorizing  consolidation  of  railroads,  22  n. 
statutes  prescribing  method  of  consolidating,  52  n. 

854 


INDEX 

ARKANSAS  —  continued, 
(6)    Sales. 

statutes  authorizing  sales  of  railroads,  145  n. 

statute  prescribing  method  of  authorizing  sale  of  railroad,  148  n. 

(c)  Leases. 

statute  authorizing  lessee  to  exercise  right  of  eminent  domain, 
210  n. 

statute  authorizing  railroad  leases,  145  n,  180  n. 

statute  concerning  taxation  of  leased  railroad,  224  n. 

statute  prescribing  method  of  adopting  railroad  lease,  193  n. 

statute  providing  that  lessor  corporation  shall  be  liable  for  dam- 
ages, 216  n. 

statute  relating  to  foreign  lessee  corporations,  254  n. 

(d)  Stockholding. 

statutes  authorizing  corporate  stockholding,  271  n. 

(e)  Combinations. 

anti-trust  statute,  414  n. 

constitutional  provision  against  monopolies,  414  n. 
ARTICLES  OF  ASSOCIATION, 

effect  of  assumption  of  power  to  hold  stock  in,  270. 
ASSENT  OF  STOCKHOLDERS.     (See  Stockholders.) 
ASSESSMENTS, 

corporation  liable  for,  upon  intra  vires  holdings,  287. 

covenant  to  pay,  in  railroad  leases,  205. 

liability  for,  upon  ultra  vires  holdings,  289. 
(See  also  Taxes.) 
ASSIGNEES, 

of  illegal  combination,  rights  and  remedies  of,  368. 
ASSIGNMENT, 

covenant  not  to  make,  of  leases,  206. 

of  trackage  contracts,  258. 

what  constitutes,  of  lease,  206. 
ASSOCIATIONS, 

application  of  rule  of  public  policy  to,  of  carrier  corporations,  365. 

application  of  rule  of  public  policy  to,  of  dealers,  362. 

application  of  rule  of  public  policy  to,  of  gas  companies,  365. 

application  of  rule  of  public  policy  to,  of  manufacturers,  360. 

application  of  rule  of  public  policy  to,  of  manufacturers  owning 
patents,  3G1. 

application  of  rule  of  public  policy  to,  of  producers,  360. 

definition,  303. 

formation  of,  308. 

forms  of  industrial,  308. 

legality  of,  not  generally  a  question  of  corporation  law,  312. 

nature  of  pools,  308,  364. 
ASSOCIATIONS  OF  RAILROAD  COMPANIES, 

pools,  308,  364  a. 

855 


INDEX 

ASSOCIATIONS  OF  RAILROAD  COMPANIES  —  con^mwed, 

traffic  contracts  of  competing  lines,  364. 

traffic  contracts  of  connecting  lines,  363. 
ASSUMPTION, 

of  power  to  hold  stock  in  articles  of  association,  270. 

by  vendee  corporation  of  debts  of  vendor,  123. 

B 
BONDS, 

collateral  trust,  287  a. 

power  of  consolidated  corporation  to  issue  mortgage,  75. 

when  guarantee  of,  by  competing  corporation  amounts  to  consolida- 
tion, 35. 

(See  also  Bondholders.) 
BONDHOLDERS, 

election  of,  in  case  of  convertible  bonds,  81. 

obligations  of  consolidated  corporation  to,  of  constituents,  81. 

of  de  facto  consolidated  corporation  estopped  to  deny  regularity  of 
consolidation,  96. 

when,  cannot  be  deprived  of  right  to  convert  bonds  into  stock  of 
consolidated  corporation,  81. 
BOOKS, 

production  of,  under  federal  an ti- trust  statute,  413. 

production  of,  under  State  anti-trust  statutes,  450. 
BRIDGE  COMPANIES, 

constitutional  prohibitions  against  consolidation  of  competing,  39. 
BUSINESS  CORPORATIONS, 

consolidation  of,  statutory  provisions,  23. 

construction  of  statutes  authorizing  consolidation  of,  30. 

CALIFORNIA, 

(a)    Consolidation. 

statute  authorizing  consolidation  of  mining  companies,  23  n. 

statute  authorizing  consolidation  of  railroads,  22  n. 

statutes  prescribing  method  of  consolidating,  52  n. 
(6)    Sales. 

statute  authorizing  sales  of  railroads,  145  n. 

statute  prescribing  method  of  authorizing  sale  of  railroad,  148  n. 

(c)  Leases. 

statute  authorizing  railroad  leases,  180  n. 

(d)  Combinations. 

anti-trust  statutes,  414  n. 
CALLS, 

apply  to  all  subscriptions,  69. 

how  consolidated  corporation  may  apply  amount  received  on,  77. 

on  subscriptions  made  pending  consolidation,  continue  in  force,  69. 

856 


INDEX 

CANAL  COMPANIES, 

constitutional  prohibitions  against  consolidation  of  competing,  39. 
CARRIERS, 

combination  of,  violates  federal  anti-trust  statute,  398. 
constitutional  provisions  against  consolidation  of  competing,  39. 
CHARTER.     (See  Corpor.\tion.) 

CHICAGO  GAS  TRUST,  nature  and  formation  of,  346. 
CHOSES  IN  ACTION, 

of  constituents  pass,  upon  consolidation,  to  consolidated  company,  67. 
CITIZENSHIP, 

of  corporation,  101  n. 

of  interstate  consolidated  corporation,  106. 
CIVIL  REMEDIES.     (See  Remedies.) 
CLAIMS.     (See  Obligations.) 
CLASSIFICATION,  of  intercorporate  relations,  1. 
CLASS  LEGISLATION, 

State  anti-trust  statutes  as  constituting,  421. 

(Sec  also  Fourteenth  .Amendment.) 
COLLATERAL,  incidental  power  to  take  stock  as,  278. 
COLLATERAL  ATTACK, 

invalidity  under  federal  anti-trust  statutes  as  a  ground  of,  405. 
invalidity  under  State  anti-trust  statutes  as  a  ground  of,  445. 
upon  combination,  369. 

upon  de  facto  consolidated  corporation,  93,  94,  95. 
upon  unlawful  consolidated  corporation,  93. 
COLLATERAL  CONTRACTS,  to  ultra  vires  stockholding  invalid,  290. 
COLLATERAL  TRUST  BONDS, 
duties  of  trustee  under,  287  a. 
nature  of,  287  a. 

rights  and  remedies  of  holders  of,  287  a. 
COLORADO, 

(o)    Consolidation. 

constitutional  provision  against  consolidation  of  competing  cor- 
porations, .32  n. 
statute  authorizing  consolidation  of  business  corporations,  23  n. 
statute  authorizing  con.solidation  of  railroads,  22  n. 
statutes  prescribing  method  of  consolidating,  52  n. 
(6)    Sales. 

statutes  authorizing  sales  of  railroads,  14.5  n. 

(c)  Leases. 

statute  authorizing  railroad  leases,  145  n,  180  n. 

statute  prescribing  method  of  adopting  railroad  lease,  193  n. 

(d)  Stockholding. 

statutes  authorizing  corporate  stockholding,  271  n. 
COMBINATIONS, 

analysis  of  principles  determining  legality  of,  311. 
analysis  of  rules  of  public  policy  governing,  354-3.59. 

857 


INDEX 

COMBINATIONS  —  continued, 

application  of  rules  of  public  policy  to  particular  classes  of,  360-365. 

basis  of  rules  of  public  policy  concerning,  in  judicial  decisions,  341. 

by  means  of  holding  stock,  292. 

collateral  attack  upon,  369. 

connection* between  contracts  in  restraint  of  trade  and,  335. 

control  of  the  market,  356. 

corporate,  by  means  of  holding  corporation,  323. 

corporate,  by  means  of  purchasing  corporation,  in  general,  318. 

definition  of  phrase  "corporate  combination,"  306. 

definition  of  term  "association,"  303. 

definition  of  term  "  combination,"  302. 

definition  of  term  "trust,"  304. 

difficulty  of  formulating  rules  of  public  policy  concerning,  340. 

distinction  between,  and  consolidation,  16. 

evidence,  375. 

evolution  of,  6,  307. 

formation  of  associations,  308. 

formation  of  corporate,  310. 

formation  of  trusts,  309. 

form  of,  immaterial,  354. 

forms  of  industrial  associations,  308. 

forms  of  pools,  308. 

illegality  of,  no  defence  to  creditors'  actions,  370. 

in  formation  of  trust.  State  regards  acts  of  stockholders  as  acts  of 

corporation,  313. 
issue  of  stock  for  good-will  in  formation  of  corporate,  320. 
issue  of  stock  for  property  in  formation  of  corporate,  319. 
legality  of  association  not  generally  a  question  of  corporation  law, 

312. 
members  of  illegal,  cannot  recover  agreement  upon,  366. 
modern,  of  capital  seldom  conspiracies,  328. 
modern  use  of  term  "monopoly,"  332. 
nature  of  pools,  308. 
objects  and  tendencies  of,  355. 
of  carriers  violate  federal  anti-trust  statute,  398. 
of  railroads  violate  federal  anti-trust  statute,  398. 
over- valuation  of  property  acquired  by  issue  of  stock,  321. 
popular  use  of  word  "  trust,"  305. 

power  of  Congress  to  prohibit,  of  competing  railroads,  381. 
power  of  "Congress  under  commerce  clause  to  legislate  concerning, 

under  State  laws,  380. 
power  of  vendor  corporations  to  sell  property  for  stock,  322. 
power  of  State  to  prohibit,  in  exercise  of  police  power,  420. 
power  of  State  to  prohibit,  in  exerci.se  of  reserved  power,  418. 
primary  meaning  of  term  "monopoly,"  329. 
quo  warranto  against  combining  corporations,  373. 

858 


INDEX 

COMBINATIONS  —  continued, 

quo  warranto  against  corporate,  372. 

remedies  of  members  of  illegal,  366. 

rights  and  liabilities  growing  out  of  trusts,  317. 

rights  and  remedies  between  illegal,  and  members,  367. . 

rights  and  remedies  of  stockholders  of  combining  corporations,  371. 

rights  of  debtors  to  attack  legality  of,  369. 

rights  of  members  of  illegal,  366. 

rights  of  receivers  and  assignees  of  illegal,  368. 

rights  of,  to  allege  its  own  illegality,  370. 

rules  of  public  policy  regarding,  352. 

sketch  of  growth  of,  6. 

test  of  right  of  member  to  recover,  366. 

test  of  validity  of,  not  whether  in  restraint  of  trade,  337. 

test  of  validity  of,  not  whether  monopolies,  333. 

trust  invalid  as  delegating  powers,  315. 

trust  invalid  as  involving  partnership  of  corporations,  314. 

trust  invalid  as  involving  practical  consolidation,  316. 

what,  are  conspiracies,  327. 
COMMERCE, 

distinction  between,  and  manufacture,  393. 

interstate,  a  matter  of  federal  regulation,  393. 

State,  a  matter  of  State  control,  393. 

(See  also  Interstate  Commerce.) 
COMMERCE  CLAUSE, 

construction  of,  38  n. 

development  of,  38  n,  379  n. 

operation  of,  upon  State  anti-trust  legislation,  415. 

provisions  of,  379  n. 
COMMUNITY  OF  INTEREST,  meaning  of  phrase,  5,  296. 
COMPETING  OR  PARALLEL  RAILROADS, 

(a)  Consolidation. 

constitutional  and  statutory  provisions  against  consolidation  of, 

32. 
construction  of  jirovisions  against  consolidation  of,  33-37. 
popular  view  regarding  consolidation  of,  31. 
public  policy  concerning  consolidation  of,  31. 
stockholder  may  restrain  consolidation  of,  40. 
State  may  prevent  consolidation  of,  40. 
what  are,  37. 

(b)  Sales. 

constitutional  and  statutory  provisions  against  purchase  of,  147. 

(c)  Leases. 

constitutional  and  statutory  provisions  against  leases  of,  186. 
COMPETITION, 

distinction  between  restriction  of,  and  control  of  the  market.  356. 
lease  of  railroad  for  purpose  of  suppressing,  against  public  policy,  249. 

859 


INDEX 

COMPETITION  —  continued, 

holding  stock  to  prevent,  292. 
public  policy  regarding,  356. 
CONDEMNATION  OF  STOCK,  for  purposes  of  consolidation,  51. 

(See  also  Appraisal.) 
CONDITIONAL  SUBSCRIPTIONS.     (See  Subscriptions.) 
CONFEDERATION, 

consolidation  in  form  of,  8. 
exemplified  in  interstate  consolidations,  8. 
CONGRESS, 

cannot  regulate  combinations  of  manufacturers,  6,  393. 

can   only   regulate    or   prohibit   combinations   affecting   interstate 

commerce,  391. 
limitations  upon  powers  of,  6. 

power  of,  to  prohibit  combinations  of  competing  railroads,  381. 
power  of,  to  legislate  concerning  private  contracts  affecting  inter- 
state commerce,  379. 
power  of,  to  legislate  concerning  contracts  and  combinations  under 
State  laws,  380. 

(See  also  Commerce  Clause.) 
CONNECTICUT, 
(a)    Consolidation. 

statute  authorizing  consolidation  of  business  corporations,  23  n. 
statute  authorizing  consolidation  of  railroads,  22  n. 
statute  concerning  evidence  of  consolidation,  91  n. 
statutes  prescribing  method  of  consolidating,  52  n. 
(6)    Leases. 

statute  authorizing  railroad  leases,  180  n. 
statute  prescribing  method  of  adopting  railroad  lease,  193  n. 
(c)    Stockholding. 

statute  authorizing  corporate  stockholding,  271  n. 
CONNECTING  OR  CONTINUOUS  RAILROADS, 

construction  of  statutes  authorizing  consolidation  of,  29. 
construction  of  statutes  authorizing  leases  of,  185. 
what  are,  29. 

whether  connection  may  be  by  leased  road,  29. 
CONSIDERATION, 

for  fraudulent  sale,  may  be  reached  by  creditors,  125. 
for  lease  of  railroad,  198. 
CONSOLIDATED  CORPORATION, 

acquires  real  estate  and  rights  in  streets  of  constituents,  66. 

act  creating,  contravenes  constitutional  provision  against  creating 

corporations  by  special  act,  19. 
choses  in  action  of  constituent  corporations  pass  to,  67. 
constitutional  limitations  affecting  obligations  of,  78. 
entitled  to  municipal  aid  voted  to  constituents,  70. 
legislative  recognition  of,  validates  organization,  20. 

860 


INDEX 

CONSOLIDATED  CORPORATION  —  continued, 

liability  of,  for  debts  upon  consolidation  after  foreclosure  sale,  83. 

liability  of,  for  torts  of  constituents,  82. 

liability  of,  general  rule  of,  79. 

liable  upon  its  own  obligations,  78  a. 

liens,  takes  property  of  constituents  subject  to,  84. 

may  be  organized  for  full  statutory  period,  19. 

miscellaneous  powers  of,  77. 

not  purchaser  for  value  without  notice,  87. 

obligation  of,  to  perform  public  duties  of  constituents,  80. 

obligations  of,  determined  by  constitutional  limitations,  78. 

obligations  of,  to  bondholders  and  preferred  stockholders  of  con- 
stituents, 81. 

powers  of,  in  general,  74. 

power  of,  to  issue  mortgage  bonds,  75. 

remedies  upon  subscription  contracts,  69. 

right  of  eminent  domain,  76. 

rule  as  to  transmission  of  property  and  franchises  to,  65. 

special  privileges  and  immunities  passing  to,  73. 

takes  property  subject  to  equitable  liens,  85. 

terms  of  existence  of  constituent  corporations  do  not  affect,  19. 

when,  takes  subject  to  constitutional  limitations,  71. 

whether  entitled  to  exemptions  from  taxation  of  constituents,  72. 
CONSOLIDATING  CORPORATIONS. 

(See  Constituent  Corporations.) 
CONSOLIDATION, 

absorption,  process  of,  in,  8. 

accounting  after  attempted,  97. 

after   foreclosure,   consolidated   corporation   not   liable   for   debts, 
83. 

allegation  and  proof  of,  91. 

analogy  in  civil  law,  10. 

appraisal  of  stock  in,  statutory  provisions  for,  57. 

arrangements  amounting  to,  within  constitutional  prohibitions,  35. 

as  a  result  and  process,  9. 

assent  of  stockholders  to,  how  manifested,  45. 

attempted,  92. 

authorization  of,  of  interstate  railroads  not  regulation  of  interstate 
commerce,  19  a. 

choses  in  action  of  constituents  pass  upon,  to  consolidated  corpora- 
tion, 67. 

citizenship  of  interstate  consolidated  corporation,  106. 

condemnation  of  stock  for  purposes  of,  51. 

consolidated  corporation  takes  per  universitatem,  10. 

constitutional  limitations  affecting  result  of,  71. 

constitutional  prohibitions  of,   not  regulations  of  interstate  com- 
merce, 38. 

861 


INDEX 

CONSOLIDATION  —  continued,     . 

constitutional  provisions  against,  of  carrier  corporations  other  than 

railroads,  39. 
constitutional  provisions  against,  of  competing  railroads,  32. 
construction  of  constitutional  prohibitions  against,  33,  34. 
construction  of  particular  statutes  authorizing,  28. 
construction  of  statutes  authorizing,  of  business  corporations,  30. 
construction  of  statutes  authorizing,   of  corporations  of  different 

States,  100. 
construction  of  statutes  authorizing,  of  railroads,  29. 
construction  of  statutes  creating  distinct  corporation,  62. 
construction  of  statutes  showing  merger  as  result  of,  63. 
construction  of  statutes  prescribing  method  of,  54. 
conventional  and  statutory  liens,  effect  of,  upon,  84. 
court  will  not  take  judicial  notice  of,  91. 
definitions  of,  7  n. 
description  of,  9. 

distinction  between,  and  combination,  16. 
distinction  between,  and  control,  15. 
distinction  between,  and  lease,  14. 
distinction  between,  and  reorganization,  16  n. 
distinction  between,  and  sale,  13. 
distinction  between  irregular  and  invalid,  92. 
distinction  between  use  of  term  in  authorizations  and  prohibitions, 

7. 
duties  of  interstate  consolidated  corporation,  105. 
effect  of,  as  a  general  rule,  is  creation  of  distinct  corporation,  60. 
effect  of,  depends  upon  terms  of  consolidation  act,  7,  59. 
effect  of,  in  general,  58. 

effect  of  interstate,  upon  status  of  constituent  corporations,  102. 
effect  of  irregular,  94. 
effect  of  unlawful,  93. 

effect  of,  upon  stockholders  of  constituent  corporations,  64. 
enforcement  of  conditional  subscriptions,  69. 
enforcement  of  provisions  against,  40. 

enforcement  of  subscriptions  by  consolidated  corporation,  69. 
equitable  liens,  effect  of,  upon,  85. 
estoppel  to  deny  regularity  of,  96. 
exemptions  from  taxation,  whether  pass  to  consolidated  corporation, 

72. 
extreme  development  of  idea  of  combination,  16. 
foreclosure  of  mortgage  of  interstate  consolidated  corporation,  107. 
formal  statutory  requisites  for,  52. 
fraud  in  consolidation  agreements,  98. 
fusion,  process  of,  8. 

incidental  power  to  acquire  stock  in  connection  with,  279. 
includes  merger,  11. 

862 


INDEX 

CONSOLIDATION  —  continued, 

in  form  of  confederation,  8. 

interstate,  how  authorized,  99. 

invalid,  a  nullity,  93. 

laches  of  stockholders  in  restraining  invalid,  49. 

lease  is  not,  34. 

legislative  sanction  of,  how  expressed,  20. 

legislative  ratification  of,  equivalent  to  authorization,  20. 

liability  of  consolidated  corporation,  general  rule  of,  79. 

management  of  interstate  consolidated  corporation,  103. 

meaning  of  term  "  in  constitutional  prohibitions,"  33. 

merger  and  continued  existence  as  result  of,  Gl. 

miscellaneous  powers  of  consolidated  corporation,  77. 

municipal  aid  voted  to  constituent  passes  to  consolidated  corpora- 
tion upon,  70. 

not  dependent  upon  considerations  of  public  policy,  16. 

obligations    of   consolidated    corporation   determined   by   constitu- 
tional limitations,  7S. 

obligations  of  consolidated  corporation,  in  general,  79. 

obligations  of  consolidated  corporation  to  perform  public  duties  of 
constituents,  80. 

obligations  of  consolidated  corporation  upon  special  contracts  of 
constituents,  81. 

of  business  corporations,  statutory  provisions,  23. 

of  railroads,  sketch  of,  2. 

outstanding  contract  does  not  prevent  legislature  from  authorizing, 
19. 

pending  suits,  effect  of,  upon,  89. 

powers  of  consolidated  corporation,  in  general,  74. 

power  of  consolidated  corporation  to  issue  mortgage  bonds,  75. 

power  of  legislature,  in  absence  of  reserved  power,  to  withdraw  right 
to  consolidate,  24. 

power  of  legislature  to  authorize,  19. 

power  of  legislature  to  compel,  44. 

power  of  legislature  to  withdraw  right  to  consolidate  in  exercise  of 
police  power,  2G. 

power  of  legislature  to  withdraw  right  to  consolidate  in  exercise  of 
reserved  power,  25. 

pow^  to  consolidate  a  license,  24. 

power  to  consolidate  not  a  vested  right,  24. 

procedure  in  stockholders'  actions  to  restrain,  48. 

procedure  regarding  pending  suits,  90. 

public  policy  regarding,  of  competing  railroads,  31. 

public  policy  regarding,  of  non-competing  railroads,  21. 

remedies  at  law  of  creditors  of  constituent  corporations,  86. 

remedies  in  equity  of  creditors  of  constituent  corporations,  87. 

remedies  of  di.ssenting  subscriber  in  case  of  invalid,  47. 

8G3 


CONSOLIDATION  —  continued, 

remedy  of  creditors  against  constituent  corporation,  if  not  dissolved, 
88. 

requisite  number  of  stockholders  whose  assent  is  necessary,  41,  42,  43. 

rights  and  powers  of  interstate  consolidated  corporation,  104. 

rights  and  remedies  of  dissenting  stockholders,  46. 

rule  as  to  transfer  of  property  and  franchises  by,  65. 

rules  of  construction  of  statutes  authorizing,  27. 

special  privileges  and  immunities  pass  to  consolidated  corporation,  73. 

stahis  of  interstate  consolidated  corporation,  101. 

statutes  authorizing,  not  regulations  of  interstate  commerce,  19. 

statutes  showing  merger  as  result  of,  62. 

subscriptions  pass  upon,  to  consolidated  corporation,  68. 

taxation  of  interstate  consolidated  corporation,  105. 

torts  of  constituents,  liability  of  consolidated  corporation  for,  82. 

transmission  of  real  estate  and  rights  in  streets  upon,  66. 

trust  invalid  as  involving  practical,  316. 

uncertain  meaning  of  term,  7. 

uses  of  term  distinguished,  8. 

what  are  competing  or  parallel  lines,  37. 

what  railroads  may  consolidate,  statutory  provisions,  22. 

what  statutory  provisions  conditions  precedent  to,  55. 

what  statutory  provisions  not  conditions  precedent  to,  56. 

when  consolidation  is  effected,  53. 

when  guarantee  of  bonds  of  competing  corporation  amounts  to,  35. 

whether  control  through  holding  corporation  amounts  to,  36. 

whether  lease  amounts  to,  34. 

whether  majority  can  effect,  upon  giving  security,  50. 

whether  right  of  eminent  domain  passes  upon,  76. 

who  may  attack  irregular,  95. 

without  legislative  authority,  against  public  policy,  18. 

without  legislative  authority,  ultra  vires,  17. 
CONSPIRACIES, 

applicability  of  law  of,  to  corporations,  326. 

classification  of,  324. 

criminal  and  civil,  distinguished,  325. 

damage  essential  to  civil,  325. 

definitions  of,  324. 

definition  of  civil,  324.  • 

definition  of  criminal,  324. 

gist  of  criminal,  is  the  combination,  325. 

modern  combinations  of  capital  seldom,  328. 

remedies  and  procedure  in  case  of,  327  a. 

what  combinations  are,  327. 
CONSTITUENT  CORPORATIONS, 

choses  in  action  of,  pass,  upon  consolidation,  to  consolidated  com- 
pany, 67. 

864 


INDEX 

CONSTITUENT  CORPORATIONS  —  continued, 

effect  of  consolidation  upon,  58-63. 

effect  of  consolidation  upon  suits  pending  by  or  against,  89. 

effect  of  interstate  consolidation  upon  status  of,  102. 

estoppel  of,  of  de  facto  consolidated  corporation,  to  deny  regularity 
of  organization,  96. 

liability  of  consolidated  corporation  for  torts  of,  82. 

liens  upon  property  of,  not  affected  by  consolidation,  84,  85. 

municipal  aid  voted  to,  passes  to  consolidated  corporation,  70. 

obligations  of,  assumed  by  consolidated  corporation,  79. 

obligation  of  consolidated  corporation  to  perform  public  duties  of,  80. 

obligations  of  consolidated  corporation  to  preferred  stockholders  and 
bondholders  of,  81. 

real  estate  and  rights  in  streets  of,  pass  to  consolidated  corporation, 
66. 

remedies  at  law  of  creditors  of,  86. 

remedies  in  equity  of  creditors  of,  87. 

remedies  of  consolidated  corporation  to  enforce  subscriptions  to,  69. 

remedies  of  creditors  against,  if  not  dissolved,  88. 

rule  as  to  transmission  of  property  of,  upon  consolidation,  65. 

stockholders  of,  effect  of  consolidation  upon,  64. 

special  contracts  of,  assumed  by  consolidated  corporation,  81. 

subscriptions  to,  pass  to  consolidated  corporation,  68. 

terms  of  existence  of,  do  not  affect  consolidated  corporation,  19. 

whether  exemptions  from  taxation  of,  pass  to  consolidated  com- 
pany, 72. 

whether  special  privileges  and  immunities  of,  pass  to  consolidated 
corporation,  73. 
CONSTITUTIONAL  PROVISIONS, 

against  consolidation,  not  regulations  of  interstate  commerce,  38. 

against  consolidation  of  carrier  corporations  other  than  railroads,  39. 

against  consolidation  of  competing  railroads,  32. 

against  leases  of  competing  or  parallel  railroads,  186. 

against  purchase  of  competing  or  parallel  railroads,  147. 

against  trusts  and  monopolies,  414  n. 

arrangements  amounting  to  consolidation  within,  35. 

commerce  clause  of  federal  constitution,  379  n. 

construction  of,  against  consolidation,  33-37. 

construction  of,  against  corporate  stockholding,  274. 

construction  of  commerce  clause,  38  n. 

defining  status  of  interstate  consolidated  corporations,  101  n. 

development  of  commerce  clause,  38  n. 

enforcement  of,  against  consolidation,  40. 

Fifth  Amendment,  419  n. 

Fourteenth  Amendment,  419  n. 

imposing  limitations  upon  grants  of  privileges  and  immunities,  71. 

imposing  limitations  upon  grants  of  special  privileges,  78. 

865 


INDEX 

CONSTITUTIONAL  PROVISIONS  —  continued, 
meaning  of  term  "consolidation"  in,  33. 

validity  of  State  anti-trust  statutes  tested  by  Fourteenth  Amend- 
ment, 419-421. 
validity  of  State  anti-trust  statutes  under  State  constitutional  pro- 
visions, 422. 
what  are  competing  or  parallel  lines  within  meaning  of,  37. 
whether  control  through  holding  corporation  amounts  to  consolida- 
tion, 36. 
whether  lease  amounts  to  consolidation,  34. 

who  may  question  constitutionality  of  State  anti-trust  statutes,  424. 
(See  also  Commerce  Clause;  Fourteenth  Amendment;  Fifth  Amend- 
ment.) 
CONSTRUCTION  OF  STATUTES, 
(a)    Consolidation. 

authorizing  consolidation  of  railroads,  29. 
authorizing  consolidation  of  business  corporations,  30. 
authorizing  consolidation,  when  enabling  act,  42. 
authorizing  consolidation,  when  an  impairment  of  contract,  42. 
consolidation  statutes  receive  strict  but  not  unreasonable  con- 
struction, 27. 
general  statutes  authorizing  consolidation  not  retroactive,  20. 
of  interstate  consolidation  statutes,  100. 
of  Minnesota,  concerning  consolidation,  64. 
particular  consolidation  statutes,  28. 
power  to  connect  does  not  authorize  consolidation,  28. 
prescribing  method  of  consolidation,  54. 
rules  of  construction  of  consolidation  statutes,  27. 
showing  distinct  corporation  as  a  result  of  consolidation,  62. 
showing  merger  as  result  of  consolidation,  63. 
what  is  a  connecting  or  continuous  line,  29. 
what  statutory  provisions  conditions  precedent  to  consolida- 
tion, 55. 
what  statutory  provisions  not  conditions  precedent  to  consolida- 
tion, 56. 
whether  authority  to  consolidate  must  be  expressly  conferred 

upon  all  consolidating  corporations,  27. 
whether  continuous  line  may  be  formed  by  leased  road,  29. 
whether  power  to  consolidate  gives  power  to  sell  and  vice  versa, 
28. 
(6)    Sales. 

relating  to  sales  of  railroads,  146. 
(c)    Leases. 

authorizing  lease  to  foreign  corporation,  253. 
authorizing  railroad  leases,  181. 
concerning  leases  of  connecting  lines,  185. 
not  authorizing  railroad  leases,  183. 

866 


INDEX 

CONSTRUCTION  ON  ST  AT  VTES  — continued, 
power  to  lease  unfinished  road,  184. 
power  to  make  agreement  for  lease,  184. 
prescribing  method  of  adopting  railroad  leasesj  194. 
rule  of,  authorizing  railroad  leases,  181. 

(d)  Stockholding. 

authorizing  corporate  stockholding,  273. 

(e)  Combinations. 

federal  anti-trust  statute^  386-404. 
State  anti-trust  statutes,  425-444. 
CONTRACT, 

charter,  between  State  and  corporators,  17. 

grant  of  power  to  consolidate  is  not,  24. 

liability  of  lessor  upon,  of  lessee,  222. 

outstanding,  does  not  prevent  legislature  from  authorizing  consoli- 
dation, 19. 

power  of  Congress  under  commerce  clause  to  legislate  concerning 
ufTccting  interstate  commerce,  379. 

power  of  Congress  under  commerce  clause  to  legislate  concerning, 
under  State  laws,  379. 

special,  of  constituent  corporation  assumed  by  consolidated  corpo- 
ration, 81. 
CONTRACTS  IN  RESTRAINT  OF  TRADE, 

connection  between,  and  combinations,  335. 

conventional,  are  ancillary  agreements,  334. 

definition  of,  334. 

development  of  law  of,  335. 

do  not  furnish  direct  test  of  validity  of  combination,  337. 

modern  use  of  phrase,  336. 

nature  of,  334. 

test  of  reasonableness  of,  335. 

use  of  phrase,  in  federal  anti-trust  statute,  387. 
CONTROL, 

definition  of,  294. 

distinction  between,  and  community  of  interest,  296. 

distinction  between,  and  consolidation,  15,  297. 

distinction  between,  of  corporation  and,  of  property,  295. 

nature  of,  5. 

no  implied  power  to  purchase  stock  for,  298. 

phases  of,  294. 

power  to  purchase  stock  to  obtain,  298. 

remedies     of     minority     stockholders    of    controlled     corporation, 
301. 

status  of  corporation  as  controlling  stockholder,  299. 

trust  relation  of  controlling  corporation  to  minority  stockholders, 
300. 
CONTROLLING  CORPORATION.     (Sec  Control.) 

867 


INDEX 

CONTROL  OF  THE  MARKET, 

distinction  between,  and  restriction  of  competition,  356. 

meaning  of  phrase,  356. 

no  limit  of  territory  prescribed,  357. 

rule  of  public  policy  concerning,  352. 

use  of  phrase,  350. 

what  are  "useful  commodities,"  358. 
CONVERTIBLE  BONDS, 

rights  of  holder  of,  upon  consolidation,  8L 
COPYRIGHTS, 

application  of  federal  anti-trust  statute  to  combinations  under,  400. 

are  guosi-monopolies,  331. 
CORPORATE  COMBINATIONS, 

by  means  of  holding  corporations,  310,  323. 

by  means  of  purchasing  corporation,  310,  318. 

definition  of  phrase,  306. 

formation  of,  310. 

injunction  not  substitute  for  quo  warranto  against,  374. 

issue  of  stock  for  good-will  in  formation  of,  320. 

issue  of  stock  for  property  in  formation  of,  319. 

over- valuation  of  property  acquired  by  issue  of  stock,  321. 

power  of  vendor  corporations  to  sell  property  for  stock,  322. 

quo  warranto  against,  372. 
CORPORATE  PROPERTY, 

effect  of  sale  of  entire,  117. 

exchange  of,  for  stock  in  another  corporation,  118-122,  281. 

lease  of  entire,  of  losing  corporation,  167. 

lease  of  entire,  of  prosperous  corporation,  166. 

sale  of  entire,  by  directors,  112. 

sale  of  entire,  by  unanimous  consent,  109. 

sale  of  entire,  of  losing  corporation  by  majority  vote,  111. 

sale  of  entire,  of  prosperous  corporation,  by  majority  vote,  110. 
(See  also  Corporation.) 
CORPORATE  STOCKHOLDING, 

collateral  trust  bonds,  287  a. 

construction  of  constitutional  prohibitions  against,  274. 

construction  of  statutes  authorizing,  273. 

corporation  has  right  to  vote  stock,  287. 

corporation  liable  for  assessments  upon  intra  vires  holdings,  287. 

distinction  betw'een  control  and  community  of  interest,  296. 

distinction  between  control  of  corporation  and  control  of  property, 
295. 

English  rule  as  to  necessity  for  statutory  authority,  265. 

expediency  of  purchase  immaterial,  269. 

incidental  power  to  acquire  stocks,  in  general,  275. 

incidental  power  to  invest  in  stocks,  276. 

incidental  power  to  take  stock  as  collateral,  278. 

868 


INDEX 

CORPORATE  STOCKHOLDING  —  continued, 

incidental  power  to  take  stock  for  debt,  277. 

incidental  power  to  take  stock  in  connection  with  consolidation  or 
purchase,  279. 

incidental  power  to  take  stock  in  exchange  for  corporate  assets, 
281. 

incidental  power  to  take  stock  upon  reorganization,  280. 

incidents  of  ownership  attach  to  intra  vires  holdings,  287. 

liability  for  assessments  upon  ultra  vires  holdings,  289. 

meaning  of  term  "control,"  294. 

mere  assumption  of  power  to  hold  stocks  of  no  effect,  270. 

miscellaneous  instances  of  incidental  power,  282. 

nature  of  holding  corporations,  285. 

necessity  for  statutory  authority  to  purchase  stock,  264,  265. 

necessity  for  statutory  authority  to  subscribe  for  stock,  266. 

outline  of,  5. 

phases  of  control,  294. 

power  of  corporation  to  acquire  and  hold  its  own  stock,  283  a. 

power  to  purchase  stock  to  obtain  control,  298. 

power  to  subscribe  for  stock  in  foreign  corporation,  272. 

presumption  of  power  to  hold  stock,  283. 

purchases  through  trustees  or  agents,  267. 

remedies  in  case  of  ultra  vires,  293. 

remedies  of  minority  stockholders  of  controlled  corporation,  301. 

rights  of  foreign  corporation  as  stockholder,  286. 

rule  requiring  statutory  authority  cannot  be  evaded  by  indirection, 
267. 

similar  nature  of  corporations  immaterial,  268. 

status  of  corporation  as  controlling  stockholder,  299. 

status  of  corporation  holding  stock,  284. 

statutes  authorizing,  271. 

statutory  authority  necessary  to  purchase  stock,  264,  265. 

subscriptions  through  trustees  or  agents,  267. 

to  prevent  competition,  292. 

trust  relation  of  controlling  corporation  to  minority,  300. 

ultra  vires  contracts  for  purchase  of  stock,  290. 

validity  of  collateral  contracts,  290. 

validity  of  independent  contracts,  291. 

what  incidents  of  ownership  attach  to  ultra  vires  holdings,  288. 
CORPOR.\TION, 

applicability  of  law  of  con.spiracies  to,  326. 

charter  of,  measure  of  powers,  17. 

citizenship  of,  101  n. 

definition,  1. 

distinction  between  acts  ultra  i-ires  the,  and  acts  ultra  vires  the  ma- 
jority, 151. 

distinction  between  control  of,  and  control  of  property,  295. 

8G9 


CORPORATION  —  continued, 

distinction  between  rules  of  public  policy  applicable  to  private  and 

5wasi-public,  351. 
in  formation  of  trust,  State  regards  acts  of  stockholders  as  acts  of, 

313. 
lease  for  longer  term  than  existence  of,  may  be  valid,  201. 
may  exist  without  property,  117. 
nature  of  relations  of,  1-6. 

power  of,  to  acquire  and  hold  its  own  stock,  283  a. 
powers  and  privileges  of,  in  foreign  State,  101  n. 
proceedings  against,  under  State  anti-trust  statutes,  448. 
similar  nature  of,  does  not  affect  power  to  hold  stock,  268. 
status  of,  as  controlling  stockholder,  299. 
status  of,  as  stockholder,  284. 

status  of,  created  by  action  of  different  States,  101  n. 
status  of  foreign,  101. 

trust  invalid  as  involving  partnership  of,  314. 
trust  relation  of,  as  controlling  stockholder,  300. 
trustee  of  property  for  creditors,  87. 
violating  State  anti-trust  statutes  forfeits  charter,  448. 
when  receiver  may  be  appointed  to  follow  assets  of,  125. 
(See  also   Consolidation;    Foreign  Corporation;    Interstate  Con- 
solidation; Sales  of  Railroads;  Leases  of  Railroads;  Cor- 
porate Stockholding;    Combinations.) 
COVENANTS  IN  RAILROAD  LEASES, 
assumption  of  interest  payments,  204. 
dependent  and  independent  contracts,  203 
miscellaneous,  209. 
not  to  assign,  206. 
to  keep  property  insured,  209. 
to  maintain  and  increase  business,  209. 
to  make  repairs,  207. 
to  pay  assessments,  205. 
to  pay  damages  and  defend  suits,  208. 
to  pay  rent,  204. 
to  pay  taxes,  205. 

to  pay  taxes,  for  sole  benefit  of  lessor,  205. 
what  constitutes  breach  of  covenant  not  to  assign,  206. 
what  constitutes  necessary  repairs  within  covenant,  207. 
(See  also  Leases  of  Railroads.) 
CREDITORS, 

(a)    Consolidation. 

consolidated  corporation  directly  liable  to,  of  constituents,  79- 

82. 
corporation  trustee  of  property  for  benefit  of,  87. 
estoppel  of,  to  deny  regularity  of  consolidation,  96. 
remedies  at  law  of,  of  constituent  corporations,  86. 

870 


INDEX 

CREDITORS  —  continued, 

remedies  in  equity  of,  of  constituent  corporations,  87. 

remedy  of,  against  constituent  corporation,  if  not  dissolved,  88. 

rights  of,  not  impaired  by  consolidation,  19. 

rights  of,  of  constituent  corporations  not  impaired  by  stipula- 
tions in  consolidation  agreement,  79. 
(6)    Sales. 

actions  at  law  of,  in  case  of  fraudulent  sale,  12.5. 

equitable  remedies  of,  in  ca.se  of  fraudulent  .sale,  125. 

may  sue  directly  vendee  upon  assumption  clau.se,  123. 

mortgage  by  vendee  takes  priority  over  claims  of,  of  vendor,  126. 

of  vendor,  cannot  look  to  vendee  unless  debts  are  assumed  or 
imposed  by  statute,  163. 

remedies  of,  against  consideration  for  fraudukM^t  .sale,  125. 

remedies  of,  in  case  of  fraudulent  conveyances,  125. 

remedies  of.  upon  as.sumption  clause,  in  contract  of  sale,  125. 

vendee  generally  not  liable  for  debts  of  vendor,  123. 

when,  entitled  to  appointment  of  receiver  to  follow  corporate 
assets,  125. 

when,^nay  charge  stockholders  of  vendor  corporation,  125. 

(c)  Corporate  Stockholding. 

remedies  of,  when  corporation  acquires  its  own  stock,  283  a. 

(d)  Combinations. 

illegality  of  combination  no  defence  to  actions  by,  370. 
(See    also    Federal    Anti-tru.st    St.vtute;     Obligations;     Pending 

Suits;    Remedies;    St.\te  Anti-trust  St.\tutes.) 
CRIMINAL  PROCEEDINGS, 

under  federal  anti-trust  statute,  407. 
under  State  anti-trust  statutes,  446. 


D 
DAMAGES, 

covenant  to  pay,  in  railroad  leases,  208. 

recoverable  under  federal  anti-trust  statute,  409. 

recoverable  under  State  anti-trust  statutes,  449. 
DEALERS,  ai)plication  of  rule  of  public  policy  to  associations  of,  362. 
DEBT, 

incidental  power  to  take  stock  as  security  for,  278. 

incidental  power  ta  take  stock  in  satisfaction  of,  277. 
DEBTS.     (See  Obligations.) 
DE  FACTO  CORPOR.\TION, 

can  only  exist  where  de  jure  corporation  might  be  created,  17,  92. 

elements  necessary  to  form,  92. 
DE  FACTO  CONSOLIDATED  CORPORATION, 

as  a  result  of  an  irregular  consolidation,  94. 

creditors  of,  estopped  from  attacking  regularity  of  organization,  96. 

"871 


INDEX 

DE  FACTO  CONSOLIDATED  CORPORATION —  con^mwed, 
estoppel  to  deny  regularity  of  organization,  96. 
existence  generally  cannot  be  collaterally  attacked,  94. 
under  Ohio  statute,  29. 
who  may  attack  existence  of,  95. 
DEFENCES. 

(See    Acquiescence;     Estoppel;     Procedure;     Remedies;     Stock- 
holders.) 
DEFINITIONS, 
(o)    Consolidation. 

"  consolidation,"  7  n. 
"corporation,"  1. 
"merger,"  11. 
"  universitatis  juris,"  10. 
(6)    Sales. 

"  corporate  franchises,"  133. 
"franchise,"  130. 

"franchise  of  corporate  existence,"  131. 
"  franchises  of  railroad  company,"  133. 

(c)  Leases. 

"perpetuity,"  187. 
"railroad  lease,"  175. 
"trackage  contract,"  255. 

(d)  Corporate  Stockholding. 

"community  of  interest,"  296. 

"control,"  294. 

"holding  corporation,"  285. 

(e)  Combinations. 

"association,"  303. 
"civil  conspiracy,"  324. 
"combination,"  302. 
"commerce,"  393. 
"conspiracy,"  324. 
"  contract  in  restraint  of  trade,"  334. 
"contract  in  restraint  of  trade"  (in  modern  use),  336. 
"  control  of  the  market,"  356. 
"corporate  combination,"  306. 
"criminal  conspiracy,"  324. 
"engrossing,"  358  n. 
"forestalling,"  358  n. 
"good-will,"  320. 
"manufacture,"  393. 
"monopolize,"  389. 
"monopoly,"  .329. 

"monopoly  "  (in  modern  use),  332,  389. 
"police  power,"  420. 
"pools,"  308. 
872 


INDEX 

DEFINITIONS  —  continued, 

"public  policy,"  338. 

"regrating,"  358  n. 

"right  to  contract,"  419. 

"  trade  or  commerce  among  the  several  States,"  390. 

"trust,"  304. 
DELAWARE, 

(a)  Consolidation. 

consolidation  appraisal  statute,  .57. 

statute    authorizing    consolidation    of     business    corporations, 

23  n. 
statute  authorizing  consolidation  of  railroads,  22  n. 
statutes  prescribing  method  of  consolidating,  52  n. 

(b)  Corporate  Stockholding. 

statutes  authorizing  corporate  stockholding,  271  n. 
DELEGATION  OF  POWERS, 

consolidation  without  legislative  authority,  involves  unlawful,  18. 

trust  invalid,  as  involving,  315. 

unauthorized  sale  of  franchise  involves  unlawful,  138. 
DEPENDENT  AND  INDEPENDENT  CONTRACTS, 

in  connection  with  railroad  leases,  203. 
DIAMOND  MATCH  COMPANY,  formation  and  purposes  of,  347. 
DIRECTORS, 

(a)  Consolidation. 

not  liable  to  dissenting  stockholder  in  case  of  illegal  consolida- 
tion, 46. 

(b)  Sales. 

have  no  power  to  authorize  sale  of  railroad,  149. 

have  no  power  to  sell  entire  property  of  corporation  not  insolvent, 

112. 
have  power  to  assign  property  of  insolvent  corporation,  112. 
ratification  by  stockholders  of  .sale  by,  113. 
when  same,  in  vendor  and  vendee  companies,  sale  prima  facie 

fraudulent,  124. 

(c)  Leases. 

cannot  lease  railroad  unless  expressly  authorized,  188. 
lease  by  directors  may  be  voidable,  168. 

lease  by,  to  corporation  in  which,  are  interested  voidable,  248. 
DISSENTING  STOCKHOLDERS.     (See  Stockholders.) 
DISSOLUTION, 

eflFect   of   voluntary,   of   combination    pending    proceedings    under 

federal  an ti- trust  statute,  411. 
sale  of  entire  property  does  not  effect,  of  corporation,  117. 
sale  of  railroad  and  franchises  does  not  effect,  of  railroad  company, 

152. 
sale  of  railroad   and   franchises,   including  franchi.se  of  corporate 
existence,  may  effect,  152. 

873 


DIVIDENDS, 

liability  of  consolidated  corporation  for,  upon  preferred  stock  of 

constituents,  81. 
whether  consolidated  corporation  can  declare,  out  of  earnings  of 

constituent  before  consolidation,  77. 

E 

EFFECT  OF  CONSOLIDATION, 

as  general  rule,  creation  of  distinct  corporation,  60. 

cases  of  absorption  or  merger,  63. 

cases  showing  creation  of  distinct  corporation,  62. 

depends  upon  consolidation  act,  59. 

fusion,  merger  or  continued  existence,  58. 

interstate  upon  status  of  constituent  corporations,  102. 

merger  and  continuance  of  corporations,  61. 

of  unlawful,  9.3. 

upon  pending  suits,  89. 

upon  stockholders  of  constituent  companies,  64. 
(See    also    Consolidation;     Consolidated    Corporation;     Pending 

Suits.) 
EMINENT  DOMAIN, 

lessor  corporation  retains  right  of,  210. 

power  of  consolidated  corporation  to  exercise  right  of,  76. 

whether  right  of,  passes  to  vendee  corporation  upon  sale  of  railroad, 
159. 

when  may  be  exercised  by  lessee,  210. 
EMPLOYEES, 

application  of  federal  anti-trust  statute  to  combinations  of  railroad, 
398. 

lessor  liable  to,  of  lessee  for  breach  of  statutory  or  primary  obliga- 
tions, 220. 

of  lessee  corporation  generally  cannot  look  to  lessor,  220. 

of  lessee  corporation,  must  look  to  it  for  damages,  220. 

remedies  of,  against  licensee  company  under  trackage  contract,  263. 

remedies  of,  against  proprietary  company  under  trackage  contract, 
263. 
(See    also    Leases    of    Railroads;     Lessee   Corporation;     Lessor 

Corporation.) 
ENGLAND, 

amalgamation  statute,  12. 

appraisal  statute  applicable  in  case  of  transfer  for  stock,  121  n. 

statute  concerning  issue  of  stock  for  property,  319  n. 

statute  concerning  railroad  leases,  180  n. 
ENGROSSING,  definition  of,  308  n. 
EQUITABLE  LIENS.     (See  Liens.) 
EQUITABLE  REMEDIES.     (See  Remedies.) 

874 


EQUITY  RULE, 

of  federal  courts  imposing  conditions  upon  plaintiff  stockholder,  Ho. 
ESTOPPEL, 

against  de  facto  consolidated  corporation,  96. 

defence  of,  involves  both  knowledge  and  delay,  IIG. 

when  a  defence  to  stockholder's  action  to  prevent  con.solidation,  45. 

when  a  defence  to  stockholder's  action  to  prevent  sale  of  corporate 

property,  116. 
when  a  defence  to  stockholder's  action  to  prevent  sale  of  railroad,  15U. 
when,  operates  against  subscriber  of  constituent  corporation,  96. 
when,  operates  against  constituent  corporations,  96. 

(See  also  Acquiescence;    Remedies;   Stockholders.) 
EVIDENCE, 

(a)    Consolidation. 

consolidated  corporation,  bound  by  admissions  of  constituents 

regarding  obligations,  86. 
consolidation,  how  proved,  91. 

existence  of  competition,  must  be  established  by,  37. 
necessary  to  dissolve  injunction  granted  dissenting  stockholder, 

48. 
of  consolidation,  statutory  provision,  91  n. 
(6)    Combinations. 

in  proceedings  under  federal  anti-trust  statute,  412. 
in  proceedings  under  State  anti-trust  statutes,  450. 
of  unlawful  combination,  375. 
EXCHANGE  OF  CORPORATE  PROPERTY  FOR  STOCK, 
appraisal  of  stock  of  dissenting  stockholders,  121. 
distinction  between,  and  sale,  118. 
effect  of  execution  of  ultra  vires  contract  for,  122  a. 
incidental  power  to  take  stock  upon,  281. 
infringement  of  rights  of  dissenting  stockholders,  120. 
objection  of  idtra  vires  obviated  by  distribution  of  stock  to  stock- 
holders, 119. 
payment  for  shares  of  dis.senting  stockholders,  121. 
remedies  of  dissenting  stockholder.s  in  case  of,  122  b. 
stock  received  belongs  primarily  to  corporation,  122. 
transfer  of  entire  corporate  property  without  unanimous  consent 

requires  monetary  consideration,  118. 
whether  stock  having  established  market  value  can  be  taken,  120. 
without  legislative  authoritj^  ultra  vires,  119. 
EXCHANGES, 

not  in  violation  of  federal  anti-trust  statute,  395. 
EXCLUSIVE  PRIVILEGES, 

charters  do  not  confer,  unless  clearly  expressed  133. 
for  .selling  gas,  pas.ses  to  consolidated  corporation,  73. 
grants  of,  as  constituting  monopolies,  331  n. 
(See  also  Franchises.) 

875 


INDEX 

EXECUTION, 

indispensable  property  of  quasi-public  corporation  cannot  be  taken 
on,  127. 

of  trackage  contracts,  257. 
EXECUTION  OF  RAILROAD  LEASES. 

(See  Adoption  of  Railroad  Leases.) 
EXEMPTION, 

from  jury,  road  and  military  duty  passes  to  consolidated  corpora^ 
tion,  73. 

invalidity  of,  in  State  anti-trust  statutes,  421. 

necessary  to  relieve  lessor  from  primary  obligations,  217. 

necessary  to  relieve  lessor  from  statutory  obligations,  216. 

whether  necessary  to  relieve  lessor  under  authorized  lease,  219. 
EXEMPTIONS  FROM  TAXATION, 

improvements  and  betterments  follow  property,  72. 

term  "immunities"  generally  includes,  160. 

what  language  carries,  upon  sale  of  railroad,  160. 

whether,  pass  to  consolidated  corporation,  72. 

whether,  pass  to  vendee  corporation  upon  purchase  of  railroad,  160. 
EXPEDITION  ACT, 

as  supplementing  federal  anti-trust  statute,  384. 

provisions  of,  384. 
EXPRESS  COMPANIES, 

constitutional  prohibitions  against  consolidation  of  competing,  39. 


FACILITIES  FOR  COMMERCE, 

combination  imposing  restraints  upon,  not  in  violation  of  federal 
anti-trust  statute,  394. 
FEDERAL  ANTI-TRUST  STATUTE, 
actions  for  treble  damages  under,  409. 
analysis  of,  377. 

application  of,  to  combinations  under  copyrights,  400. 
application  of,  to  combinations  under  patents,  399. 
application  of,  to  combinations  under  secret  processes,  401. 
application  of,  to  contracts  concerning  market  quotations,  402. 
applies  only  to  restraints  upon  interstate  commerce,  391. 
applies  to  combinations  of  carriers,  398. 
applies  to  combinations  of  railroad  employees,  398. 
applies  to  continuing  combinations,  404. 
applies  to  railroad  combinations,  398. 

combination  controlling  disposition  and  distribution  violates,  393. 
combination  must  have  direct  effect  upon  interstate  commerce,  392. 
combination  of  distributors  violates,  393. 
combination  of  manufacturers  not  in  violation  of,  393. 

876 


INDEX 

FEDERAL  ANTI-TRUST  STATUTE  — continued, 

constitutionality  of,  379-382. 

construction  of,  386-404. 

criminal  proceedings  under,  407. 

damages  recoverable  under,  409. 

device  of  holding  corporation  may  be  illegal  under,  397. 

distinction  between  manufacture  and  commerce,  393. 

effect  of  voluntary  dissolution  pending  proceedings,  411. 

enforcement  of  forfeitures  by  government,  408. 

evidence  in  proceedings  under,  412. 

exchanges  not  in  violation  of,  395. 

form  of  combination  immaterial,  397. 

illegality  of  combination  must  be  shown,  412. 

immunity  proviso,  385,  413. 

inapplicable  to  State's  monopoly,  403. 

inapplicable  to  State  regulations,  403. 

indictments  under,  407. 

injunctive  relief  under,  remedy  of  government  only,  406. 

invalidity  under,  as  a  ground  of  collateral  attack,  405. 

is  constitutional,  382. 

limitations  of  actions  under,  410. 

meaning  of  phrase  "  trade  or  commerce  among  the  several  States,"  390. 

meaning  of  term  "monopolize,"  389. 

not  in  conflict  with  interstate  commerce  act,  398  n. 

not  retroactive,  404. 

object  of,  378. 

parties  to  proceedings  under,  406,  407,  409. 

pleadings  in  actions  to  recover  treble  damages  under,  409. 

previous  legality  of  combination  immaterial,  388. 

reasonableness  of  restraint  imposed  by  combination  immaterial,  388. 

remedies  under,  406-409. 

restraint  upon  commerce  must  be  direct,  392-395. 

restraint  may  be  imposed  upon    those  engaged  in  interstate  com- 
merce by  those  not  engaged  therein,  396. 

restraints  upon  facilities  for  commerce  not  in  violation  of,  394. 

statute,  376. 

title  of,  386. 

use  of  phrase,  contract  in  restraint  of  trade,  387. 

voluntary  associations  for  mutual  benefit  not  in  violation  of,  395. 
FEDERAL  COURTS,  equity  rule  of,  applicable  in  stockholders'  actions, 
115. 

(See  also  Citizenship.) 
FIFTH  AMENDMENT,  provisions  of,  420  n. 
FLORIDA, 

(a)    Consolidation. 

statute  authorizing  consolidation  of  competing  lines,  32  n. 
statute  authorizing  consolidation  of  railroads,  22  n. 

877 


INDEX 

FLORIDA  —  continued, 

(b)  Sales. 

statute  authorizing  sales  of  railroads,  145  n. 

(c)  Leases. 

statute  authorizing  railroad  leases,  145  n,  180  n. 

(d)  Stockholding. 

statutes  authorizing  corporate  stockholding,  271  n. 

(e)  Combinations. 

anti-trust  statute,  414  n. 
FORECLOSURE, 

extinguishes  claims  of  general  creditors,  83. 

of  mortgage  executed  by  interstate  consolidated  corporation,  107. 
FOREIGN  CORPORATION, 

(a)  Consolidation. 

consolidation  with,  when  authorized,  99. 

construction  of  statutes  authorizing  consolidation  with,  100. 

status  of,  101  n. 

(b)  Sales. 

purchasing  railroad,  status  of,  164. 

remedies  of  State  against,  in  case  of  unauthorized  purchase  of 
railroad,  156. 

(c)  Leases. 

authority  to  lease  to,  252. 

railroad  lease  to,  must  be  authorized  by  State  where  road  is 

located,  252. 
status  of,  leasing  railroad,  254. 

(d)  Stockholding. 

power  to  subscribe  for  stock  in,  272. 

rights  of,  as  stockholder  in  domestic  corporation,  286. 

right  of,  to  acquire  stock  in  domestic  corporation,  286. 

(e)  Combinations. 

applicability  of  State  anti-trust  statutes  to,  436. 
violating  State  anti-trust  statutes  ousted  from  State,  448. 
FORESTALLING,  definition  of,  358  n. 
FORFEITURES, 

enforcement  of,  under  federal  anti-trust  statute,  408. 

under  State  anti-trust  statutes,  447. 
FORM  OF  LEASE, 

habendum,  197. 

premises,  197. 

reddendum,  197. 

term,  197. 

(See  also  Leases  of  Railroads.) 
FOURTEENTH  AMENDMENT, 

does  not  conflict  with  police  power,  420. 

guarantees  right  to  contract,  419. 

provisions  of,  420  n. 

878 


FOURTEENTH  AMENDMENT  —  continued, 

State  anti-trust  statutes  as  class  legislation,  421. 

validity  of  State  anti-trust  statutes  tested  by,  419-421. 
FRANCHISE  OF  CORPORATE   EXISTENCE, 

belongs  to  stockholders,  131. 

nature  of,  131. 

transferability  of,  132. 
FRANCHISES, 

definition  of,  130. 

distinction  between  sale  of,  and  sale  of  railroad,  142. 

essential,  pass  to  lessee  corporation,  225. 

essential,  pass  upon  sale  of  railroad,  157. 

essential  elements  of,  130. 

exclusive,  are  ^ua.si-monopolies,  331. 

franchise  of  corporate  existence,  131. 

kinds  of,   130. 

leases  of,  173. 

legislative  authority  essential  to  purcha.se  of,  139. 

legislative  authority  essential  to  sale  of,  135. 

municipality  cannot  grant,  133. 

of  ^uasi-public  corporations,  133. 

of  railroad  companies,   133. 

to  construct  and  operate  street  railway,  133. 

transferability  of  corporate,  134. 

transferability  of  franchise  of  corporate  existence,  132. 

ultra  vires  sales  of,  139  a. 

unauthorized  sale  of,  against  public  policy,  137. 

unauthorized  sale  of,  ultra  vires,  136. 

unauthorized  sale  of,  unlawful  delegation  of  powers,  138. 
FRANCHISES    OF  CORPOR.\TIONS, 

distinction  between,  and  powers,  133. 

distinction  between,  and  privileges,  133. 

fundamental  nature  of  transfer  of,  134. 

nature  of,  133. 

transferability  of,  134. 

(See  also  Franchises.) 
FRAUD, 

exchange  of  property  for  stock,  constructively  fraudulent,  124. 

in  consolidation  agreements,  98. 

in  sales  of  property  of  private  corporation,  124. 

remedies  of  creditors  in  case  of,  125. 

sale  in  which  directors  are  personally  interested  prima  facie  fraudu- 
lent, 124. 

what  transfers  of  corporate  propcrtj'  are  fraudulent,  124. 
FUSION, 

of  corporations,  as  a  result  of  consolidation,  S,  58. 
(See  also  Consolidation.) 

879 


INDEX 

G 

GAS  COMPANIES, 

associations  of,  365. 
GEORGIA, 

(o)    Consolidation. 

constitutional  provision  against  consolidation  construed,  35. 

constitutional  provision  against  consolidation  of  competing  cor- 
porations, 32  n. 

statutes  authorizing  consolidation  of  railroads,  22  n. 
(6)    Sales. 

statutes  authorizing  sales  of  railroads,  145  n. 

(c)  Leases. 

statute  authorizing  railroad  leases,  145  n,  180  n. 
statute  concerning  terms  of  railroad  leases,  193  n. 
statute  imposing  liability  upon  lessee  corporation,  230  n. 

(d)  Stockholding. 

statutes  authorizing  corporate  stockholding,  271  n. 

(e)  Combinations. 

anti-trust  statute,   414  n. 
GLUCOSE  COMBINATION,  nature  and  formation  of,  348. 
GOOD-WILL, 

definition  of,  320. 

issue  of  stock  for,  in  formation  of  corporate  combination,  320. 
GUARANTEE, 

of  ultra  vires  lease  void,  247. 

(See  also  Leases  of  Railroads.) 


H 
HOLDING  CORPORATION, 

as  a  device  to  form  combination  may  contravene  federal  anti-trust 

statute,  397. 
corporate  combination  by  means  of,  310,  323. 
nature  of,  5,  285. 
peculiar  value  of,  5,  285. 
rights  of  foreign,  286. 
whether  control  through,  amounts  to  consolidation,  36. 


I 

IDAHO, 

(a)    Consolidation. 

constitutional  provision  defining  status  of  interstate  consolidated 

corporation,  101  n. 
statute  authorizing  consolidation  of  railroads,  22  n. 
statutes  prescribing  method  of  consolidating,  52  n. 

880 


INDEX 

IDAHO  —  continued, 
(6)    Sales. 

statutes  authorizing  sales  of  railroads,  145  n. 

(c)  Leases. 

statutes  authorizing  leases  of  railroads,  145  n. 

(d)  Stockholding. 

statutes  authorizing  corporate  stockholding,  271  n. 
ILLINOIS, 

(o)    Consolidation. 

constitutional    provision    against    consolidation    of    competing 
corporations,  32  n. 

public  policy  of,  regarding  consolidation  of  domestic  and  foreign 
railroads,  21. 

public  policy  regarding  consolidation  of  non-competing  rail- 
road, 21. 

statute  authorizing  consolidation  of  business  corporations,  23  n. 

statute  authorizing  consolidation  of  railroads,  22  n. 

statute  providing  that  consolidated  corporation  cannot  change 
location  of  railroad,  77  n. 

statute  prescribing  method  of  consolidating,  52  n. 
(6)    Sales. 

statutes  authorizing  sales  of  railroads,  145  n. 

statute  prescribing  method  of  authorizing  sale  of  railroads,  148  n. 

(c)  Leases. 

construction  of  statute  of,  authorizing  railroad  leases,  182. 

(d)  Stockholding. 

statute  authorizing  corporate  stockholding,  271  n. 

(e)  Combinations. 

anti-trust  statutes,  414  n. 

certain  anti-trust  statutes  unconstitutional,  421. 
IMMUNITY  PROVISO, 

as  supplementing  federal  anti-trust  statute,  385. 

interpretation  of,  413. 

provisions  of,  385. 
IMPROVEMENTS, 

whether  exempt  from  taxation,  72. 

whether  lessee  can  recover  for,  made  under  idtra  vires  lease,  245. 
INCIDENTAL  POWER  TO  ACQUIRE  STOCK, 

as  collateral,  278. 

for  investment,  276. 

in  connection  with  consolidation  or  purchase,  279. 

in  exchange  for  corporate  assets,  281. 

in  general,  275. 

in  satisfaction  of  debt,  277. 

miscellaneous  instances,  282. 

upon  reorganization,  280. 

(See  also  Corporate  Stockholding.) 

881 


INDEX 

INDEPENDENT  CONTRACTS, 

remedies  upon,  of  illegal  combination,  369. 
validity  of,  connected  with  ultra  vires  stockholding,  291. 
(See  also  Collateral  Attack.) 
INDIANA, 

(a)    Consolidation. 

statutes  authorizing  consolidation  of  railroads.  22  n. 
statute  prescribing  method  of  consolidating,  52  n. 
(6)    Sales. 

statutes  authorizing  .sales  of  railroads,  14.5  n. 
statute  conferring  powers  on  corporation  purchasing  railroad, 
158  n. 

(c)  Leases. 

construction  of,  statute  authorizing  connecting  railroads  to  make 
contracts,  183. 

(d)  Stockholding. 

statutes  authorizing  corporate  stockholding,  271  n. 

(e)  Combinations. 

anti-trust  .statutes,  414  n. 
INDICTMENTS, 

under  federal  anti-trust  statute,  407. 
under  State  anti-trust  statutes,  446. 
INDISPENSABLE  PROPERTY, 
leases  of,  171. 
of  guasi-public  corporation  cannot  be  alienated  without  statutory 

authority,  127. 
of  ^wasi-public  corporation  cannot  be  taken  on  execution  without 

statutory  authority,  127. 
of  railroad  cannot  be  sold  without  statutory  authority,  143. 
test  of  indispensability,  128. 
INJUNCTION, 

remedy  of  dissenting  stockholders  by,  in  case  of  invalid  consolida- 
tion, 40,  46,  48. 
remedy  of  State  by,  in  case  of  ultra  vires  consolidation,  40. 
remedy  of  State  by,  in  case  of  ultra  vires  lease,  251. 
remedy  of  State  by,  in  case  of  unlawful  combinations,  374. 
under  federal  anti-trust  statute,  granted  at  instance  of  government 
only,  406. 

(See  also  Remedies.) 
INSURANCE  COMBINATIONS, 

application  of  State  anti-trust  statutes  to,  435. 
INTERCORPORATE  RELATIONS, 

distinction  between  relation  of  lessor  and  lessee  and  other,  176. 
distinction    between    relation    of  vendor  and    vendee    and    other, 

141. 
nature  of,  1. 
outline  of  consolidation,  2. 

882 


INTERCORPORATE  RELATIONS  —  continued, 

outline  of  corporate  stockholding,  5. 

outline  of  evolution  of  combination,  6. 

outline  of  relations  of  lessor  and  lessee,  4. 

outline  of  relations  of  vendor  and  vendee,  3. 
INTERSTATE  COMMERCE, 

federal  anti-trust  statute  applies  only  to  restraints  upon,  391. 

prohibitions  of  consolidation  not  regulations  of,  38. 

restraint  upon,  must  be  direct  to  violate  federal  anti-trust  statute, 
392-395. 

restraint  may   be  imposed    upon  those  engaged  in,  by  those  not 
engaged  therein,  396. 

State  anti-trust  statutes  not  regulations  of,  426. 

statutes  authorizing  consolidation  not  regulations  of,  19  a. 

when  article  becomes  subject  of,  393. 

when,  begins,  393. 
INTERSTATE  COMMERCE  ACT, 

not  in  conflict  with  federal  anti-trust  statute,  398  n. 

provision  concerning  connecting  lines,  363  n. 

provision  concerning  pools,  364  n. 
INTERSTATE  CONSOLIDATED  CORPORATION, 

a  domestic  corporation  in  each  State,  101. 

citizenship  of,  106. 

duties  of,  10.5. 

foreclosure  of  mortgage  of,  107. 

jurisdiction  in  case  of  mortgage  foreclosure,  107. 

management  of,  103. 

rights  and  powers  of,  104. 

status  of,  101. 

taxation  of,  10.5. 
(See  also  Consolidated  Corporation;    Consolidation;    Interstate 

Consolidation.) 
INTERSTATE  CONSOLIDATION, 

authorization  of,  not  regulation  of  interstate  commerce,  19  a. 

effect  of,  upon  status  of  constituent  corporations,  102. 

how  authorized,  99. 
(See  also  Consolidation;    Foreign   Corporation;    Inter.state  Con- 
solidated Corpor.vtion.) 
INTRA  VIRES, 

holdings  of  stock,  incidents  of  ownership  attach  to,  287. 
(Sec  also  Corporate   Stockholding;     Ultra   Vires.) 
INVALID  CONSOLIDATION.     (See  Consolid.\tion.) 
INVALID  LEASES.     (Sec  Leases  of  Railroads.) 
INVALID  SALES. 

(See  Sales  of  Property  of  Private  Corporation.) 
INVESTMENTS, 

incidental  power  to  make  corporate,  in  stocks,  270. 

883 


INDEX 

IOWA, 

(o)    Consolidation. 

statute  authorizing  consolidation  of  railroads,  22  n. 

statute  prescribing  method  of  consolidating,  52  n. 
(6)    Sales. 

statute  authorizing  sales  of  railroads,  145  n. 

(c)  Leases. 

statute  authorizing  mortgage  of  leases,  227  n. 

statute  imposing  liability  upon  lessee  corporation,  230  n. 

(d)  Stockholding. 

statutes  authorizing  corporate  stockholding,  271  n. 

(e)  Combinations. 

anti-trust  statute,  414  n. 
IRREGULAR  CONSOLIDATION. 

(See  also  Collateral  Attack;    Consolidation.) 
IRREGULAR  LEASES.     (See  Leases  of  Railroads.) 


JUDICIAL  NOTICE, 

court  may  take,  of  geography  of  State  and  general  direction  of 

railroads,  37. 
court  will  not  take,  of  consolidation,  91. 
JURISDICTION, 

of  foreclosure  of  mortgage  of  interstate  consolidated  corporation,  107. 


K 

KANSAS, 

(a)  Consolidation. 

statute  authorizing  consolidation  of  railroads,  22  n. 
statute  prescribing  method  of  consolidating,  52  n. 

(b)  Sales. 

statute  authorizing  sales  of  railroads,  145  n. 

statute  prescribing  method  of  authorizing  sale  of  railroad,  148  n. 

(c)  Leases. 

statutes  authorizing  railroad  leases,  145  n,  180  n. 
statute  concerning  taxation  of  leased  railroad,  224  n. 
statute  prescribing  method  of  adopting  railroad  lease,  193  n. 
statute  relating  to  foreign  lessee  corporations,  254  n. 

(d)  Stockholding. 

statutes  authorizing  corporate  stockholding,  271  n. 

(e)  Combinations. 

anti-trust  statutes,  414  n. 
constitutionality  of  anti-trust  statute,  420. 
884 


INDEX 

KENTUCKY, 

(a)    Consolidation. 

constitutional  provision  against  consolidation  of  competing  cor. 
porations,  32  n. 

constitutional  provision  defining  status  of  interstate  consolidated 
corporation,  101  n. 

statute  authorizing  consolidation  of  railroads,  22  n. 

statute  authorizing  consolidation  of  business  corporations,  23  n. 

statute  prescribing  method  of  consolidating,  52  n. 
(6)    Stockholding. 

statutes  authorizing  corporate  stockholding,  271  n. 
(c)    Combinations. 

anti-trust  statute,  414  n. 

constitutional  provision  against  trusts  and  combinations,  414  n. 


LABOR  ORGANIZATIONS, 

invalidity  of  exemptions  of,  from  State  anti-trust  statutes,  421. 
(See  also  Class  Legislation;   Fourteenth  Amendment.) 
LACHES, 

as  a  defence  to  stockholder's  action  to  prevent  sale  of  corporate 
property,  116. 

of  stockholders  in  restraining  consolidation,  49. 

of  stockholders  may  prevent  attacking  invalid  railroad  lease,  192. 
(See  also  Acquiescence;    Estoppel.) 
LEASE, 

distinction  between,  and  consolidation,  14. 

nature  of,   14. 

outline  of  relations  of  lessor  and  lessee,  4. 

statute   authorizing   condemnation  of  stock  for   consolidation    not 
applicable  to,  51. 

whether,  amounts  to  consolidation,  34. 
(See  also  Leases  of  Property  of  Private  Corporations;    Leases 
OF  Property  of  Quasi- public  Corporations;  Leases  of  Rail- 
roads.) 
LEASES  OF  PROPERTY  OF  PRIVATE  CORPORATIONS, 

distinction  between,  and  leases  of  <7?/as;-public  corporations,  170. 

of  entire  property  of  prosperous  corporation,  166. 

of  entire  property  of  losing  corporation,  167. 

of  entire  property  of  losing  corporation  may  be  made  for  purposes  of 
liquidation,   167. 

power  to  lease  generally,  165. 

power  to  take  a  lease,  165. 

remedies  of  objecting  stockholders,  169. 

voidable  leases,  168. 

885 


INDEX 

LEASES  OF  PROPERTY  OF  QUASI-PUBLIC  CORPORATIONS, 

distinction  between,  and  leases  of  private  corporations,  170. 

of  indispensable  property,  171. 

of  surplus  property,  172. 
LEASES  OF  RAILROADS, 

acknowledgment,  witnesses,  etc.,  175. 

acquiescence  and  laches  may  prevent  stockholder  attacking,  192. 

allegation  and  proof  of  execution  of,  195  n. 

assent  of  stockholders  necessary,  188. 

authority  of  officers  or  agents  to  execute,  195. 

authority  to  execute,  must  be  derived  from  State  where  railroad  is 
located,  252. 

by  receiver,  238. 

consideration,  198. 

constitutional  provisions  against,  when  competing  or  parallel,  186. 

construction  of  particular,  200. 

construction  of  statutes  authorizing  leases  of  connecting  lines,  185. 

construction  of  statutes  prescribing  method  of  adopting,  194. 

construction  of  statutory  provisions  authorizing,  182. 

corporation  may  be  estopped  to  allege  irregular  execution,  196. 

covenant  not  to  assign,  206. 

covenant  to  defend  suits,  208. 

covenant  to  make  repairs,  207. 

covenant  to  pay  assessments,  205. 

covenant  to  pay  damages,  208. 

covenant  to  pay  rent,  204. 

covenant  to  pay  taxes,  205. 

delivery  of  possession  under  ultra  vires,  241. 

dependent  and  independent  contracts,  203. 

distinction  between,  and  trackage  contracts,  176,  255. 

distinction  between  relations  under,  and  other  intercorporate  rela- 
tions, 176. 

distinction  between  ultra  vires  and  irregular,  239. 

effect  of  ultra  vires,  upon  stock  subscriptions,  246. 

enforcement  of  executory  ultra  vires,  240. 

essential  elements  of,  175. 

for  longer  term  than  existence  of  corporations  may  be  valid,  201. 

formalities  attending  execution  of,  195. 

formal  parts  of,  197. 

form  of,  197. 

for  purpose  of  suppressing  competition  against  public  policy,  249. 

guarantee  of  ultra  vires,  void,  247. 

improvements  made  by  lessee  under  ultra  vires,  245. 

incidental  franchises  pass  to  lessee,  225. 

injunction  by  State,  in  case  of  ultra  vires,  251. 

joint  liability  of  lessor  and  lessee,  232. 

legislative  authority  necessary  to  make,  177. 
886 


INDEX 

LEASES  OF  RAILROADS  — contimiefl, 

legislative  authority  necessary  to  take,  178. 

lessor  cannot  avoid  primary  obligations  unless  exempted,  217. 

lessor  cannot  avoid  statutory  obligations  unless  exempted,  216. 

lessor  retains  prerogative  powers,  210. 

liability  of  lessee  for  debts  of  lessor,  233. 

liability  of  lessee  for  nuisance,  217,  231. 

liability  of  lessee  for  torts,  231. 

liability  of  lessor  for  negligent  operation  under  authorized,  219. 

liability  of  lessor  for  negligent  operation  under  unauthorized,  218. 

liability  of  lessor  for  nuisance,  217. 

liability  of  lessor  for  reconstruction  and  repairs,  223. 

liability  of  lessor  to  employees  of  lessee,  220. 

liability  of  lessor  upon  contracts  of  lessee,  222. 

liability  of  lessor  when  it  shares  in  control,  221. 

long  term,  not  perpetuities,  187. 

majority  may  authorize,  in  absence  of  controlling  statute,  189. 

meaning  of  phrase  "  terminal  facilities"  in,  200. 

miscellaneous  covenants  in,  209. 

mortgages  of,  227. 

mortgage  of  rent  charge,  213. 

obligation  of  lessee  to  perform  lessor's  public  duties,  229. 

obligation  of  lessor  to  State,  215. 

obligations  of  receiver  after  election  to  assume,  237. 

obligations  of  receiver  after  renunciation  of,  237. 

partial  invalidity  of,  202. 

place  of  execution  of,  195. 

power  to  lease  unfinished  road,  184. 

quo  warranto  in  case  of  tdtra  vires,  250. 

receiver  may  elect  to  assume  or  renounce,  235. 

receiver  may  not  abrogate,  as  between  parties,  234. 

receiver  not  assignee  of  term,  234. 

receiver's  obligations  pending  election  to  assume  or  renounce,  230. 

record  of,  195. 

recovery  of  property  after  disaffirmance  of  ultra  vires,  243. 

recovery  on  quantum  meruit  after  disaffirmance  of  ultra  vires,  244. 

remedies  of  dissenting  stockholders,  191. 

remedies  of  lessee,  228. 

remedies  of  lessor,  214. 

requisite  majority  prescribe  terms  of,  190. 

right  and  duty  of  disaffirmance  of  ultra  vires,  242. 

rights  of  lessee,  in  general,  225. 

rights  of  le.ssee  in  matter  of  tolls,  226. 

rights  of  lessor  when  entitled  to  share  of  earnings,  211. 

rights  of  stockholders  when  rent  is  payable  in  form  of  dividends,  212. 

rules  of  construction  of,  199. 

rule  of  construction  of  statutes,  181. 

887 


INDEX 

LEASES  OF  RAILROABS  —  continued, 
seals  upon,  195. 

status  of  foreign  lessee  corporation,  254. 
statutory  liability  of  lessee,  230. 
statutory  provisions  authorizing,  180. 

statutory  provisions  concerning  approval  and  execution  of,  193. 
statutory  provisions  not  authorizing,  183. 
taxation  of  leased  railroads,  224. 
to  foreign  corporations,  2.52,  253,  254. 
typical  of  leases  of  quasi-puhUc  corporations,  174. 
unauthorized,  validated  by  legislative  ratification,  179. 
voidable,  248. 
void  restrictions,  202. 
what  constitutes,  175. 

what  constitutes  breach  of  covenant  not  to  assign,  206. 
what  statutory  provisions  authorize,  to  foreign  corporations,  253. 
when  lessee  liable  for  nuisance,  217,  231. 
when  lessor  liable  for  nuisance,  217. 
whether  lessor  liable  for  negligent  operation  under  authorized  lease, 

219. 
whether  lessor  may  have  equitable  lien  upon  earnings,  211. 
whether  right  of  eminent  domain  passes  by,  210. 
whether  unanimous  consent  of  stockholders  is  necessary,  189. 
without  legislative  authority,  against  public  policy,  177. 
without  legislative  authority,  ultra  vires,  177. 
LEGAL  REMEDIES.     (See  Remedies.) 

LEGISLATION      SUPPLEMENTING      FEDERAL      ANTI-TRUST 
STATUTE, 
anti-trust  provisions  of  Wilson  Tariff  Act,  383. 
expedition  act,  384. 
immunity  proviso,  385. 
LEGISLATIVE  AUTHORITY, 
(a)    Consolidation. 

consolidation  without,  against  public  policy,  18. 

consolidation  without,  unlawful  delegation  of  powers,  18. 

consolidation  without,  ultra  vires,  17. 

for  consolidation,  how  expressed,  20. 
(6)    Sales. 

essential  to  purchase  of  franchises,  139. 

essential  to  purchase  of  railroad,  144. 

essential  to  sale  of  franchises,  135. 

essential  to  sale  of  railroad,  143. 

necessary  for  sale  of  indispensable  property  of  gwasi-public  cor- 
poration, 127. 

sale  of  franchises  without,  against  public  policy,  137. 

sale  of  franchises  without,  iiltra  vires,  136. 

sale  of  franchises  without,  unlawful  delegation  of  powers,  138. 


INDEX 

LEGISLATIVE  AUTHORITY  —  continued, 

(c)  Leases. 

lease  of  railroad  invalid  without,  177. 

necessary  to  take  a  lease,  178. 

not  necessary  for  execution  of  trackage  contract,  256. 

ratification  of  unauthorized  lease  validates  it,  179. 

to  lease  railroad,  must  be  granted  by  State  where  located,  252. 

(d)  Stockholding. 

necessary  for  corporation  to  purchase  stock,  264. 
necessary  for  corporation  to  subscribe  for  stock,  266. 
rule  in  England  as  to  necessity  for,  to  purchase  stock,  265. 
(See  also  Legislature.) 
LEGISLATURE, 

outstanding  contract  does  not  prevent,  from  authorizing  consolida- 
tion, 19. 

power  of,  to  authorize  consolidation,  19. 

power  of,  to  compel  consolidation,  44. 

power  of,  over  property  devoted  to  public  uses,  417. 

power  of,  to  prohibit  combinations  of  ^imsi-public  corporations,  417. 

power  of,  under  reserved  power,  to  change  rights  of  shareholders 
among  themselves,  4.3. 

power  of,  to  withdraw  right  to  consolidate,  in  absence  of  reserva^ 
tion,  24. 

power  of,  to  withdraw  right  to  consolidate  in  exerci.se  of  police 
power,  26. 

power  of,  to  withdraw  right  to  consolidate  in  exercise  of  reserved 
power,  25. 

presumption  of  intention  of,  as  to  succe.s.sion  by  consolidated  corpo- 
ration to  property  of  constituents,  65. 

(See  al.so  Legislative  Authority.) 
LESSEE  CORPORATION, 

acquires  incidental  franchises,  225. 

estopped  to  allege  irregular  execution  of  lease,  196. 

joint  liability  of,  and  lessor,  2.32. 

liability  of,  as  a  common  carrier,  231. 

liability  of,  for  debts  of  lessor,  233. 

liability  of,  for  failure  to  maintain  cattle  guards,  230. 

liability  of,  for  failure  to  maintain  fences,  230. 

liability  of,  for  fires,  230. 

liability  of,  for  negligence,  231. 

liability  of,  for  nuisance,  217,  231. 

liability  of,  for  performance  of  lessor's  public  duties,  229. 

liability  of,  for  torts,  231. 

liabilty  of  lessor  for  negligence  of,  under  authorized  lea.se,  219. 

liability  of  lessor  for  negligence  of,  under  unauthorized  lea.se,  218. 

liability  of  le.s.sor  upon  contracts  of,  222. 

may  surrender  iiltra  vires  lease  without  liabilitv,  211. 

889 


LESSEE   CORPORATION  — corKmued, 

must  be  expressly  authorized  to  take  lease  of  railroad,  178. 

obligation  of,  to  perform  lessor's  public  duties,  229. 

power  to  mortgage  lease,  227. 

remedies  of,  228. 

rights  of,  in  general,  225. 

rights  of,  in  matter  of  tolls,  226. 

statutory  liability  of,  230. 

when,  agent  of  lessor,  222. 

when,  liable  for  debts  of  lessor,  233. 

when,  liable  for  nuisance,  217,  231. 

when,  liable  for  taxes,  224. 

when,  may  exercise  power  of  eminent  domain  in  its  own  name,  210. 

when,  may  exercise  power  of  eminent  domain  in  name  of  lessor,  210. 

whether,   may  recover  for  improvements   made  under  ultra  vires 

lease,  45. 
LESSOR  CORPORATION, 

cannot  avoid  primary  obligations  unless  exempted,  217. 

cannot  avoid  statutory  obligations  unless  exempted,  216. 

equitable  lien  upon  earnings,  211. 

estopped  to  allege  irregular  execution  of  lease,  196. 

generally  liable  for  taxes  upon  leased  roads,  224. 

joint  liability  of,  and  lessee,  232. 

liable  for  negligent  operation  under  unauthorized  lease,  218. 

liability  of,  for  negligent  operation  of  railroad  under  authorized 

lease,  219. 
liability  of,  for  reconstruction  and  repairs,  223. 
liability  of  lessee  for  debts  of,  233. 

liability  of,  not  affected  by  fact  that  lessee  is  also  liable,  216. 
liability  of,  upon  contracts  of  lessee,  222. 
liability  of,  when  it  shares  in  control,  221. 
liability  of,  for  failure  to  fence  tracks,  216. 
liability  of,  for  failure  to  maintain  cattle  guards,  216. 
liability  of,  for  nuisance,  217. 
liability  of,  to  employees  of  lessee  for  failure  to  perform  statutory 

or  primary  duties,  220. 
may  recover  on  quantum  meruit  after  disaffirmance  of  ultra  vires 

lease,  244. 
may  recover  property  after  disaffirmance  of  lease  by  lessee,  243. 
must  be  expressly  authorized  to  lease  railroad,  177. 
not  liable  to  emploj'ees  of  lessee  for  its  negligence,  220. 
obligation  of  lessee  to  perform  public  duties  of,  229. 
obligations  of,  to  State,  215. 
power  to  mortgage  rent  charge,  213. 
primary  duties  of,  217. 
public  duties  of,  215. 
remedies  at  law  of,  214. 

890 


INDEX 

LESSOR  CORPORATION  —  continued, 
remedies  in  equity  of,  214. 
retains  prerogative  powers,  210. 
retains  right  of  eminent  domain,  210. 
rights  of,  when  entitled  to  share  of  earnings,  211. 
statutes  providing  that,  shall  be  liable  for  damages,  216  n. 
statutory  liability  of,  216. 
when  liable  for  injuries  from  fires,  216. 
when  liable  for  nuisance,  217. 
when  power  of  eminent   domain   may   be   exercised   in   name   of, 

210. 
whether,  can  recover  property  after  disaffirmance  of  ultra  rxires  lease, 
242. 
LESSOR  AND  LESSEE, 
joint  liability  of,  232. 
outline  of  relations  of,  4. 
LICENSE, 

grant  of  power  to  consolidate  is,  24. 
trackage  contract,  in  nature  of,  255. 

(See  also  Trackage  Contracts.) 
LICENSEE  COMPANY, 

liability  of,  under  trackage  contract,  to  employees,  263. 
liability  of,  under  trackage  contract,  to  third  persons,  262. 
(See  also  Trackage  Contracts.) 
LICENSOR  COMPANY.     (See  Proprietary  Company.) 
LIEN, 

equitable,  of  lessor  when  entitled  to  share  of  earnings,  211. 
effect  of  consolidation  upon  conventional  and  statutory,  84. 
effect  of  consolidation  upon  equitable,  85. 
LIMITATIONS, 

of  actions  under  federal  anti-trust  statute,  410. 
of  actions  under  State  anti-trust  statutes,  451. 
LOSING  CORPORATION, 

lease  of  entire  property  of,  167. 
sale  of  entire  property  of,  111. 
(See  also  Leases  of  Property  of  Private  Corporations;    Sales  of 

Property  of  Private  Corporations.) 
LOUISIANA, 

(a)    Consolidation. 

constitutional  provision  defining  status  of  interstate  consolidated 

corporation,  101  n. 
corporate  existence  of  consolidated  corporation  limited  to  ninety- 
nine  years,  77  n. 
statute    authorizing    consolidation    of     business    corporations, 

23  n. 
statutes  authorizing  consolidation  of  railroads,  22  n. 
statutes  prescribing  method  of  consolidating,  52  n. 

891 


INDEX 


LOUISIANA  —  continued, 
(Jo)    Combinations. 

anti-trust  statute,  414  n. 

constitutional  provision  against  combinations,  414  n. 


M 

MAINE, 

(a)    Sales. 

statute  concerning  sales  of  railroads,  145  n. 
(6)    Leases. 

statute  concerning  railroad  leases,  145  n. 

(c)  Stockholding. 

statutes  authorizing  corporate  stockholding,  271  n. 

(d)  Combinations. 

anti-trust  statute,  414  n. 
MAJORITY, 
(o)    Sales. 

Cannot  sell  entire  property  of  prosperous  corporation  for  pur- 
poses of  speculation,  110. 
distinction  between  acts  ultra  vires  the,  and  acts  ultra  vires  the 

corporation,  151. 
may  sell  entire  property  of  prosperous  corporation  for  purposes 

of  liquidation,  110. 
obligation  of,  to  minority  in  case  of  sale  of  corporate  property, 

114. 
power  of,  to  sell  entire  property  of  losing  corporation.  111. 
power  of,  to  sell  not  limited  to  failing  concerns,  110. 
whether,  can  authorize  sale  of  railroad,  149. 
(6)    Leases. 

cannot  lease  entire  property  of  prosperous  corporation,  166. 

fiduciary  relation  of,  towards  minority,  168. 

lease  by,  may  be  voidable,  168. 

lease  by,  to  corporation  in  which,  are  interested  maj'  be  voidable, 

248. 
may  authorize  lease  of  entire  property  of  losing  corporation,  167. 
may  authorize  lease  of  railroad  in  absence  of  controlling  statute, 

189. 
prescribed,  fix  terms  of  railroad  lease,  190. 
(See  also  Consolidation.) 
MANDAMUS, 

when,  may  be  granted  to  compel  recording  of  consolidation  agree- 
ment, 55. 
MANUFACTURE, 

combinations  relating  solely  to,  not  in  violation  of  federal  anti-trust 

statute,  393. 
distinction  between,  and  commerce,  393. 

892 


INDEX 

MANUFACTURERS, 

associations  of,  360. 

combination  of,  when  in  violation  of  federal  anti-trust  statute,  393. 
owning  patents,  associations  of,  361. 
MARKET  QUOTATIONS, 

application  of  federal  anti-trust  statute  to  contracts  concerning, 
402. 
MARYLAND, 

(a)    Consolidation. 

statute  authorizing  consolidation  of  business  corporations,  23  n. 
statute  authorizing  consolidation  of  railroads,  22  n. 
statutes  prescribing  method  of  consolidating,  52  n. 
(&)    Sales. 

statute  authorizing  sales  of  railroads,  145  n. 

(c)  Leases. 

statute  authorizing  railroad  leases,  145  n,  180  n. 

(d)  Stockholding. 

statutes  authorizing  corporate  stockholding,  271  n. 

(e)  Combinations. 

constitutional  provision  against  monopolies,  414  n. 
MASSACHUSETTS, 

(a)  Leases. 

statute  authorizing  railroad  leases,  180  n. 
statutes  prescribing  method  of  adopting  railroad  lease,  193  n. 
(6)    Stockholding. 

statutes  authorizing  corporate  stockholding,  271  n. 
MERGER, 

as  a  result  of  consolidation  proceedings,  8,  61. 

definition  of,  11. 

included  in  term  "consolidation,"  11. 

outline  of  process  of,  8. 

statutes  showing,  as  a  result  of  consolidation,  63. 

when,  may  be  effect  of  consolidation,  58. 

(See  also  Consolidation.) 
MICHIGAN, 

(o)    Consolidation. 

constitutional  provision  against  consolidation  of  competing  cor- 
porations, 32  n. 
statute  authorizing  consolidation  of  railroads,  22  n. 
statute  authorizing  consolidation  of  street  railway,  electric,  and 

gas  companies,  23  n. 
statute  prescribing  method  of  consolidating,  52  n. 
statutory  provision  as  to  powers  of  consolidated  corporation, 
77  n. 

(b)  Sales. 

statutes  authorizing  .sales  of  railroads,  145  n. 

statute  prescribing  method  of  authorizing  sale  of  railroad,  148  n. 

893 


INDEX 

MICHIGAN  —  continued, 

(c)  Leases. 

statute  authorizing  lessee  to  condemn  in  name  of  lessor,  210  n. 
statutes  authorizing  railroad  leases,  145  n,  180  n. 
statute  prescribing  method  of  adopting  railroad  lease,  193  n. 
statute  relating  to  foreign  lessee  corporations,  254  n. 

(d)  Stockholding. 

statutes  authorizing  corporate  stockholding,  271  n. 

(e)  Combinations. 

anti-trust  statutes,  414  n. 
MINNESOTA, 
(o)    Consolidation. 

statutes  against  consolidation  of  competing  railroads,  35  n. 

statutes  authorizing  consolidation  of  railroads,  22  n. 

statutes  prescribing  method  of  consolidating,  52  n. 
(6)    Sales. 

statutes  authorizing  sales  of  railroads,  145  n. 

statute  prescribing  method  of  authorizing  sale  of  railroad,  148  n. 

(c)  Leases. 

statute  authorizing  railroad  leases,  145  n,  180  n. 

statute  prescribing  method  of  adopting  railroad  lease,  193  n. 

(d)  Stockholding. 

statutes  authorizing  corporate  stockholding,  271  n. 

(e)  Combinations. 

anti-trust  statutes,  414  n. 
MINORITY, 

obligation  of  majority  to,  in  case  of  sale-  of  corporate  property, 

114. 
remedies  of,  in  case  of  voidable  leases,  248. 
right  of,  to  avoid  leases  authorized  by  majority,  168. 
trust  relation  of  controlling  corporation  to,  300. 
(See  also  Majority.) 
MISSISSIPPI, 

(a)  Consolidation. 

statute  authorizing  consolidation  of  railroads,  22  n. 
statute  prescribing  method  of  consolidating,  52  n. 

(b)  Leases. 

statute  authorizing  railroad  leases,  180  n. 

(c)  Stockholding. 

statutes  authorizing  corporate  stockholding,  271  n. 

(d)  Combinations. 

anti-trust  statutes,  414  n. 

constitutional  provision  against  trusts  and  combinations,  414  n. 
MISSOURI, 

(a)    Consolidation. 

constitutional  provision  against  consolidation  of  competing  cor- 
porations, 32  n. 

894 


INDEX 

MISSOURI  —  continued, 

constitutional  provision  defining  status  of  interstate  consoli- 
dated corporation,  101  n. 

statute  authorizing  consolidation  of  manufacturing  companies, 
23  n. 

statutes  authorizing  consolidation  of  railroads,  22  n. 

statutes  prescribing  method  of  consolidating,  52  n. 

statute  providing  that  consolidated  corporation  may  hold  neces- 
sary real  estate,  77  n. 

(b)  Sales. 

statutes  authorizing  sales  of  railroads,  145  n. 
statute  prescribing  method    of    authorizing   sale    of    railroad, 
148  n. 

(c)  Leases. 

statute  authorizing  railroad  leases,  145  n,  180  n. 
statute  concerning  taxation  of  leased  railroad,  224  n. 
statute  prescribing  method  of  adopting  railroad  lea^e,  193  n. 
statute  relating  to  foreign  lessee  corporations,  254  n. 

(d)  Stockholding. 

statutes  authorizing  corporate  stockholding,  271  n. 

(e)  Combinations. 

anti-trust  statutes,  414  n. 
MONOPOLIES, 

grants  of  exclusive  privileges  as  constituting,  331  n. 
growth  of,  330. 
history  of,  330. 
illegality  of,  330. 
modern  use  of  term,  332. 
no  true,  in  United  States,  331. 
patents  and  other  quasi,  331. 
primary  meaning  of  term,  329. 

test  of  validity  of  combinations,  not  whether  constitute,  333. 
use  of  term,  in  federal  anti-trust  statute,  389. 
MONOPOLIZE, 

use  of  term,  in  federal  anti-trust  statute,  389. 
MONTANA, 

(o)    Consolidation. 

constitutional  provision  against  consolidation  of  competing  cor- 
porations, 32  n. 
constitutional  provision  defining  status  of  interstate  consolidated 

corporation,  101  n. 
statute  authorizing  consolidation  of  mining  companies,  23  n. 
statutes  authorizing  consolidation  of  railroads,  22  n. 
statutes  prescribing  method  of  consolidating,  52  n. 
(6)    Sales. 

statutes  authorizing  sales  of  railroads,  145  n. 

statutes  prescribing  method  of  authorizing  sale  of  railroad,  148  n. 

895 


INDEX 

MONTANA  —  continued, 

(c)  Leases. 

statute  authorizing  railroad  leases,  145  n,  180  n. 
statute  concerning  taxation  of  leased  railroad,  224  n. 
statute  prescribing  method  of  adopting  railroad  lease,  193  n. 

(d)  Stockholding. 

statutes  authorizing  corporate  stockholding,  271  n. 

(e)  Combinations. 

anti-trust  statute  unconstitutional,  414  n. 
MORTGAGES, 

effect  of  consolidation  upon,  84. 

foreclosure  of,  executed  by  interstate  consolidated  corporation,  107. 

of  leases,  227. 
of  vendee  corporation,  take  priority  over  claims  of  vendor's  creditors, 

126. 
power  of  consolidated  corporation  to  issue  bonds  secured  by,  75. 
whether  lease  comes  within  "after  acquired  property"  clause,  227. 
(See  also  Bonds;   Bondholders.) 
MUNICIPAL  AID, 

consolidated  corporation  entitled  to,  voted  to  constituents,  70. 
to  railroads  against  present  public  policy,  70. 

N 
NEBRASKA, 

(a)    Consolidation. 

constitutional  provision  against  consolidation  of  competing  cor- 
porations, 32  n. 

statute  authorizing  consolidation  of  railroads,  22  n. 

statute  prescribing  method  of  consolidating,  52  n. 
(6)    Sales. 

statutes  authorizing  sales  of  railroads,  145  n. 

statute  prescribing  method  of  authorizing  sale  of  railroad,  148  n. 

(c)  Leases. 

statute  authorizing  railroad  leases,  145  n,  180  n. 
statute  concerning  taxation  of  leased  railroad,  224  n. 
statute  prescribing  method  of  adopting  railroad  lease,  193  n. 
statute  relating  to  foreign  lessee  corporations,  254  n. 

(d)  Stockholding. 

statutes  authorizing  corporate  stockholding,  271  n. 

(e)  Combinations. 

anti-trust  statute,  414  n. 
constitutionality  of  anti-trust  statute,  421. 
NECESSARIES  OF  LIFE, 

what  articles  constitute,  358. 
NEGLIGENCE, 

liability  of  lessee  for,  231. 

liability  of  lessor  for,  of  lessee  under  authorized  lease,  219. 

896 


INDEX 

NEGLIGENCE  —  continued, 

liability  of  lessor  for,  of  lessee  under  unauthorized  lease,  218. 
liability  of  lessor  for,  when  it  shares  in  control,  221. 
liability  of  parties  to  trackage  contracts  for,  261-263. 
liability  of  vendor  for,  154,  155. 
NEVADA, 

(a)    Consolidation. 

statute   authorizing    consolidation    of    corporations    generally, 

23  n.  .  " 

statute  authorizing  consolidation  of  railroads,  22  n. 
statutes  prescribing  method  of  consolidating,  52  n. 
(6)    Sales. 

statute  authorizing  sales  of  railroads,  145  n. 
statute  conferring  powers  on  corporation  purchasing  railroad, 
158  n. 
(c)    Stockholding. 

statutes  authorizing  corporate  stockholding,  271  n. 
NEW  HAMPSHIRE, 
(a)    Consolidation. 

statute  authorizing  consolidation  of  railroads,  22  n. 
(6)    Leases. 

statutes  authorizing  railroad  leases,  180  n. 
statute  prescribing  method  of  adopting  railroad  lease,  180  n. 
statute  providing  that  lease  shall  not  affect  lessor's  public  obliga- 
tion, 215  n. 
NEW  JERSEY, 
(a)    Consolidation. 

statute  authorizing  consolidation  of  business  corporations,  23  n. 
statutes  authorizing  consolidation  of  railroads,  22  n. 
statutes  prescribing  method  of  consolidating,  52  n. 
(6)    Sales. 

statute  authorizing  purchase  of  railroad,  145  n. 

statute  prescribing  method  of  authorizing  sale  of  railroad,  148  n. 

(c)  Leases. 

statutes  authorizing  railroad  leases,  180  n. 

statute  prescribing  method  of  adopting  railroad  lease,  180  n. 

(d)  Stockholding. 

statutes  authorizing  corporate  stockholding,  271  n. 

(e)  Combinations. 

statute  authorizing  issue  of  stock  for  property,  319  n. 
NEW  MEXICO, 
(a)    Consolidation. 

statute  authorizing  consolidation  of  railroads,  22  n. 
statutes  prescribing  method  of  consolidating,  52  n. 
(6)    Sales. 

statute  authorizing  purchase  of  railroads,  145  n. 
statute  prescribing  method  of  authorizing  sale  of  railroad,  148  n. 

897 


INDEX 

NEW  MEXICO  —  continued, 

(c)  Leases. 

statutes  authorizing  railroad  leases,  145  n,  180  n. 

statute  prescribing  method  of  adopting  railroad  lease,  193  n. 

(d)  Stockholding. 

statutes  authorizing  corporate  stockholding,  271  n. 
NEW  YORK, 
(a)    Consolidation. 

public  policy  of,  regarding  consolidation  of  non-competing  rail- 
roads, 21. 

statute  authorizing  consolidation  of  business  corporations,  23  n. 

statute  authorizing  consolidation  of  railroads,  22  n. 

statutes  prescribing  method  of  consolidating,  52  n. 

statute  prescribing  obligations  of  consolidated  corporation,  79  n. 

statute  relating  to  transmission  of  property  and  franchises  upon 
consolidation,  65. 

statute  regarding  effect  of  consolidation  upon  pending  suits,  89  n. 

statutory  provision  as  to  powers  of  consolidated  business  cor- 
poration, 77  n. 
(6)    Sales. 

statute  authorizing  acquisition  of  railroad,  145  n. 
(c)    Leases. 

construction  of  statute  of,  authorizing  railroad  leases,  182. 

statute  authorizing  railroad  leases,  180  n. 

statutes  imposing  liabilities  upon  lessee  corporation,  230  n. 

statute  prescribing  method  of  adopting  railroad  lease,  180  n. 
{d)    Stockholding. 

statutes  authorizing  corporate  stockholding,  201  n. 

(e)  Combinations. 

anti-trust  statutes,  414  n. 
NON-COMPETING  RAILROADS, 

public  policy  regarding  consolidation  of,  21. 
NORTH  CAROLINA, 

(a)  Leases. 

statute  authorizing  railroad  leases,  180  n. 

statute  concerning  taxation  of  leased  railroad,  224  n. 

(b)  Stockholding. 

statutes  authorizing  corporate  stockholding,  271  n. 

(c)  Combinations. 

anti-trust  statute,  414  n. 

constitutional  provision  against  monopolies,  414  n. 
NORTH  DAKOTA, 
(a)    Consolidation. 

constitutional  provision  against  consolidation  of  competing  cor- 
porations, 32  n. 
statute  authorizing  consolidation  of  railroads,  22  n. 
statute  prescribing  method  of  consolidating,  52  n. 

898 


INDEX 

NORTH  DAKOTA  —  continued, 

(b)  Sales. 

statute  authorizino;  sales  of  railroads,  145  n. 

statute  prescribing  method  of  authorizing  sale  of  railroad,  148  n. 

(c)  Leases. 

statute  authorizing  railroad  leases,  14.5  n,  ISO  n. 
statute  prescribing  method  of  adopting  railroad  lease,  193  n. 
{(1)    Combinations. 

anti-trust  statute,  414  n. 

constitutional  provision  against  combinations,  414  n. 
NORTHERN  SECURITIES  CASE, 

review  of,  397  a. 
NUISANCE, 

joint  liability  of  lessor  and  lessee  for,  232. 

lessee  liable  for  maintaining,  217. 

lessor  liable  for  creating,  217. 

liability  of  lessee  for  creating  or  maintaining,  231. 


O 

OBLIGATIONS, 

(a)    Consolidation. 

liability  of  consolidated  corporation  after  foreclosure  for,  of  con- 
stituents, 83. 
of  constituents,  assumed  by  consolidated  corporations,  79. 
of  interstate  consolidated  corporation,  105. 

of  subscribers  of  constituents  enforced  by  consolidated  corpora- 
tion, 69. 
public,  of  constituents  assumed  by  consolidated  corporation,  80. 
settlement  of,  of  constituents  by  consolidated  corporation,  77. 
(jb)    Sales. 

of  vendor  not  assumed  by  vendee  upon  purchase  of  railroad,  163. 
vendee  not  generally  liable  upon,  of  vendor,  123. 
(c)    Leases. 

when  lessee  liable  for,  of  lessor,  233. 

(See  also  Creditors.) 
OHIO, 

(a)    Consolidation. 

statute  authorizing  consolidated  corporation  to  take  and  dispose 

of  stocks  and  l^onds,  77  n. 
statute  authorizing  consolidation  <  f  railroads,  22  n. 
statute  prescribing  method  of  consolidating,  52  n. 
(6)    Sales. 

statute  authorizing  salens  of  railroads,  145  n. 

statute  conferring  powers  on  corporation  purchasing  railroad, 

158  n. 
statute  prescribing  method  of  authorining  sale  of  railroad,  14S  n. 

899 


OHIO  —  continued, 

(c)  Leases. 

statute  authorizing  lessee  to  exercise  right  of  eminent  domain, 
210  n. 

statutes  authorizing  railroad  leases,  145  n,  180  n. 
statute  prescribing  method  of  adopting  railroad  lease,  193  n. 
statute  providing  that  lessor  shall  be  liable  as  if  operating  rail- 
road, 216  n. 

(d)  Stockholding. 

statutes  authorizing  corporate  stockholding,  271  n. 

(e)  Combinations. 

anti-trust  statutes,  414  n. 
OKLAHOMA, 

(o)    Consolidation. 

statute  authorizing  consolidation  of  railroads,  22  n. 
statute  prescribing  method  of  consolidating,  52  n. 

(b)  Sales. 

statutes  authorizing  sales  of  railroads,  145  n. 
statute  conferring  powers  on  corporation  purchasing  railroad, 
158  n. 

(c)  Leases. 

statute  authoi'izing  railroad  leases,  145  n,  180  n. 

(d)  Combinations. 

anti-trust  statutes,  414  n. 

constitutional  provision  against  monopolies,  414  n. 
OREGON, 

statute  authorizing  sales  of  railroads,  145  n.  • 

statute  authorizing  railroad  leases,  145  n,  180  n. 


PARALLEL  LINES.     (See  Competing  or  Parallel  Railroads.) 
PARTIES, 

in  stockholders'  actions  to  enjoin  sales,  115. 

necessary,  in  proceedings  under  federal  anti-trust  statute,  406,  407, 
409. 

(See  also  Procedure;    Remedies.) 
PATENTS, 

application   of  federal  anti-trust   statute   to   combinations   under, 

399. 
are  ^uosi-monopolies,  331. 
associations  of  manufacturers  owning,  361. 
PENALTIES, 

under  federal  anti- trust  statute,  407,  409. 
under  State  anti-trust  statutes,  446,  449. 

(See   also   Forfeitures.) 

900 


INDEX 

PENDING  SUITS, 

effect  of  consolidation  upon,  89. 
procedure  regarding,  90. 
PENNSYLVANIA, 
(a)   Consolidation, 

constitutional  provision  against  consolidation  of  competing  cor- 
porations, 32  n. 
statutes  authorizing  consolidation  of  railroads,  22  n. 
statutes  prescribing  method  of  consolidating,  52  n. 
(6)    Sales. 

statute  authorizing  acquisition  of  railroad  franchises  and  prop- 
erty, 145  n. 
statute  conferring  powers  on  corporation  purchasing  railroad, 

158  n. 
statute   prescribing    method    of   authorizing   sale    of     railroad, 
U8  n. 
(c)    Leases. 

statute    authorizing    lessee    to    assume    obligations    of    lessor, 

225  n. 
statute  authorizing  railroad  leases,  180  n. 
{d)    Stockholding. 

statutes  authorizing  corporate  stockholding,  271  n. 
PERPETUITIES, 

definition  of,   187. 

long-term  leases  not  prohibited  by  statutes  against,  187. 
PLEADINGS, 

allegation  of  execution  of  lease,  195  n. 

allegation  of  consolidation,  91. 

in  actions  to  recover  treble  damages  under  federal  anti-trust  statute, 

409. 
what  allegations   necessary   to  dissolve  injunction   restraining  at- 
tempted consolidation,  48. 

(See  also   Procedure.) 
POCAHONTAS  COKE  COMPANY, 

nature  and  formati<^n  of,  348  a. 
POLICE  POWER, 
definition  of,  420. 

fourteenth  amendment  does  not  conflict  with,  419. 
power  of  State  under,  to  withdraw  right  to  consolidate,  26. 
power  of  State  under,  to  enact  anti-trust  statutes,  420. 
POOLS, 

money,  308. 

nature  of,  308. 

New  Hampshire  statute  against,  35  n. 

provisions  of  interstate  commerce  act  concerning,  364. 

traffic,  308. 

validity  of  railroad,  364  a. 

901 


INDEX 

POWER  OF  CORPORATION  TO  ACQUIRE  AND  HOLD  ITS  OWN 
STOCK, 
American  doctrine,  283  a. 
English  doctrine,  283  a. 
rights  and  remedies  of  creditors,  283  a. 
statutes  granting,  283  a. 
statutes  prohibiting,  283  a. 

status  of  corporation  as  holder  of  its  own  stock,  283  a. 
POWERS, 

(a)    Consolidation. 

charter  of  corporation  measure  of,  17. 
miscellaneous,  of  consolidated  corporation,  77. 
of  consolidated  corporation,  eminent  domain,  76. 
of  consolidated  corporation,  in  general,  74. 
of  consolidated  corporation  to  issue  of  mortgage  bonds,  75. 
of  corporation,  how  conferred,  17. 
of  interstate  consolidated  corporation,  104. 
(6)    Sales. 

distinction  between  franchises  of  corporation  and,  133. 
of  private  corporation,  to  purchase  and  sell,  108. 
of  vendor  corporation  after  sale  of  railroad,  153. 
(c)    Leases. 

lessor  corporation  retains  its  prerogative,  210. 
(See    also    Consolidated   Corporation;     Consolidation;     Corpora- 
tion;    Lessor  Corporation;    Lessee   Corporation;     Vendor 
Corporation;    Vendee  Corporation.) 
PRESERVERS  TRUST,  nature  and  formation  of,  345. 
PRESUMPTION, 

of  citizenship,  for  jurisdictional  purposes,  101  n. 
of  power  to  hold  stock,  283. 

that  certificate  of  consolidation  has  been  recorded,  55. 
PRIORITY, 

of  purchaser's  mortgage  over  claims  of  vendor's  creditors,  126. 
PRIVATE  CORPORATIONS. 

(See  Corporations.) 
PRIVILEGES  AND  IMMUNITIES, 

constitutional  limitations  upon  transmission  of,  upon  consolidation, 

71. 
whether  special,  pass  upon  consolidation,  73. 
(See  also  Exemptions  from  Taxation;   Franchises;   Rates  of  Fare.) 
PROCEDURE, 

defences  in  stockholders'  action  to  enjoin  sale  of  corporate  property, 

116. 
in  stockholders'  action  to  enjoin  sale  of  corporate  property,  115. 
in  stockholders'  actions  to  restrain  consolidation,  48. 
in  suits  pending  at  time  of  consolidation,  90. 

(See  also  Evidence;    Parties;    Pleadings;    Remedies.) 

902 


INDEX 

PRODUCERS, 

associations  of,  360. 

associations  of,  when  in  violation  of  federal  anti-trust  statute,  393. 
PROPERTY, 

devoted  to  public  uses,  power  of  State  over,  400. 
issue  of  stock  for,  in  formation  of  corporate  combination,  319. 
(See  also  Corporate  Combination;    Corporate  Property.) 
PROPRIETARY  COMPANY, 

liability  of,  under  trackage  contract,  to  employees,  203. 
liability  of,  under  trackage  contract,  to  third  persons,  261. 
(See  also  Trackage  Contracts.) 
PROSPEROUS  CORPORATION, 

lease  of  entire  property  of,  requires  unanimous  consent,  166. 
sale  of  entire  property  of,  requires  unanimous  consent,  110. 
PUBLIC  DUTIES, 

corporation  purchasing  railroad  a.ssumes  accompanying,  162. 
lessor  corporation  must  discharge,  215. 
obligation  of  lessee  to  perform  lessor's,  229. 

obligation  of  consolidated  corporation  to  perform,  of  constituents, 
80. 
PUBLIC  POLICY, 
(a)    Consolidation. 

consolidation  not  dependent  upon  considerations  of,  16. 
consolidation,  without  legislative  authority,  against,  18. 
regarding  consolidation  of  competing  railroads,  31. 
regarding  consolidation  of  non-competing  railroads,  21. 
(6)    Sales. 

unauthorized  sale  of  franchises,  against,  137. 

(c)  Leases. 

lease  of  railroad  for  purpose  of  suppressing  competition  against, 

249. 
unauthorized  lease  of  railroad  against,  177. 
unauthorized  taking  of  lease  against,  178. 

(d)  Combinations. 

basis  of,  338. 

basis  of  rules  of,  in  judicial  decisions,  341. 

definition  of,  338. 

difficulty    of    formulating   rules   of,    concerning    combinations, 

340. 
nature  of,  338. 
necessity  for  rules  of,  339. 
regarding  competition,  3.56. 
regarding  combinations  generally,  6. 
rules  of,  352. 

(See  also  Rules  of  Public  Policy.) 
PURCHASE  OF  FRANCHISES. 

(See  Franchises;    Sales  of  Franchises.) 

903 


INDEX 

PURCHASE  OF  RAILROADS. 

(See  Sales  of  Railroads.) 
PURCHASING  CORPORATION. 

(See  Vendee  Corporation.) 

Q 

QUANTUM  MERUIT, 

recovery  on,  by  lessor  corporation  after  disafRrmance  of  ultra  vires 
lease,  244. 

(See  also  Leases  of  Railroads.) 
QUASI-PUBLIC  CORPORATIONS, 
(o)    Consolidation. 

consolidation  of,  without  legislative    authority,  against  public 

policy,  18. 
railroad  companies  are,  18  n. 
(6)    Sales. 

indispensable  property   of,   cannot  be  sold   without  statutory 

authority,  127. 
indispensable  property  of,  cannot  be  taken  on  execution  without 

statutory  authority,  127. 
legislative  authority  essential  to  purchase  of  franchises  of,  139. 
legislative  authority  essential  to  sale  of  franchises  of,  135. 
nature  of  franchises  of,  133. 
sales  of  surplus  property  of,  129. 
test  of  indispensability  of  property  of,  128. 
transferability  of  franchises  of,  134. 

unauthorized  sales  of  franchises  of,  against  public  policy,  137. 
unauthorized  sale  of  franchises  of,  ultra  vires,  136. 
unauthorized  sale  of  franchises  of,  unlawful  delegation  of  powers, 
138. 

(c)  Leases. 

leases  of  franchises  of,  173.  ■ 
leases  of  indispensable  property  of,  171. 
leases  of  surplus  property  of,  172. 
railroad  leases  typical  of  leases  of,  174. 

(d)  Combinations. 

analysis  of  rule  of  public  policy  applicable  to,  359. 

associations  of,  365. 

distinction  between  rules  of  public  policy  applicable  to  private 
and,  351. 

power  of  State  to  prohibit  combinations  of,  417. 

rule  of  public  policy  applicable  to,  352. 
QUO  WARRANTO, 

against  combining  corporations,  373. 
against  corporate  combination,  372. 
in  case  of  tdtra  vires  consolidation,  40. 
in  case  of  ultra  vires  leases,  250. 

904 


INDEX 

QUO  WARRANTO  —  continued, 

in  case  of  unauthorized  sale,  156. 
judgment  in,  373. 

(See  also  Remedies;    State.) 

R 
RAILROAD  COMPANIES, 

are  ^i^ast-public  corporations,  18  n. 

combinations  of,  violate  federal  anti-trust  statute,  398. 
franchises  of,  133. 

power  of  Congress  to  prohibit  combinations  of  competing,  381. 
sketch  of  consolidation  of,  2. 
(See    also    Association.s    of    Railroad    Companies;     Consolidation; 
Sales  of  Railroads;    Leases  of  Railroads;     Pools;    Track- 
age  Contracts.) 
RAILROADS, 

highways,  early  theory,  2  n. 
sketch  of  leases  of,  4. 
sketch  of  .sales  of,  3. 

unconstructed,  when  within  provi.sions  of  consolidation  act,  29. 
unfinished,  when  may  be  leased,  184. 
(See     also     titles     containing     words    "Railroads"     or     "Railroad 

Companies.") 
RAILROAD  EMPLOYEES, 

application  of  federal  anti-trust  statute  to  combinations  of,  398. 
RAILROAD  LEASES  UNDER  RECEIVERSHIP. 

(See  Leases  of  Railroads;    Receivers.) 
RAILROAD  POOLS.     (See  Pools.) 
RATES  OF  FARE, 

consolidated  corporation  may  exercise  power  of  constituent  regard- 
ing, 77. 
right  of  lessee  to  fix,  226. 

whether  chartered  rates  follow  railroad  when  sold,  161. 
whether  right  to  fL\,  passes  to  vendee  corporation,  161. 
RATIFICATION, 
(a)    Consolidation. 

legislative  recognition  of  consolidation  equivalent  to,  20. 
(6)    Sales. 

by  stockholders  of  sale  by  directors,  113. 
governed  by  same  principles  as  authorization,  113. 
(c)    Leases. 

distinction  between,  by  legislature  and  stockholders,  179. 
legislative,  validates  unauthorized  railroad  leivse,  179. 
legislative,  what  constitutes,  179. 

(See  also  Legislative  Authority.) 
REAL  ESTATE, 

transmission  of,  upon  consolidation,  66. 

905 


INDEX 

RECEIVER, 

(a)  Sales. 

when  may  be  appointed  to  follow  corporate  assets,  125. 

(b)  Leases. 

may  elect  within  reasonable  time  to  assume  or  renounce  lease, 

235. 
may  not  abrogate  lease  as  between  parties,  234. 
not  assignee  of  term  of  railroad  lease,  234. 
obligations  of,  after  election  to  assume  lease,  237. 
obligations  of,  after  election  to  renounce  lease,  237. 
obligations  of,  pending  election  to  assume  or  renounce  lease,  230. 
power  to  lease  railroad,  238. 
power  to  take  lease  of  railroad,  238. 

what  constitutes  election  to  assume  or  renounce  lease,  235. 
what  constitutes  reasonable  time  within  which  to  elect  to  assume 

or  renounce  lease,  235. 

(c)  Combinations. 

of  illegal  combination,  rights  and  remedies  of,  368. 
RECOGNITION, 

legislative,  of  consolidated  corporation  validates  organization,  20. 
(See  also  Ratification.) 
RECONSTRUCTION  AND  REPAIRS, 

liability  of  lessor  corporation  for,  223. 
REGRATING, 

definition  of,  358  n. 
REMEDIES, 

(a)  Consolidation. 

against  consolidating  corporations  if  not  dissolved,  88. 
enforcement  of  constitutional  provisions  against  consolidation, 

40. 
equitable,  of  creditors  of  consolidating  corporations,  87. 
legal,  of  creditors  of  consolidating  corporations,  86. 
of  consolidated  corporation  to  enforce  subscriptions,  69. 
of  dissenting  stockholder  in  case  of  invalid  consolidation,  46. 
of  dissenting  subscribers  in  case  of  invalid  consolidation,  47. 
procedure  in  stockholders'  actions  to  restrain  consolidation,  48. 

(b)  Sales. 

of  creditors  against  consideration  for  fraudulent  sale,  125. 

of  creditors  against  stockholders  of  vendor  corporation,  125. 

of  creditors,  at  law,  in  case  of  fraudulent  sale,  125. 

of  creditors,  in  equity,  in  case  of  fraudulent  sale,  125. 

of  creditors  upon  assumption  clause  in  contract  of  sale,  125. 

of  dissenting  stockholders  in  case  of  invalid  sale,  114. 

of  dissenting  stockholders  in  case  of  invalid  sale  of  railroad,  151. 

(c)  Leases. 

against  licensee  company  under  trackage  contract,  262,  263. 
against  proprietary  company  under  trackage  contract,  261,  263. 

906 


INDEX 

REMEDIES  —  continued, 

of  lessee  corporation,  228. 

of  lessor  corporation,  in  equity,  214. 

of  lessor  corporation  after  disaflarmance  of  ultra  inres  lease,  242, 

243,  244. 
of  State  in  case  of  ultra  vires  leases,  250,  251. 
of  stockholders  in  case  of  unauthorized  railroad  lca.sc,  191. 
of  stockholders  to  restrain  lease,  169. 

(d)  Stockholding. 

of  minority  stockholders  of  controlled  corporation,  301. 
of  State  in  case  of  ultra  inres  stockholding,  293. 
of  stockholders  in  case  of  ultra  vires  stockholding,  293. 
stockholder   may  enjoin   voting  ultra  inres  holdings  of  stock, 
288. 

(e)  Combinations. 

between  combination  and  its  members,  367. 
collateral  attack  upon  combination,  369. 
•  injunction  by  State  against  illegal  combination,  374. 
injunction  not  a  .substitute  for  quo  warranto,  374. 
member  of  illegal  combination  cannot  recover  upon,  366. 
of  members  of  illegal  combination,  306. 
of  receivers  and  assignees  of  illegal  combinations,  368. 
of  stockholders  of  combining  corporations,  371. 
quo  warranto  against  corporate  coml)ination,  372. 
test  of  right  of  member  of  illegal  combination  to  recover,  366. 
under  federal  anti-trust  statute,  406-409. 
under  State  anti-trust  statutes,  446-449. 
upon  independent  contracts  of  illegal  combination,  369. 
RENT, 

by  stipulation  may  be  paid  to  third  person,  198. 

consideration  of  lease  is,  198. 

covenant  to  pay,  204. 

due  primarily  to  le.s.sor,  198. 

equitable  lien  upon  .share  of  earnings,  211. 

rights  of  stockholders  when,  payable  in  form  of  dividends,  212. 

.share  of  earnings  as,  211. 

(See  also  Le.\ses  of  Railro.\ds.) 
REORGANIZATIOxN, 

corporation  takes  property  under,  a.s  successor,  141. 
distinction  between,  and  consolidation,   10  n. 
distinction  between,  and  .sale  of  railroad,  141. 
incidental  power  to  take  stock  upon,  280. 
(See   also    E.\ch.\nge    of   Corporate    Property    for    Stock;     Sales 

OF  Property  of  Private  Corporations.) 
REPAIRS, 

covenant  to  make,  in  railroad  leases,  207. 
what  constitutes  necessary,  207. 

907 


INDEX 

RESERVED  POWER, 

power  of  Icgi^ilature  to  withdraw  or  limit  right  to  consolidate  in 
absence  of,  24. 

power  of  legislature  to  withdraw  or  limit  right  to   consolidate   in 
exercise  of,  25. 

power  of  state  to  prohibit  combinations  of  corporations  in  exercise 
of,  418. 
RIGHT  OF  EMINENT  DOMAIN.     (See  Eminent  Domain.) 
RIGHT  TO  CONTRACT, 

as  affected  by  State  anti-trust  statutes,  419. 

not  absolute,  419. 

under  Fifth  Amendment,  420. 

under  Fourteenth  Amendment,  419. 
RIGHT  TO  VOTE, 

corporation  has,  intra  vires  holdings,  287. 

corporation  has  no,  ultra  vires  holdings,  288. 
RIGHTS  IN  STREETS, 

transmission  of,  upon  consolidation,  66. 
RULES  OF  PUBLIC  POLICY, 

analysis  of  rule  applicable  to  ^uasi-public  corporations,  359. 

analysis  of  rule  governing  private  corporations,  354. 

application  of,  to  associations  of  quasi-public  corporations,  365. 

application  of,  to  associations  of  dealers,  362. 

application  of,  to  associations  of  manufacturers,  360. 

application  of,  to  associations  of  manufacturers  owning  patents,  361. 

application  of,  to  associations  of  railroad  companies,  363,  364. 

application  of,  to  associations  of  producers,  360. 

basis  of,  in  judicial  decisions,  341. 

basis  of,  case  of  Biscuit  Combination,  349. 

basis  of,  case  of  the  Chicago  Gas  Trust,  346. 

basis  of,  case  of  the  Diamond  Match  Company,  347. 

basis  of,  case  of  the  Glucose  Combination,  348. 

basis  of,  case  of  the  National  Lead  Trust,  349. 

basis  of,  case  of  the  Pocahontas  Coke  Company,  348  a. 

basis  of,  case  of  the  Preservers  Trust,  345. 

basis  of,  case  of  the  Standard  Oil  Trust,  343. 

basis  of,  case  of  the  Sugar  Trust,  342. 

basis  of.  Whiskey  Trust  cases,  344. 

basis  of,  cases  of  associations,  349. 

conservative  standards,  353. 

control  of  the  market,  356. 

difficulty  of  formulating,  concerning  combinations,  340. 

distinction  between,  applicable  to  private  and  ^wasi-public  corpora- 
tions, 351. 

distinction  between  useful  commodities  and  necessaries  of  life,  358. 

extent  of  territory,  357. 

form  of  combination  immaterial,  354. 

908 


INDEX 

RULES  OF  PUBLIC  FOLICY  —  continued , 

in  general,  350. 

necessity  for,  339. 

objects  and  tendencies  of  combinations,  355. 

stated,  352. 

what  are  necessaries  of  life,  358. 

what  are  useful  commodities,  358. 

(See  also  Combinations;    Public  Policy.) 
RUNNING  POWERS.     (See  Trackage  Contracts.) 


S 
SALE, 

distinction  between,  and  consolidation,  13. 

outline  of  relations  of  vendor  and  vendee,  3. 
(See   also   Sales  of  Franchises;     Sales   of   Property   of   Private 
Corporations;     Sales    of    Property    of    Quasi-public    Cor- 
porations;  Sales  of  Railroads.) 
SALES  OF  FRANCHISES, 

distinction  between,  and  sale  of  railroad,  142. 

legislative  authority  essential  to,  135. 

legislative  authority  essential  to  purchase,  139. 

of  corporations,  133,  134. 

of  corporation,  does  not  carry  property,  142. 

of  corporations,  nature  of,  134. 

transferability  of  franchise  of  corporate  existence,  132. 

ultra  vires,   139  a. 

unauthorized,  against  public  policy,  137. 

unauthorized,  xdtra  vires,  13G. 

unauthorized,  unlawful  delegation  of  powers,  138. 
SALES  OF  PROPERTY  OF  PRIVATE  CORPORATION, 

defences  to  stockholders'  actions  to  set  a.side,  116. 

effect  of  .sale  of  entire  corporate  property,  1 17. 

for  stock,  constructively  fraudulent,  124. 

liability  of  purcha-sing  corporation  for  debts  of  vendor,  123. 

obligation  of  majority  stockholders  to  minority,  114. 

of  entire  property  by  directors,  112. 

of  entire  property  by  unanimous  consent,  109. 

of  entire  property  of  losing  corporation  by  majority  vote,  111. 

of  entire  property  of  prosperous  corporation  by  majority  vote,  110. 

power  to  purchase  and  sell  generally,  108. 

priority  of  purchtuser's  mortgage  over  claims   of  vendor's  creditors, 
126. 

procedure  in  stockholders'  actions,  115. 

ratification  by  stockholders  of  sale  by  directors,  113. 

remedies  of  creditors  in  ca.se  of  fraudulent,  125. 

remedies  of  di.sscnting  stockholders  in  case  of  invalid,  114. 

909 


SALES  OF  PROPERTY  OF  PRIVATE  CORPORATION  —  conhnued, 

ultra  vires,  129  a. 

voidable,  114. 

what  action  necessary  to  authorize,  108. 

■when  directors  are  interested  in  vendee  company,  prima  facie  fraudu- 
lent, 124. 

whether  stock  of  dissenting  .stockholders  can  be  appraised,  121. 
(See  also  Exchange  of  Corporate  Property  for  Stock.) 
SALES  OF  PROPERTY  OF  QUASI-PUBLIC  CORPORATIONS, 

indispensable    property    cannot    be    alienated    without    legislative 
authority,  127. 

surplus  property,  129. 

test  of  indispensability,  128. 

ultra  vires,  129  o. 
SALES  OF  RAILROADS, 

acquiescence  of  stockholders  in,  150. 

construction  of  statutes,  146. 

conventional  and  judicial,  distinguished,  140. 

directors  have  no  power  to  authorize,  149. 

distinction  between,  and  reorganization,  141. 

distinction  between,  and  sales  of  franchises,  142. 

do  not  terminate  corporate  existence,  152. 

essential  franchises  pass  upon  sale  of  road,  157. 

liabilities  of  vendor  corporation  after  authorized  sale,  154. 

liabilities  of  vendor  corporation  after  unauthorized  sale,  155. 

method  of  authorizing  and  executing,  148. 

obligations  of  vendee  in  respect  of  vendor's  public  duties,  162. 

of  road  alone  carries  necessary  franchises,  142. 

remedies  of  dissenting  stockholders  in  case  of  invalid,  151. 

remedies  of  State  in  case  of  unauthorized,  156. 

rights  of  vendee  corporation  in  general,  158. 

rights  of  vendor  corporation  after  sale,  153. 

seller  must  have  authority  to  sell  and  buyer  to  buy,  144. 

status  of  foreign  purchasing  corporation,  164. 

statutes  authorizing,  145. 

statutes  authorizing,  strictly  construed,  146. 

statutory  authority  necessary  to,  143. 

statutory  requisites  for  authorization  and  execution,  148. 

stockholders  may  be  estopped  from  questioning  validity  of,  150. 

to  competing  or  parallel  line  prohibited,  147. 

vendee  not  liable  for  debts  of  vendor,  163. 

whether  approval  of  majority  is  sufficient   in  absence  of  statute, 
149. 

whether  chartered  rates  of  fare  follow  the  property,  161. 

whether  exemptions  from  taxation  pass  to  vendee  corporation,  160. 

whether  right  of  eminent  domain  passes  to  vendee,  159. 

whether  sale  of  railroad  carries  franchises,  142. 

910 


INDEX 

SECRET  PROCESSES, 

application  of  federal  anti-trust  statute  to  combinations  under,  401. 
SECURITY,  whether  majority  can  effect  consolidation  upon  giving,  50. 

(See  Appr.visal.) 
SHERMAN  LAW.      (See  Federal  Anti-trust  St.\tute.) 
SPECIFIC  PERFORMANCE,  of  trackage  contracts,  260. 
SOUTH  CAROLINA, 

(a)    Consolidation.  ^ 

constitutional  provision  against  consolidation  of  competing  cor- 
porations, 32  n. 
statutes  authorizing  consolidation  of  railroads,  22  n. 
statutes  prescribing  method  of  consolidating,  52  n. 
statute  providing  that  consolidated  corporation  shall  acquire  no 
extraordinary  powers,  77  n. 
(6)    Sales. 

statutes  authorizing  purcha.sc  of  railroads,  145  n. 

(c)  Leases. 

statute  authorizing  railroad  leases,  145  n,  ISO  n. 

(d)  Stockholding. 

statutes  authorizing  corporate  stockholding,  271  n. 

(e)  Combinations. 

anti-trust  statute,  414  n. 
SOUTH  DAKOTA, 

(a)  Consolidation, 

statute  authorizing  consolidation  of  railroads,  22  n. 
statute  prescribing  method  of  consolidating,  52  n. 

(b)  Sales. 

statute  authorizing  sales  of  railroads,  145  n. 
statute    prescribing   method   of    authorizing   .sale   of    railroad, 
148  n. 

(c)  Leases. 

statute  authorizing  railroad  lea-ses,  145  n,  180  n. 
statute  concerning  taxation  of  leased  railroad,  224  n. 
statute  prescribing  method  of  adopting  railroad  lease,  193  n. 
statute  relating  to  foreign  lessee  corporations,  254  n. 

(d)  Stockholding. 

statute  authorizing  corporate  stockholding,  271  n. 

(e)  Combinations. 

anti-trust  statutes,  414  n. 

constitutional  provision  against  monopolies  and  trusts,  414  n. 
STANDARD  OIL  TRUST,  nature  and  formation  of,  343. 
STATE, 

(a)  Consolidation. 

may  attack  irregular  consolidation,  95. 

status  of  corporation  created  by  joint  legislative  action,  101  n. 

(b)  Leases. 

remedies  of,  in  cases  of  ultra  vires  leases,  250. 

911 


INDEX 

STATE  —  continued, 

(c)  Sales. 

remedies  of,  in  case  of  unauthorized  sale  of  railroad,  156. 

(d)  Stockholding. 

remedies  of,  in  case  of  ultra  vires  stockholding,  293. 

(e)  Combinations. 

federal  anti-trust  statute  inapplicable  to  regulations  of,  403. 

outline  of  power  of,  over  combinations,  414. 

power  of,  over  property  devoted  to  public  uses,  417. 

power  of,  to  prohibit  combinations  of  corporations  in  exercise  of 
reserved  power,  418. 

power  of,  to  prohibit  combinations  of  quasi-puhlic  corporations, 
417. 

remedies  of,  in  case  of  unlawful  combinations,  372,  373,  374. 
(See  also  Quo  Warranto.) 
STATE  ANTI-TRUST  STATUTES, 

applicability  of,  to  foreign  corporations,  436. 

application  of  miscellaneous,  444. 

application  of,  to  insurance  combinations,  435. 

apply  to  continuing  combinations,  443. 

as  defence  to  actions  for  recovery  of  debt,  445. 

civil  remedies  under,  449. 

constitutionality  of,  415-424. 

construction  of  miscellaneous,  444. 

controlling  propositions  in  determining  constitutionality  of,  416. 

criminal  proceedings  under,  446. 

damages  recovered  under,  449. 

development  of,   414. 

enacted  in  exercise  of  police  power,  420. 

evidence  in  proceedings  under,  450. 

forfeitures  under,  447. 

have  no  extraterritorial  effect,  437. 

indictments  under,  446. 

invalidity  of  class  legislation,  421. 

invalidity  of  exemptions  of  anti-trust  statutes,  421. 

invalidity  of  exemptions  of  agricultural  products,  421. 

invalidity  under,  as  a  ground  for  collateral  attack,  445. 

limitations  of  actions,  451. 

not  regulations  of  interstate  commerce,  426. 

not  retroactive,  443. 

penalties,  446  n. 

power  of  State  over  property  devoted  to  public  uses,  417. 

power  of  State  to  prohibit  combinations  of  corporations,  in  exercise 

of  reserved  power,  418. 
power  of  State  to  prohibit  combinations  of  gwasi-public  corporations, 

417. 
proceedings  against  corporations  under,  448. 
912 


INDEX 

STATE  ANTI-TRUST  ST ATUTES  —  continued, 
production  of  books  under,  450. 
provisions  that,  may  be  pleaded  as  defence,  445. 
rule  of  construction  of,  427. 
sphere  of  State  legislation,  415. 

State  courts'  interpretation  of,  followed  by  federal  courts,  423. 
summary  of,  414  n. 

validity  of  provisions  that,  may  be  pleaded  as  defence,  445. 
validity  of,  tested  by  Fourteenth  Amendment,  419-421. 
validity  of,  under  state  constitutional  provisions,  422. 
when,  may  be  pleaded  as  defence,  445. 
who  may  question  constitutionality  of,  424. 
STATUS, 

effect  of  interstate  consolidation  upon,  of  constituent  corporations, 

102. 
of  corporation  as  controlling  stockholder,  299. 
of  foreign  corporations,  101  n. 
of  foreign  vendee  corporation,  164. 
of  interstate  consolidated  corporation,  101. 
(See  also  Corporation.) 
STATUTES, 

(a)    Consolidation. 

against  consolidation  of  competing  or  parallel  railroads,  32  n. 
as  to  transmission  of  property  and  franchises  upon  consolidation, 

65. 
authorizing  consolidated  corporations  to  issue  mortgage  bonds, 

75  n. 
authorizing  consolidation  not  regulations  of  interstate  commerce, 

19. 
authorizing  consolidation,  not  retroactive,  20. 
authorizing  consolidation  of  business  corporations,  23  n. 
authorizing  consolidation  of  railroads,  22  n. 
authorizing  consolidated  corporation  to  exercise  right  of  eminent 

domain,  76. 
Connecticut,  concerning  evidence  of  consolidation,  91  n. 
construction  of  particular,  authorizing  consolidation,  28,  62,  63. 
construction  of,  prescribing  method  of  consolidation,  54. 
effect  of  consolidation  depends  upon  terms  of,  59. 
enforcement  of,  against  consolidation,  40. 
English,  authorizing  amalgamation,  12. 
for  appraisal  of  stock  in  consolidation  proceedings,  57. 
formal  requirements  of,  for  consolidation,  52. 
Minnesota,  against  consolidation  of  competing  lines,  35  n. 
miscellaneous,   conferring  powers  on  consolidated  corporation, 

77  n. 
New   York,   concerning  effect  of  consolidation   upon   pending 
suits,  89  n. 

913 


INDEX 

STATUTES  —  continued, 

prescribing  obligations  of  consolidated  corporation,  79  n. 

prohibiting   consolidation   of   competing  railroads   have   no   ex 
post  facto  application,  32. 

relating  to  transmission  of  property  and  franchises,  65. 

rule  of  construction  of,  authorizing  consolidation,  27. 

showing  creation  of  distinct  corporation  as  result  of  consolida- 
tion, 62. 

showing  merger  as  result  of  consolidation,  63. 
(6)    Sales. 

against  purchase  of  competing  or  parallel  railroads,  147. 

authorizing  purchases  of  railroads,  14.5. 

authorizing  sales  of  railroads,  145. 

construction  of,  relating  to  sales  of  railroads,  146. 

defining  status  of  corporation  purchasing  railroad,  158. 

for  appraisal  of  stock  in  case  of  exchange,  121. 

Pennsylvania,    concerning    dissolution   of    vendor  corporation, 
152  n. 

prescribing  method  of  authorizing  and  executing  sales   of  rail- 
roads, 148. 

providing  that  corporation  purchasing  railroad    may    exercise 
right  of  eminent  domain,  159  n. 

providing  that  sale  of  railroad  shall  not  afifect  creditors,  163  n. 

(c)  Leases. 

authorizing  leases  of  railroads,  180. 

authorizing  lessee  to  exercise  power  of  eminent  domain  in  name 

of  lessor,  210  n. 
authorizing  lessee  to  exercise  right  of  eminent  domain,  210  n. 
authorizing  railroad  leai;es,  rule  of  construction  of,  181. 
compelling  railroads  to  make  track  connections,  255. 
concerning  taxation  of  leased  railroads,  224  n. 
construction  of,  authorizing  railroad  leases,  182. 
construction  of,  not  authorizing  railroad  leases,  183. 
imposing  liability  upon  lessee,  230  n. 
prescribing  method  of  adopting  lease  of  railroads,  193. 
prohibiting  lea.ses  of  competing  or  parallel  railroads,  186. 
providing  that  railroad  lease  shall  not  affect  public  obligations 

of  lessor,  215. 
relating  to  foreign  lessee  corporations,  254. 

(d)  Stockholditig. 

authorizing  corporate  stockholding,  271.  J 

(e)  Combinations. 

authorizing  issue  of  stock  of  propertj',  319  n. 

concerning  pools,  364  n. 

federal  anti-trust  statute,  376  n. 

interstate  commerce  act  concerning  connecting  lines,  363  n. 

invalid  exemptions  in  State  anti-trust,  421. 

914 


INDEX 

STATUTES  —  continued, 

providing  that  anti-trust,  may  be  pleaded  in  defence,  445. 
State  anti-trust,  414  n. 
STATUTES  OF  LIMITATION.     (See  Limitations.) 
STATUTORY  AUTHORITY.     (See  Legislative  Authority.) 
STOCK, 

(o)    Consolidation. 

appraisal  of,  57. 

condemnation  of,  for  purposes  of  consolidation,  5L 
(6)    Sales. 

appraisal  of,  of  dissenting  stockholder  in  case  of  exchange,  121. 

English  statute  for  appraisal  of,  121  n. 

exchange  of  corporate  property  for,  ultra  vires,  119. 

exchange  of  property  for,  infringement  of  rights  of  dissenting 

stockholders,  120. 
received  upon  exchange  belongs  primarily  to  corporation,  122. 
reorganization  plan   involving   payment  of   money  in   lieu  of, 

120. 
transfer  of  entire  corporate  property  for,  requires  unanimous 
consent,  118. 

(c)  Stockholding. 

assumption  of  power  to  hold,  in  articles  of  association,  270. 
English  rule  as  to  necessity  for  statutory  authority  to  purchase, 

265. 
expediency  of  purchase  of,  immaterial,  269. 
power  of  corporation  to  acquire  and  hold  its  own,  283  a. 
rule  requiring  statutory  authority  for  corporate  subscriptions  or 

purchases  not  evaded  by  indirection,  267. 
similar  nature  of  corporations  does  not  affect  power  to  hold,  268. 
statutory  authority  necessary  for  corporation  to  purchase,  264. 
statutory  authority  necessary  to  subscribe  for,  266. 

(d)  Combinations. 

i.s.sue  of,  for  good-will  in  formation  of  corporate  combination,  320. 

issue  of,  for  property  in  formation  of  corporate  combination,  319. 

(See  also  Corporate  Stockholding;    Stockholders.) 
STOCKHOLDERS, 
(a)    Consolidation. 

assent  of,  to  consolidation,  how  manifested,  45. 

condemnation  of  stock  of,  in  aid  of  con.solidation,  51. 

estoppel  of,  of  constituent  corporations  to  deny  regularity  of 
organization  of  de  facto  consolidated  corporation,  96. 

estoppel  of,  of  de  facto  consolidated  corporation  to  deny  regular- 
ity of  organization,  90. 

laches  of,  in  restraining  consolidation,  49. 

of  constituent  corporations,  effect  of  consolidation  upon,  64. 

of  constituent  corporations  may  restrain  consolidation  of  com- 
peting railroads,  40. 

9  If) 


INDEX 

STOCKHOLDERS  —  continued, 

preferred,  of  constituents,  obligatioas  of  consolidated  corpora- 
tion to,  81. 

procedure  in  actions  of,  to  restrain  consolidation,  48. 

requisite  number  of,  whose  consent  is  necessary  to  consolida- 
tion, 41,  42,  43. 

rights  and  remedies  of  dissenting,  to  enjoin  consolidation,  46. 

statutes  authorizing  condemnation  of  stock  of  dissenting,  in  con- 
solidation proceedings  not  applicable  to  lease,  51. 

when  unanimous  consent  is  necessary  to  consolidation,  42. 

whether  majority  can  effect  consolidation  upon  giving  security, 
50. 

(b)  Sales. 

appraisal  of  stock  of  dissenting,  in  case  of  exchange,  121. 

defences  to  actions  by,  to  set  aside  sales  of  property,  116. 

entitled  to  stock  received  upon  exchange  only  upon  distribution, 
122. 

estoppel  of,  to  maintain  suit  to  set  aside  sales  of  property,  116. 

exchange  of  entire  corporate  property  for  stock  requires  unani- 
mous consent  of,  118. 

exchange  of  property  for  stock  infringement  of  rights  of,  120. 

franchise  of  corporate  existence  belongs  to,  131. 

hold  consideration  for  fraudulent  sale  as  trustees  for  creditors, 
125. 

laches  of,  as  affecting  right  to  complain  of  sales  of  property, 
116. 

may  be  estopped  by  participation  or  acquiescence  from  ques- 
tioning validity  of  sale  of  railroad,  150. 

objections  to  plan  of  paying  dissenting,  money  in  lieu  of  shares, 
120. 

procedure  in  actions  of,  to  enjoin  sale  of  corporate  property,  115. 

ratification  by,  of  sale  by  directors,  113. 

remedies  of  dissenting,  in  case  of  invalid  sales,  114. 

remedies  of,  in  case  of  exchange  of  property  for  stock,  122  b. 

remedies  of,  in  case  of  invalid  sale  of  railroad,  151. 

sale  of  property  of  private  corporation,  defences  to  actions  of,  to 
prevent,  116. 

when,  may  directly  receive  stock  in  exchange  for  corporate 
property,  122. 

whether  approval  of  majority  of,  sufficient  in  absence  of  statute, 
149. 

(c)  Leases. 

assent  of,  necessary  to  railroad  lease,  188. 
distinction  between  ratification  by,  and  by  legislature,  179. 
laches  of,  may  prevent  attacking  railroad  lease,  192. 
lease  of  entire  property  of  prosperous  corporation  requires  unani- 
mous consent  of,  166. 

916 


INDEX 

STOCKHOLDERS  —  continued, 

may  be  estopped  by  acquiescence  from  attacking  invalid  railroad 

lease,  192. 
remedies  of,  in  case  of  unauthorized  railroad  lease,  191. 
remedies  of,  to  restrain  lease  of  corporate  property,  169. 
rights  of,  when  rent  is  payable  in  form  of  dividends,  212. 
when   leases   by   directors    or   majority    of,    can   be  set   aside, 

168. 
whether  approval  of  lease  by  majority  of,  sufficient  in  absence  of 

statute,  189. 

(d)  Stockholding. 

may  enjoin  voting  of  ultra  vires  holdings  of  stock,  288. 
remedies  of,  in  case  of  ultra  vires  stockholding,  293. 
remedies  of  minority,  of  controlled  corporation,  301. 
status  of  corporations,  as  controlling,  299. 
status  of  corporations  as,  284. 

(e)  Combinations. 

in  formation  of  trust  State  regards  acts  of,  as  acts  of  corporation , 

313. 
remedies  of,  of  combining  corporations,  371. 
(See  also  Subscribkrs.) 
SUBSCRIBERS, 

action    upon    subscription     by    constituent    corporation    against, 

69. 
enforcement  by  consolidated  corporation  of  obligations  of,  to  con- 
stituent corporation,  69.  ■ 
remedies  of  dissenting,  in  case  of  invalid  consolidation,  47. 
to  stock  of  constituent  corporation  may  attack  irregular  consolida- 
tion, 95. 
when,  bound  by  consolidation  proceedings,  68. 
when,  estopped  to  question  regularity  of  consolidation,  96. 
(See  also  Consolidation;   Stockholders.) 
SUBSCRIPTIONS, 

conditional,  enforcement  of,  by  consolidated  corporation,  69. 
corporate,  for  stock  in  foreign  corporations,  272. 
corporate,  through  agents  invalid,  267. 
effect  of  ultra  vires  lease  upon,  246. 
necessity  for    tatutory  authority  for  corporate,  266. 
remedies  of  consolidated  corporations  to  enforce,  69. 
to  stock  of  constituent  corporations  pass  to  consolidated  corpora- 
tion, 68. 
SUGAR  TRUST,  nature  and  formation  of,  342. 
SUITS.     (See  Remedies.) 
SURPLUS  PROPERTY, 
leases  of,  172. 
sales  of,  129. 
surplus  use  of  tracks,  172. 

917 


INDEX 


TAXATION, 

exemptions  from.     (See  Exemptions  from  Taxation.) 

of  interstate  consolidated  corporation,  105. 

of  leased  railroads,  224. 
TAXES, 

distinction  between,  and  assessments,  205. 

covenant  to  pay,  for  sole  benefit  of  lessor,  205. 

covenant  to  pay  in  railroad  leases,  205. 
TELEGRAPH  COMPANIES, 

constitutional  prohibitions  against  consolidation  of  competing,  39. 
TELEPHONE  COMPANIES, 

constitutional    prohibitions    against   consolidation    of    competing, 
39. 
TENNESSEE, 

(a)  Consolidation. 

statutes  authorizing  consolidation  of  railroads,  22  n. 
statutes  prescribing  method  of  consolidating,  52  n. 

(b)  Sales. 

statutes  authorizing  purchase  of  railroads,  145  n. 
statute    prescribing  method  of  authorizing    sale    of    railroadi 
148  n. 

(c)  Leases. 

statutes  authorizing  railroad  leases,  145  n,  180  n. 

statute  prescribing  method  of  adopting  railroad  lease,  193  n. 

(d)  Combinations. 

anti-trust  statutes,  414  n. 

constitutional  provision  against  monopolies,  414  n. 
TERMINAL  FACILITIES,  meaning  of  phrase,  200. 
TEXAS, 

(a)  Consolidation. 

statute  authorizing  consolidation  of  benevolent,  etc.,  corpora- 
tions, 23  n. 

statute  concerning  consolidation  of  railroads,  22  n. 

constitutional  provision  against  consolidation  of  competing 
corporations,  32  n. 

(b)  Leases. 

constitutional  provision  against  consolidation  not  construed  to 
authorize  lease,  183. 

statute  authorizing  railroad  leases,  180  n. 

statute  providing  that  lease  shall  not  afifect  lessor's  public  obli- 
gation, 215. 

statute  providing  that  lessor  shall  be  liable  as  if  operating  rail- 
road, 216  n. 

(c)  Stockholding. 

statutes  authorizing  corporate  stockholding,  271  n. 

918 


INDEX 

TEXAS  —  continued, 
(d)    Combinations. 

anti-trust  statutes,  414  n. 

constitutional  provision  against  monopolies,  414  n. 
constitutionality  of  anti-trust  statutes,  420. 
TORTS, 

liability  of  consolidated  corporation  for,  of  constituents,  82. 

liability  of  lessor  for,  of  lessee,  218-221. 
(See  also  Consolid.\tion;    Les.see  Corporation;    Lessor  Corpora- 
tion;  Negligence.) 
TRACK.\GE  CONTRACTS, 

assignability  of,  258. 

construction  of,  259. 

distinction  between,  and  leases,  176,  255. 

English  statutes  granting  running  powers,  255. 

execution  of,  256,  257. 

limitations  upon  power  to  execute,  256. 

liability  of  licensee  company  to  employees,  263. 

liability  of  licensee  company  to  third  persons,  262. 

liability  of  proprietary  company  to  employees,  263. 

liability  of  proprietary  company  to  third  persons,  261. 

nature  of,  255. 

nature  of  running  powers,  255. 

specific  performance  of,  260. 

statutory  authority  not  necessary  for  execution  of,  256. 

whether  written  contract  is  necessary,  257. 
TRAFFIC  CONTRACTS. 

(See  Associations  of  Railroad  Companies.) 
TRANSMITTING  COMPANIES, 

constitutional    prohibitions    against    consolidation    of    competing, 
39. 
TRANSPORTATION  COMPANIES, 

constitutional  prohibitions  against  consolidation  of  competing,  39. 
TRUST, 

definition  of,  304. 

formation  of,  309. 

in  formation  of.  State  regards  acts  of  stockholders  as  acts  of  corpo- 
ration, 313. 

invalid  as  delegating  corporate  powers,  315. 

invalid  as  involving  partnership  of  corporations,  314. 

invalid  as  involving  practical  consolidation,  316 

nature  of  trust  certificates,  317. 

popular  use  of  word,  305. 

rights  and  liabilities  of  trustees,  317. 

right  of  trustee,  317. 

transferability  of  certificates,  317. 

(Sec  also  Combinations.) 

919 


INDEX 

TRUST  CERTIFICATES, 

nature  of,  317. 

State  anti-trust  statutes  concerning,  414  n. 

transferability  of,  317. 
TRUST  FUND  DOCTRINE, 

development  of,  123  n. 

limitations  upon,  123  n. 

objections  to,  123  n. 

stated,  123  n.  ^ 
TRUSTEES, 

rights  and  liabilities  of,  under  industrial  trusts,  317. 


U 
ULTRA  VIRES, 

consolidation  without  legislative  authority  is,  17. 

contracts  for  purchase  of  stock,  290. 

defence  of,  after  delivery  of  possession  under  lease,  241. 

defence  of,  to  enforcement  of  leases,  240. 

distinction  between  acts,  the  majority  and,  the  corporation,  151. 

effect  of  execution  of,  contract  for  exchange  of  property  for  stock, 
122  a. 

exchange  of  property  for  stock  is,  119. 

holdings  of  stock,  independent  contracts,  291. 

holdings  of  stock,  liability  for  assessments  upon,  289. 

holdings  of  stock,  what  incidents  of  ownership  attach  to,  288. 

purchase  for  control  without  express  authority  is,  298. 

sale  of  railroad,  remedies  of  dissenting  stockholders  in  case  of,  lol. 

sales  of  franchises,  139  a. 

unauthorized  lease  of  railroad  is,  177. 

unauthorized  sale  of  franchises  is,  136. 

unauthorized  taking  of  lease  is,  178. 
ULTRA  VIRES  LEASES, 

distinction  between,  and  irregular,  239. 

effect  of  delivery  of  possession  under,  241. 

effect  of,  upon  stock  subscriptions,  246. 

enforcement  of  executory,  240. 

guarantee  of,  void,  247. 

lessee  may  surrender,  without  liability,  241. 

obligations  of  parties  after  disaffirmance,  242. 

quo  warranto  in  case  of,  250. 

recovery  of  property  after  disaffirmance  by  lessee,  243. 

recovery  on  quantum  meruit  after  disaffirmance,  244. 

remedy  of  State  by  injunction  in  case  of,  251. 

right  and  duty  of  disaffirmance,  242. 

right  of  lessee  to  disaffirm,  242. 

right  of  lessor  to  disaffirm,  242. 

920 


INDEX 

ULTR  VIRES  LEASES  — continued, 

whether  lessee  can  recover  for  improvements  made  under,  245. 
whether  lessor  can  recover  property  when  it  disaffirms,  242. 
(See  also  Leases  of  Railroads.) 
UNANIMOUS  CONSENT, 

exchange  of  entire  corporate  property  for  stock  requires,  118. 
lease  of  entire  property  of  prosperous  corporation  requires,  166. 
sale  of  entire  corporate  property  by,  109. 
when  necessary  to  consolidation,  42. 

whether,  necessary  for  lease  of  railroad,  in  absence  of  statute,  189. 
whether,  necessarj'  for  sale  of  railroad,  in  absence  of  statute,  149. 
(See  also  Majority;    Minority.) 
UNAUTHORIZED  LEASE. 

(See    Leases    of    Railroads;    Lessee    Corporation;    Lessor     Cor- 
poration.) 
UNIVERSITATIS  JURIS,  meaning  of  phrase,  10. 
UNREASONABLE  RESTRAINT  OF  TRADE, 

federal  anti-trust  statute  not  limited  to  contracts  in,  388. 
USEFUL  COMMODITIES, 

use  of  phrase,  350,  351,  358. 
what  are,  358. 
UTAH, 

(a)    Consolidation. 

constitutional    provision    against    consolidation    of    competing 

corporations,  32  n. 
statute  authorizing  consolidation  of  business  corporations,  23  n. 
statute  authorizing  consolidation  of  railroads,  22  n. 
statutes  prescribing  method  of  consolidating,  52  n. 
(6)    Sales. 

statutes  authorizing  sales  of  railroads,  145  n. 
statute  conferring  powers  on  corporation  purchasing  railroads, 
158  n. 

(c)  Leases. 

statutes  authorizing  railroad  leases,  145  n,  180  n. 

(d)  Stockholding. 

statutes  authorizing  corporate  stockholding,  271  u. 

(e)  Combinations. 

anti-trust  statutes,  414  n. 

constitutional  provision  against  combinations,  414  n. 

V 
VENDEE  CORPOR.\TION, 

acquires  essential  franchises  upon  purcha.'^e  of  railroad,  157. 
generally  not  liable  for  debts  of  vendor,  123. 
may  assume  debts  of  vendor,  123. 
may  assume  obligations  of  vendor,  163. 
may  be  made  liable  by  statute  for  debts  of  vendor,  163. 

921 


INDEX 

VENDEE  CORPORATION  — ron^/nued, 

mortgage  of,  takes  priority  over  claims  of  vendor's  creditors,  126. 
not  liable  for  debts  of  vendor  unless  assumed  or  imposed  by  law,  163. 
obligations  of,  4n  respect  of  vendor's  public  duties,  162. 
rights  of,  in  general,  158. 
statutes  defining  status  of,  158. 
status  of  foreign,  164. 

whether,  acquires  exemptions  from  taxation  upon  purchase  of  rail- 
road, 160. 
whether,  acquires  right  of  eminent  domain  upon  purchase  of  rail- 
road, 159. 
whether,  acquires  vendor's  right  to  fix  rates  of  fares,  161. 
VENDOR  CORPORATION, 

liabilities  of,  after  authorized  sale  of  railroad,  154. 
liabilities  of,  after  unauthorized  sale  of  railroad,  155. 
liability  of  vendee  for  debts  of,  123. 

mortgage  of  vendee  takes  priority  over  claims  of  creditors  of,  126. 
obligations  of,  not  assumed  by  vendee  upon  sale  of  railroad,  163. 
obligations  of  vendee  in  respect  of  public  duties  of,  162. 
power  of,  to  sell  property  for  stock,  322. 
powers  of,  after  sale  of  railroad,  153. 

quo  warranto  against,  in  case  of  unauthorized  sale  of  railroad,  156. 
sale  of  railroad  does  not  terminate  corporate  existence  of,  152. 
vendee  may  assume  debts  of,  123. 
vendee  may  be  liable  by  statute  for  debts  of,  163. 
vendee  may  expressly  assume  obligations  of,  163. 
VENDOR  AND  VENDEE, 
outline  of  relations  of,  3. 

distinction  between  relation  of,  and  other  intercorporate  relations,  141. 
VERMONT, 

(o)    Consolidation. 

statute  authorizing  consolidation  of  railroads,  22  n. 
(6)    Leases. 

statute  authorizing  railroad  leases,  180  n. 
(c)    Stockholding. 

statutes  authorizing  corporate  stockholding,  271  n. 
VESTED  RIGHTS, 

legislation  cannot  affect,  26,  266. 
power  to  consolidate  not  a,  24. 
VIRGINIA, 

statutes  authorizing  corporate  stockholding,  271  n. 
VOIDABLE  LEASES, 

may  become  valid  by  acquiescence,  248. 
of  private  corporation,  168. 
of  railroads,  248. 

(See  also  Leases  op  Railroads.) 
VOID  RESTRICTIONS,  in  railroad  leases,  220. 
922 


INDEX 

w 

WASHINGTON, 

(o)    Consolidation. 

constitutional  provision  against  consolidation  of  competing  cor- 
porations, 32  n. 

statute  authorizing  consolidation  of  railroads,  22  n. 

statute  prescribing  method  of  consolidating,  52  n. 
(6)    Sales. 

statute  authorizing  purchase  of  railroads,  145  n. 
(c)    Leases. 

statute  authorizing  railroad  leases,  145  n,  ISO  n. 
{d)    Stockholding. 

statutes  authorizing  corporate  stockholding,  .271  n. 
(e)     Combinations. 

constitutional  provision  against  monopolies  and  trusts,  414  n. 
WEST  VIRGINIA, 
(a)    Consolidation. 

constitutional  provision  against  consolidation  of  competing  cor- 
porations, 32  n. 

statutes  authorizing  consohdation  of  railroads,  22  n. 

statutes  prescribing  method  of  consolidating,  52  n. 
(6)    Sales. 

statutes  authorizing  purchase  of  railroads,  145  n. 

statute    prescribing    method   of    authorizing    sale  of    railroad, 
148  n. 

(c)  Leases. 

statutes  authorizing  railroad  leases,  180  n. 

statute  prescribing  method  of  adopting  railroad  lease,  193  n. 

(d)  Stockholding. 

statutes  authorizing  corporate  stockholding,  271  n. 
WHISKEY  TRUST,  nature  and  formation  of,  344. 
WISCONSIN, 

(a)    Consolidation. 

statute  authorizing  consolidation  of  railroads,  22  n. 
statute  providing  that  land  grants  pass  to  consolidated  corpora- 
tion, 77  n. 
statute  prescribing  method  of  consolidating,  52  n. 
(fe)    Sales. 

statute  authorizing  sales  of  railroads,  145  n. 
statute  conferring  powers  on  corporation  purchasing  railroadi 
158  n. 

(c)  Leases. 

statute  authorizing  railroad  leases,  145  n,  180  n. 

(d)  Stockholding.  , 

statutes  authorizing  corporate  stockholding,  271  n. 

(e)  Combinations. 

anti-trust  statute,  414  n. 

923 


INDEX 

WILSON  TARIFF  ACT, 

provisions  of,  supplementing  federal  anti-trust  statute,  383. 
WORDS  AND  PHRASES.     (See  Definitions.) 
WYOMING, 

(a)  Consolidation. 

constitutional  provision  against  consolidation  of  competing  cor- 
porations, 32  n. 
statutes  authorizing  consolidation  of  railroads,  22  n. 
statutes  prescribing  method  of  consolidating,  52  n. 

(b)  Sales. 

statute  authorizing  sales  of  railroads,  145  n. 

statute  prescribing  method  of  authorizing  sale  of  railroad,  148  n. 

(c)  Leases. 

statute  authorizing  lessee  to  exercise  right  of  eminent  domain, 

210  n. 
statute  authorizing  railroad  leases,  145  n,  180  n. 
statute  concerning  taxation  of  leased  railroad,  224  n. 
statute  prescribing  method  of  adopting  railroad  lease,  193  n. 
statute  relating  to  foreign  lessee  corporation-;,  254  n. 

(d)  Stockholdinj. 

statutes  authorizing  corporate  stockholding,  271  n. 

(e)  Combinations. 

constitutional  provision  against  consolidations  or  combinations, 

414  n. 
coiistitutiona.1  provision  against  monopolies,  414  n. 


924 


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